With the average home price of $626,911 in the District of Columbia (DC), you’re probably suffering from sticker shock. This area of the country has the second most expensive housing market with Hawaii as the only other state with a higher average home price. Even with a hefty down payment, the monthly mortgage bill probably prices you out of the market, but there are ways to make the nation’s capital more affordable. House hacking has become popular in several major cities throughout the country, and you can make it work for you in DC.
What Is a House Hack?
In the simplest terms, a house hack is when you get others to pay the mortgage for you so that your housing costs are minimal or free. Sounds too good to be true? Not so fast. With house hacking, you buy a multiple housing unit. You can purchase a quadruplex, triplex, or duplex and live in one of the units while renting out the others. The goal is to find a unit where you charge enough rent in the other units to cover the cost of your own without dipping into your own resources.
Of course, your best bet to make this work is to buy a quadruplex. With three tenants, it’s easier to recoup the money you need to pay your own household bills. However, you can make house hacking work in a triplex or duplex, depending on the neighborhood and current rental market. Washington, DC is a great area for house hacking because rental property costs are above average just like the purchase prices of the homes.
A Down Payment for Your House Hack
Traditional wisdom says you need to put down 20 percent when buying a home or multi-unit property. With homes in the mid $600,000 range in the DC area, you’re going to need a substantial down payment, although you might not need one as a large as you think. There are mortgages available that require a lower down payment than 20 percent.
In some cases, you can get your down payment down to between zero to five percent of the house’s cost. The Federal Housing Administration (FHA) loan is a great option with fixed interest rates for 30 years and a down payment of 3.5 percent required. The FHA loan also has less stringent requirements than a conventional mortgage lender. The Veterans Administration also has a loan program.
The VA loans also offer a fixed interest rate for 30 years, but they don’t require any down payment. While the requirements for qualification aren’t as strict as a conventional loan, they are more detailed than an FHA loan. If the property you choose needs a lot of work, you probably won’t qualify for this type of loan.
Calculating a Loan Payment for Your House Hack
Before you meet up with a real estate agent to start looking for a property, you need to decide how much you can afford. One thing to consider is the affordability of a property and the amount of the monthly mortgage payment. Determining the monthly mortgage payment is fairly straightforward. Here are a few steps:
- Determine the cost of the multi-unit property. For this example, we’ll use $700,000.
- Determine the amount of the down payment. Let’s say you’re going to use an FHA loan with a 3.5 percent down payment of $24,500.
- Subtract the down payment from the cost of the property. It looks like this: $700,000 – $24,500 = $675,500. The sum is the amount you need to borrow or the principal.
- Put the information into a mortgage calculator. With a five percent interest rate over a 30 year period, your monthly payment is $3,626. Don’t worry! You plan to have help with this payment.
- In the mortgage calculator, you need to enter the amount of principal, the amount of down payment, expected interest rate, and the expected length of the mortgage. You can expect to pay once a month for 30 years or 360 equal payment. Interest rates are really low, so you can use five percent.
- Click the “Calculate” button. With a five percent interest rate over a 30 year period, your monthly payment is $3,626. Don’t worry! You plan to have help with this payment.
In some cases, the costs of property taxes and homeowner’s insurance are added to the monthly mortgage payment. This mortgage has a function to add those in after you have an idea of how much each is going to cost per month. Once you decide on a financial institution, you can talk to them about the final monthly payment.
To save some money, you might consider looking for a quadruplex, triplex, or duplex that needs a little work before it’s rental property ready. You can easily handle the small job but what about remodeling a kitchen. Before looking at fixer-upper properties, you’re going to need to decide how much work you can do yourself and how much money you have to invest in a contractor.
It’s okay to add a fresh coat of paint but you may want to pass if it needs to be torn down to the studs. Also, a VA loan probably isn’t going to get approved if the property needs too much work.
Benefits of House Hacking
There are a variety of benefits for house hacking in the DC area. Here are a few things to consider:
- You can get your household expenses down to almost nothing. With the other units paying the bulk of the mortgage, property taxes, and insurance, you can live rent-free.
- Since you live on the property, you’ll get favorable terms for the mortgage. It’s better terms than if the property was a straight rental property.
- As long as you own the property, you’re building equity in the property. In the first few years, you’re paying primarily interest but eventually, you’ll begin to pay down the principal and build equity.
- The value of properly maintained property almost always increases so you’ll be making a long-term investment that can grow your wealth.
House hacking may be a new concept for you, but if you’re struggling to find affordable housing in the DC market, it might be a good idea to consider it. You can reap many benefits, and with the right loan, move in without saving up a small fortune.