Passive Income with Benefits: House Hacking

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house hacking washington dc

Can you buy a house and avoid paying the mortgage? Can you build equity without a formidable investment? You can, and it doesn’t have anything to do with magic. It’s called house hacking, and it is how millions of Americans generate passive income.

You may have noticed the dual entrances as you stroll through alongside Washington, DC townhouses. Homeowners can transform top-notch properties in a multitude of ways to cover their monthly mortgage payments. This is called house hacking. Can you do it too?

Let’s look at what hacking your housing is all about.

What is House Hacking?

Thankfully, hacking your house doesn’t have anything to do with cybercrime. What it entails is buying a multifamily property, living in one part of it, and renting the rest to tenants.

Depending on how high the rent is, you could cover mortgage payments partially or entirely. Granted, you would need to live next to your tenants for some time. On the bright side, you have a chance of keeping an eye on their behavior.

Let’s do the math:

  • Triplex price – $400,000
  • 20% down payment – $80,000
  • Loan amount – $320,000

If you get a loan for 30 years with an interest rate of 5%, your monthly payments will be about $2,000.

If you rent out the two parts of your triplex for $1,000 each, you can cover the monthly payments entirely.

Voila! You can live for free. Even if you set a lower rent amount, you’d still pay only a small part of your mortgage. House hacking is often a better choice than renting since it’s cheaper and allows you to build equity.

Benefits of House Hacking

According to Zillow’s 2018 affordability report, Americans spend about 17% of their income on monthly mortgage payments. That’s a formidable number. If you can cover these expenses by house hacking, you can save the money for new real estate investments or other needs.

1. Low-Risk Passive Income

House hacking is a lower risk endeavor than traditional real estate investing. Yes, you still have tenants and a property to manage, need to deal with expenses, and face certain risks that come with it. However, since you are living on the property, you can catch problems on-site before they grow into serious issues.

2. Tax Benefits

House hacking gives you a variety of tax benefits. You can enjoy benefits that include:

  • Interest tax deductions from income
  • Depreciation deduction from income
  • Property tax deductions
  • Costs of house maintenance
  • Cost of rental-related services (e.g. legal consultations)
  • Utilities
  • Appliance replacement

You would need to get professional advice about tax deductions as a house hacker.

3. Flexibility

If you need to move out of town due to a job assignment or family issues, you can always rent out your part of the property without losing any benefits.

House hacking allows you to buy expensive property you wouldn’t consider otherwise. It could cut your transportation expenses and give better education opportunities to your children.

4. New Possibilities

House hacking can be your first step toward real estate investment. By living on the property, you can learn all the ins and outs of being a landlord without the distance hindering your options.

With time, you’ll gain valuable skills that could help you dive deeper into real estate investment opportunities.

5. Wealth

This type of passive income allows you to pay down your mortgage and save money for further real estate investment while building equity.

4 Ways to Generate Passive Income

If you decide that house hacking is worth considering, you can take advantage of the following options.

1. Multi-family Properties

Buying a multi-family property (duplex, triplex, quadruplex) is the most popular way to hack your housing. The more units a property has, the more money you can save.

Triplex is typically better than duplex while a quadruplex is better than a triplex. With a triplex or a quadruplex, you can expect to cover the mortgage payments. With a duplex, you’ll probably cover only a part of them.  

2. Zoned Basement

One of the highly convenient ways to house hack is to buy a property with a finished basement converted to a separate living area. While the income from such an option won’t cover your mortgage payment fully, you get all the benefits of having the entire house (sans basement) to yourself.

You can also choose to live in the basement while renting the rest of the house. Tenants are more likely to opt for such a housing arrangement in a single-family home neighborhood rather than in a multi-family home area.

3. Additional Dwelling Units

An additional dwelling unit (ADU) is a structure added to your property. Usually, it’s built in the backyard and equipped with plumbing, electricity, and all the other options necessary for comfortable living.

If you can find a house with an ADU, it could be an excellent way to house hack. However, building an ADU in your backyard comes with certain restrictions. Many cities don’t allow ADUs. Others limit their size. In some cities, you can only rent an ADU to a relative.  

4. A House with Multiple Bedrooms

A single-family home with multiple bedrooms could also be an option for house hacking. You can rent out any number of the bedrooms you wish. You would need to look for a house with numerous bedrooms since the more you rent out, the bigger the chunk of a mortgage payment you can cover.

When searching for a house hacking property, you need to pay special attention to the location. Look for a property in a desirable neighborhood with a strong infrastructure excellent access to public transportation.

Is Housing Hacking Right For You?

If you are ready to put up with the comfort issues related to having tenants as close neighbors, the next step is to crunch the numbers.

Add up all the costs of owning a house (mortgage, maintenance, taxes, utilities, etc.). Estimate the rent amount. Subtract the latter from the former. If you like the number you see, it could mean that house hacking is a way to go.

If you think you are ready for house hacking, you may need assistance with organizational issues. For more information about hacked property management, please contact us today!

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Enhanced Reporting

Your portal includes a selection of extremely useful reports. Reports are available in the “Reports” section, and are distinct from the financial statements. Unlike financial statements which are static records, Reports are dynamic real-time records that will update with current data every time you view them. 

Scroll down to learn more about Reports:

Navigate to the "Reports" module in your portal:

  • Keep in mind, these reports are dynamic records. They will refresh to display current information every time you view them. 

Enhanced Rent Roll Report:

  • The Enhanced Rent Roll Report will show the rent amount, last payment date, move-in date, lease expiration date, and security deposit amount for each of your tenants. 
  • It will also show a portfolio summary with occupancy percentage, vacancy loss, and more!

Unit Comparison Report:

  • If you own multiple units (or buildings) with Nomadic, you’ll get access to the Unit Comparison Report. 
  • This report enables you to quickly compare financial performance between your units at a glance without toggling between individual reports. 

Income Statement Month-Over-Month:

  • The Income Statement Detail – Monthly Report serves as a month-over-month record of portfolio performance. You’ll see itemized income and expense categories and can track monthly. This report will update with fresh data every time you view it. 

Financial Statements

Financial statements will be published to your portal on a monthly basis. The statements are found in your Documents library, and provide a historical record of all financial performance. The statements serve as a snapshot of financial performance over a given period, and are static documents (unlike Reports, the statements do not update/change in real-time). 

Scroll down for more info about the Financial Statements in your Documents library:

The Documents area contains monthly financial statements:

  • The statements in the Documents are are static documents. They are posted to the portal once a month to serve as a historical record of financial performance. 

Download a statement to see month and YTD financials:

You'll also find a month-over-month operating statement:

Portal Communication Tool

You can use your owner portal to communicate with our team. Any messages you send through the portal will go straight to your Account Manager. When we reply, you’ll get an email notification and you’ll also see the message in your portal next time you log in. 

Here’s an overview of using the communication platform:

Click "Communications" and navigate to "Conversations":

  • The communications module will contain a record of all messages that you create through the portal. 

Click the "New Message" button and send your message:

Responses will show up in the conversation ticket:

  • You’ll get an email notification whenever you get a response, and you’ll also see the message in your portal next time you log in. 

You can reply in-line using the comment box:

Each conversation will be logged in its entirety:

Understanding the Ledger

Your portal includes a ledger with all transactions. The ledger is populated with data in real-time as transactions flow through our accounting software. Much of this information is also available in the Reports area, as well as the Statements in your Documents library, but the ledger is the most comprehensive resource for diving into the details. 

Please scroll through the sections below to get a better understanding of how to interpret the ledger. 

By default, transactions are sorted chronologically:

  • The date reflected in the lefthand column is the actual transaction date, not the “bill date”. This is the date the transaction was actually processed. 

If you have multiple properties with Nomadic, you'll see the address for each transaction in the "Location" column:

  • You can filter the ledger to look at just one property, all properties, or specific sets of properties. 
  • If you only have one property with us, you’ll just see the ledger for that property. 

The Description column displays the transaction type:

  • BILL: this is an expense transaction, such as for repair costs or management fees.
  • CHARGE: this is a transaction  billed to the tenant, most typically a rent payment. 
  • NACHA EXPORT: this is a credit we processed to your distribution account. This type of transaction is how you get paid! 

The Amount column shows the dollar value of each transaction:

  • Positive Amounts: if an amount is positive, it reflects a transaction that is payable to you. Typically, this will be a rent payment that we collected from your tenants. On occasion, a positive number could also signify a journal entry or credit adjustment. 
  • Negative Amounts:  if an amount is negative, this is a transaction that is either payable to Nomadic or is an amount that has already been paid to you. Typically this will be for repair costs or management/leasing fees. Owner draws (net distributions into your checking/savings account) also reflect as negative amounts, since they have already been paid to you. 

The Account Balance column shows a sum of positive/negative transactions at a given point in time:

  • Account Balance should always equal zero after a net distribution has been processed. When the balance is zero, this means that all expenses have been paid and you’ve received the remainder as net operating income, leaving a balance of zero (meaning: no one is due any money, as all funds have been distributed appropriately). 

Navigating the Propertyware Owner Portal

Your portal includes some extremely useful features that help you understand your property’s financial performance at a new level, with real-time transparency into every transaction.

Scroll through the snapshots below for an overview of portal navigation! If you need more help or have specific questions about using the portal, you can reach out to your Account Manager any time for a screen share. 

You can filter all info by date range or property:

View a snapshot of income and expenses on your dashboard:

See every transaction in real-time on your ledger:

Statements and forms will be posted to your documents library:

View a suite of real-time financial reports:

See a running list of all bills, and drill down for more detail:

Under Bill Details, you'll find dates/descriptions/amounts and more:

You can also communicate with your Account Manager through the portal:

How do net distributions work?

Net distributions keep your accounting clean and simple. Each month we’ll collect rent from the tenants, deduct any repair expenses for the previous month and any management/leasing fees for the current month, and credit the remaining net operating income to your account. 

You’ll receive a statement via email each time a net distribution is processed, and can view all transaction details in your Propertyware owner portal.