What is a Good Cap Rate for Rental Properties in 2020?

As a real estate investor, it’s important to know at all times if your investments are profitable. If you don’t, then you can quickly dig yourself a hole that could be extremely difficult or impossible to get out of.

While this can seem daunting, particularly if you’re new to real estate investing, it doesn’t have to be, and in this article we’ll be talking about how you can figure out the return on investment for your properties using the cap rate method.

Here at Zumbly, we know a thing or two about smart real estate investments. In this article we’ll be talking about how you can figure out the return on investment for your properties using the cap rate method.

Related: How much does it cost to build a house in 2020?

What is Cap Rate?

The cap rate, or capitalization rate, is a term used by real estate investors to indicate the rate of return that is expected to be generated on a real estate investment. This is based on the income which the property is estimated to generate for the investor.

Knowing your cap rate is vital because it helps you to see whether a property will generate a worthwhile return for the time and funds which you have invested in it. This number is displayed as a percentage, and it’s generally a reliable way of estimating your return on investment.

Determining the cap rate for rental properties is a great way for investors to compare different real estate investments. If there are two buildings on the market at completely different prices, it can be difficult to determine which constitutes the better investments.

A building that costs $600,000 is not necessarily a better investment than one that costs $700,000 just because its purchase price is lower.

Rather it is important to understand how much of a return on investment each building is likely to produce and comparing two cap rates can help an investor make this determination.

Cap rate can also be a good starting point for investors looking to break into the world of real estate.

The cap rate for rental properties is also a useful tool for evaluating a property’s profitability over time. If a property’s net operating income rises while its market value remains the same, its cap rate will rise.

For an investment property to remain profitable as time goes by, its net operating income must increase either at the same rate as its market value or at a greater rate.

The cap rate is a strong measure of whether a property is becoming more or less profitable.

Related: The Ultimate Beginner’s Guide On How To Find Investment Properties Using Zumbly

START SEARCHING FOR HOMES THAT BUILD WEALTH!


SIGNUP FOR FREE

How Do You Calculate Cap Rate?

There are a few different ways to calculate the cap rate for your investment property, but we’re going to talk about one of the most common and easiest formulas which you can use.

Cap rate = Net operating income / current market value

The “net operating income” is the expected annual income which will be generated by the property. So, for example, if you planned to purchase a property which would rent for $2,000 per month, then your net operating income would be $24,000, but you also need to take expenses into account.

This means you need to deduct anything required for the upkeep of the property such as insurance, taxes, property management fees, and estimated maintenance costs from this number.

While it can be tough to budget for everything, some people set aside 1% of the total property value for maintenance costs every year. Once you have your net operating income figured out, divide it by the current market value of the property to get your cap rate.

As an example of cap rate, let’s assume that you’re looking to buy a million dollar property, which you estimate will return you $70,000 per year.

$70,000 / $1 million = 7% cap rate

This formula is an easy way to compare similar investment opportunities, basically letting you know which all-cash purchase will yield a larger return for you. For example, if there are two pieces of property in the same neighborhood, look at their cap rate to decide which one makes more sense for you. 

Just remember, a cap rate isn’t the only indicator of a good or bad investment. Let’s say you buy a piece of property for $1 million, expecting to make $100,000 per year from renting it. This would give you a cap rate of 10%. That sounds great, but if the local housing market changes and the value of the property increases to $1.5 million, you would be left with a cap rate of 6.6%, which is significantly lower. 

In a situation like this, selling the property and collecting the immediate profits would be a better investment than renting it out in hopes of an ongoing profit. 

Of course, there are even more factors involved in a situation like this, including an increase in income levels or the expense levels going down. These also have a big part in how smart an investment is, not just cap rate. 

What’s an Income Level and How Does it Affect My Investment?

As we mentioned earlier, the income level of a property is another factor to consider when debating a real estate investment. So if you know the cap rate of properties in the area of your investment property, you can use that information to then determine the net income your property will need to generate for the investment to feel worth it. 

Find out for yourself by multiplying the property’s asking price by the cap rate of similar properties in the neighborhood. This will give you the recommended net income level. 

NET INCOME / ASKING PRICE = CAP RATE FOR NET INCOME

Here’s an example. If you bought a property for $400,000 in an area where most homes have an 8% cap rate, the recommended income level could be found by multiplying 400,000 by .08. This gives you $32,000. This means that the property would have to generate $32,000 per year to get an 8% cap rate. 

Unfortunately, rental rates cannot be set based on the cap rate. Instead, they must be based on market rates and other rentals in the area. So if you can only rent out the property for around $2,300 a month, that means you’d make a net profit of $27,600 before expenses. According to this equation, the property may not be worth investing in. 

Cap Rate Examples

Aerial view nice house with pool

Let’s assume you have $10,000,000 to invest and 10-year treasury bonds are yielding 3% annually. This means you could invest all $10,000,000 into treasuries, considered a very safe investment, and spend your days at the beach collecting checks.

But what if you were presented with an opportunity to sell your treasuries and instead invest in a class A office building with multiple tenants?

A quick way to evaluate this potential investment property relative to your safe treasury investment is to compare the cap rate.

Suppose the acquisition cap rate on the investment property was 5%. This means that the risk premium over the risk-free rate is 2%.

This 2% risk reflects all of the additional risk you assume over and above the risk-free treasuries, which takes into account factors such as:

  • Diversity of the tenants
  • Age of the property
  • Underlying economic fundamentals of the region including population growth, employment growth, and inventory of comparable on the market.

When you take all these items and break them out, it’s easy to see their relationship with the risk-free rate and the overall cap rate.

It is important to note that the actual percentage of each risk factor of a cap rate and ultimately the cap rate itself are subjective and depend on your own business judgment and experience.

Is cashing in your treasuries and investing in an office building at a 5% acquisition cap rate a good decision?

Well, it depends on how risk averse you are. An extra 2% yield on your investment may or may not be worth the additional risk inherent in the property.

Perhaps you’re able to secure favorable financing terms and using this leverage, you could increase your return from 5% to 8%. If you are a more aggressive investor, this might be appealing to you.

On the other hand, you might want the safety and security that treasuries provide, and a 3% yield is adequate compensation for this downside protection.

Related: House Hacking: Live for free with an Airbnb Investment Property

How Cap Rates Affect Interest Rates

One of the most complex and least intuitive parts of understanding cap rates is their relationship with interest rates.

Often in real estate, cap rates for rental properties may shift without any change to the actual property or surrounding area but only as a result of a change in interest rates.

That is because investing in real estate property is largely driven by the amount of debt that can be borrowed to purchase a property and resulting spread between the interest rate and the cap rate. The larger the spread, the better the potential return.

This makes sense if you think of the interest rate as the cost of money, and the cap rate as the value of that same money when invested in the property.

Artificially adjusted interest rates (such as those set by the Federal Reserve) can artificially impact cap rates.

Imagine a stabilized apartment building which was purchased for $10 million and generates $750,000 in NOI each year (7.5% Cap Rate.

The property was financed with $6million of debt at a 5.0% interest rate, which costs roughly $386,000 per year.

This would make the levered yield 9.1%

Now, imagine that a few years have passed. Nothing has changed about the deal, but the interest rate on a new loan with the exact same terms as the original has increased from 5.0% to 6.0%.

This would increase the cost of the debt service to roughly $430,000 per year. In order to achieve the same levered yield of 9.1%, a buyer would only be willing to pay $9,516,000 for the same property.

The property value has decreased by nearly $500,000 and the cap rate has increased from 7.50% to 7.88%, even though nothing changed about the property itself.

The implication for the cap rate increase is that the risk of the investment also increased, but in reality, this doesn’t seem like the case. After all, you’re still dealing with the same asset in the same market, all that changed was the interest rate.

Going back to the fundamentals of finance, you’ll recall that the return on any investment can be broken into two parts: the risk-free rate of return, which is usually defined as the rate of return on the US Treasury note, and the risk premium which is the extra money you’re getting paid to compensate you for the additional risk you’re taking on.

This principle holds true for asset values across the economy. If the risk-free rate of return increases, then the amount of money you would be willing to pay for an asset that generates an additional risk premium would decrease accordingly.

What is a Good Cap Rate for Rental Properties?

What is a good cap rate?

The short answer is that it depends on how you’re using the cap rate.

The concept of a “good” cap rate is more subjective than objective.

If for nothing else, capitalization rates have become synonymous with risk more than anything else. Therefore, in order to determine a good cap rate for rental properties, you must first identify how much risk you are comfortable exposing yourself to.

According to Entrepreneur, “Different cap rates represent different levels of risk.  Low cap rates imply lower risk, higher cap rates imply higher risk.” Therefore, you shouldn’t be asking yourself “what is a good capitalization rate,” but rather “what’s the right cap rate in proportion to the amount of risk you are willing to tolerate?”

An investment property cap rate may sound simple, but its implications are heavily weighted. After all, those that can accurately estimate a property’s cap rate stand a better chance at realizing success.

In the example given earlier, investing in a 10-year treasury bond would be a good fit for investors looking for a more stable, passive experience.

While investing in a class A building with multiple tenants is a good fit for the more entrepreneurial investors. The potential returns are bigger if everything goes well. But there’s also the potential for lower returns or even losses.

Generally speaking, to answer the question “what is a good cap rate:” a cap rate that falls between 4 percent and 12 percent is typical and considered to be a good cap rate. 

However, it does depend on the demand, the available inventory in the area and the specific type of property. What is a good cap rate can be subjective and various real estate investors with dissimilar investing strategies look at it differently.

For example, a 4 percent cap rate may be the norm in high-demand areas such as in and around large metropolitan areas and high-cost areas like Southern California and New York City.

In contrast, a lower-demand area like a rural neighborhood or an up-and-coming neighborhood that is in the process of gentrification, you may see a cap rate of 10 percent or higher.

Typically, buyers want a high cap rate, meaning the purchase price is relatively low in comparison to the NOI. However, a higher cap rate typically means more risk and a lower cap rate represents lower risk. A property with a high cap rate may be located in an area where there isn’t much opportunity for increasing the rent rates or where property appreciation isn’t on a scale with other areas. An investor needs to weigh the risks and determine an appropriate cap rate for their investment goals.

So, how do you know if your cap rate is good or not? Unfortunately, the answer to this question is debatable, but most people look to have a cap rate that is somewhere between 4% and 12%.

While you might be tempted to call it a day if your investment falls within the “acceptable” cap rate range, there is a bit more to it than that, unfortunately. There are actually a number of factors which might cause you to pump the breaks on an investment, even if the cap rate is arguably decent.

It also depends how you are using a cap rate. While when you’re looking to invest in property, you want the home to have a higher cap rate, meaning your initial investment will be lower. If you’re looking to sell, you want a lower cap rate, meaning the value of your property will be higher.

Related: 10 Best Real Estate Investor Websites in 2019

What Impacts the Cap Rate?

Not all properties are created equal, and there are some other factors that could impact your cap rate assessment. Here’s a short list of some things to look out for if your calculated cap rate is too good to be true.

Asset Type Impacts Cap Rate

What kind of property are you investing in? A commercial property would likely warrant a much larger cap rate, because if the economy tanks you could be sitting on a sizable amount of debt with no one to rent your space.

A residential property would likely be a safer bet because people always need housing. A slightly lower cap rate may be acceptable here if the property shows potential.

Location Impacts Cap Rate

Location is everything in real estate. So, before you decide a property is a great deal because of its cap rate you should evaluate where it is located. How difficult will it be to rent this property consistently? Are there enough jobs here to support a healthy rental economy?

Here are some cities in the United States with the highest cap rates, ensuring they are safe investments for 2020. 

Pittsburgh, PA

Traditional Cap Rate: 3.4%

Median Property Price: $280,800

Traditional Rental Income: $1,240

Price to Rent Ratio: 16

Cathedral City, CA

Traditional Cap Rate: 3.2%

Median Property Price: $342,000

Traditional Rental Income: $1,920

Price to Rent Ratio: 15

Detroit, MI

Traditional Cap Rate: 2.9%

Median Property Price: $168,700

Traditional Rental Income: $1,030

Price to Rent Ratio: 14

Palm Springs, CA

Traditional Cap Rate: 2.9%

Median Property Price: $610,000

Traditional Rental Income: $2,940

Price to Rent Ratio: 17

Baltimore, MD

Traditional Cap Rate: 2.9%

Median Property Price: $250,500

Traditional Rental Income: $1,540

Price to Rent Ratio: 14

Your Rental Strategy Impacts Cap Rate

What kind of rental is this? If you’re purchasing the property as a high dollar vacation rental, then your average rent will be much higher, but you might also pay more in maintenance costs than you would with a long term rental.

You should also make sure to factor in that your rental could end up sitting empty in the offseason, even if it’s in an otherwise attractive location, lowering your annual income.

Supply and Demand Impacts Cap Rate

Have you checked how many other properties are for rent in the area you plan to invest in? While your chosen rental may look like a great deal, it might not actually be if there are too many other properties to compete with.

Other landlords will continually drop their prices to stay competitive, and you could end up with either an empty property or one that is rented far beneath what you thought you were going to actually get for it. Buyer beware.

Related: House Hacking Real Estate with an Airbnb Investment Property

Why are Cap Rates Important?

Cap rates are important for making sure that you aren’t taking on debt for an asset that won’t be able to pay for itself. It’s easy to get fooled into thinking that you’ve picked up a great deal, but there could be a very good reason that the property has been on the market for a year with no takers.

Using the cap rate method also allows you to easily compare properties to each other. If you’ve been eyeing more than one rental for your portfolio, then the cap rate could be the deciding factor that helps you see which properties earn more money for you.

If you’re purchasing properties with financing, then the cap rate is also valuable for determining how long it will take you to own the property free and clear.

In closing, the cap rate formula is a great tool for real estate investors that’s both easy to use and useful for seeing the bigger picture. You owe it to yourself to take advantage of every tool you have to make sure that your investments are successful. Don’t ignore cap rates or you may quickly come to regret your new “asset”.

Click here to find out how Zumbly can help you find the perfect rental property, perfect cap rate and all.

Related: How Does Rent to Own Work in 2019?

House Hacking: Live for free with an Airbnb Investment Property

House hacking is nothing new, but it’s definitely an under utilized strategy. A dream for many people is to become a homeowner. Fortunately, house hacking is a great way to achieve that dream. The best part is that house hacking is a very popular trend amongst the younger generation of first time home buyers.

The days of buying a property and paying a mortgage for 35 years is over. It’s painful, stressful, and puts you through an emotional roller coaster ride. Once you buy the property, you’re pretty much stuck. Can’t go anywhere, and have lost your freedom. It’s time to settle down!

The good news is that you don’t have to live that type of lifestyle. Buying a home shouldn’t be scary and this is where first time home buyers are house hacking through Airbnb.

What is House Hacking?

So what exactly is house hacking? House hacking is when you live rent free or have very little in mortgage payments by renting part of the home to others.

If the market allows it and if house hacking is done correctly an individual could even make a profit. Short-term rental services such as Airbnb and VRBO have made it easier to house hack and have successfully transformed the lives of many individuals.

For example, you can purchase a fourplex, rent out 3 of the units through long term rentals and use Airbnb or another short-term rental service to rent out your unit when you’re on the go or traveling. Essentially it empowers new first time home buyers the opportunity to live life to the fullest.

Related: What is a Good Cap Rate for Rental Properties?

How Do You House Hack and Live For Free?

There’s many different ways you can house hack. The first and most easiest way to house hack where almost everyone is familiar with is by having roommates. If you’ve been to college and hated in campus housing, then you’ve probably weighed the costs of living with roommates at a house close to the university.

According to Business Insiders with respect to on campus housing vs off campus housing, at University of Oklahoma it costs $1,266 average to live on campus. Meanwhile, finding an off campus location to live would only cost $566 a person.

Holy cow, that’s a lot of money saved. Talk about ripping students off. Well the good news, this is one of the ways students have been house hacking.

First find a three or four bedroom house, then you select the room you want (preferably the smallest one), then you sublease or rent the other three rooms.

Since you chose the smallest room, you can rent out the other 3 rooms for a higher price. If done correctly, the cost of the other 3 rooms should cancel out all if not most of your rent payments. Viola, you’re living for FREE!

Welcome to the world of house hacking, and students know how to do it best. Signup for Zumbly, to start researching great homes for house hacking.

Now what if I told you the this also applies to all other parts of real estate. With the emergence of Airbnb and VRBO, more and more first time home buyers are using Airbnb as an investment property.

Related: The Ultimate Beginner’s Guide On How To Find Investment Properties Using Zumbly

Why First Time Home Buyers are House Hacking With Airbnb?

Let’s be honest with ourselves. Living in debt really sucks. Especially when you work so hard for your money. Renting month to month is no longer feasible, and most landlords require a minimum of a one year lease and have a clause that forbids subleasing.

They have to lock you down in a long term contract because they have to protect themselves from turnover. The costs of finding a new tenant is extremely expensive for apartments.

First time home buyers are house hacking because they’re sick of being locked down, losing money month to month, and never getting the opportunity to live life to the fullest. Listen, you have only one life. It’s time to take control of it.

Related: The Ultimate Thailand Vacation Guide: How To Travel For Free with Zumbly

5 Benefits of House Hacking

There are many benefits to house hacking. We all want to spend more time with our family, travel the world, meet new people, and live a life without worrying for money.

House hacking helps you save more money, it builds equity, lets you live the way you want to live, you meet many new people, and most importantly it gives you experience.

Related: How much does it cost to build a house?

1. House Hacking Saves You More Money

It’s no secret that if you get a roommate or rent a room that your monthly mortgage goes down tremendously. Let’s say you buy a 3 bedroom house, and your payment after, mortgage, furniture, taxes, HOA, insurance, and other fees is $3,500. In a city like Los Angeles, California a room can easily go for $1,200.

If you rent all 3 rooms, you will receive a total of $3,600. Which not only pays your mortgage payment, it also brings an extra $100 in income a month. This is the long term strategy of house hacking.

Now if you really want to hack away, we highly recommend exploring options such as short term rentals on Airbnb. The opportunity of short term rentals is absolutely insane, and should not be ignored.

Here is an example of another model that you can try and implement for yourself. Let’s give a hypothetical scenario where you travel a lot for work. Your mortgage is still $3,500 a month, and you only stay at home for 2 days of the week because you’re always on the go for work.

One day you’re in New York to close that next deal, the other day you’re in San Francisco securing your venture capital. No matter what you’re doing there’s a solution, house hacking.

Since you’re only in your room 2 days a week, that gives you a total of 5 days free that can be put up on Airbnb. If your room can go for $120 a day, then you can make an extra $600 a week for a maximum total of $2,400. What would you do with an extra $2,400 a month? We would recommend saving it, and then using it for a bigger investment!

2. House Hacking Builds Equity

One of the best reasons to buy a home is to build equity. The struggle of building equity is when you have to pay it.

Luckily, with services like Airbnb and VRBO it’s been a lot easier to have the house pay itself off. Meaning your building equity without having to pay for it over time. Even better, you still get the awesome tax benefits of paying interest on a mortgage.

Every payment you make towards your mortgage, the more you own of your property. If you have a 30 year mortgage, you will own 100% of the home after you’ve made 30 years of payments.

That sounds like a long time, but no matter what decision you make you will always be paying to have a roof under you. If you rent, you’re not building equity, but if you own the home and make the payments towards your mortgage then you own more and more of the home with every payment you make.

If you do a 20% down payment, that means you own 20% of the home, and the bank owns 80% of the home.

As time goes by and you continue making on-time payments, then the banks ownership will slowly reduce. This is why it’s so important to own your home and not just throw away the money towards rent.

3. House Hacking Lets You Live The Way You Want

The beauty of life is to live life the way you want. It’s your money, you should spend the way you want to.

You need to enjoy every moment of your life, and being locked down on a home just locks you down. Why should you take life so seriously?

Living life for others, living life for society? That’s not how it should be lived. Zumbly was created to help you achieve your dreams.

Love hitchhiking, traveling the world, going to parties? Then you need to get your money to work for you and not for someone else. House hacking will let you live the life you want.

Tomorrow Ibiza, Monday Ko Phi Phi, Thursday Miami. Don’t ever miss another event that you want to go to.

If you have a room available, just put it up on Airbnb and use the funds to travel around the world.

A trip from LAX to Miami is only $107 if planned according. If you did a little more research then the 5 minutes we spent, you can probably find it for a lot cheaper. Here’s proof.

Related:

house hacking lets you fly for free

So how many days do you have to rent your home to pay off your round trip? Let’s say you live in LA, and you Airbnb your room for 7 days.

If you book out all 7 days, for $120 each a night that will leave you with $840. After fees and other expenses, that will leave you with somewhere around $600.

The flight costs $107 for a one-way trip which then leaves you at $493.

Now you just have to find an Airbnb in Miami. Luckily, there’s no shortage of things to do in Miami. You can rent a bunk bed for as low as $17 a night.

You’re always on the move so all you need is a place to crash, shower, and keep hygiene on point.

If your living expenses cost, $160 for a week then your left with $330 with discretionary income.

That gives you a spending budget of $48 a day.

There you go, you went to your dream vacation to Miami without paying a dime. Maybe you even came out on top and made some cash.

Check out how much similar properties can make a month by signing up for Zumbly.

4. House Hacking Lets You Meet New Awesome People

Every time you list your home on Airbnb, or get new tenants you meet new people. The more people you meet the bigger the network you have.

It’s a small world, so you never know who you meet. You’re exposed to so many different cultures, food, and most importantly other like minded people!

The same applies when you’re renting out your room to travel to other cities. You’re always on the go meeting new individuals and that’s one of the benefits of house hacking. Meeting new people is extremely fulfilling, and the bigger your social network the more opportunities you will have in life.

5. House Hacking Gives You Experience in Real Estate

Knowledge is one thing that no one can take from you. You gain knowledge and skills that can’t be taken away by deep diving into house hacking and understanding the ins and outs of property ownership, investments, and money management.

Every homeowner is a real estate investor. Even if they are a first time home-buyer. In fact, first-time home buyers are the most important group of investors.

First time home buyers are younger, smarter, understand technology, love video games, and are more efficient. Innovation in real estate and home buying will be fueled by new investors, and they will be the ones telling the stories of success in the future.

Millenials are always trying to invest in new trends. Just like the rise of esports because of easier access to technology. If you want to be an investor looking to capitalize in new trends, then check out this new Esports ETF.

Are you looking for Airbnb investment property, and don’t know where to start? Signup to Zumbly so you get more knowledge on your local market.

Related: 10 Best Real Estate Investor Websites in 2019

Questions You Need to Answer Before House Hacking

  1. Do you have a list of houses with a great home score?
  2. Do you have a list of ideal locations for your investment property?
  3. How are you going to finance the investment property?
  4. Is my credit score high enough to get a loan?
  5. Would you live in the investment property yourself?
  6. Are you ready to learn how to become a landlord?

Searching for the right Investment Property

Find the right investment property for house hacking is a lot of fun. Searching for houses is extremely exciting. but it’s always taken for granted. When conducting your house search, you want to keep a few things in mind, amongst the most important is asking yourself whether you can invest in your potential house.

In other words, will your house be able to potentially pay for itself? You can rest assured that our Zumbly Home Score will help you make the best, most effective and most efficient house search yet.

Our Home Score here at Zumbly generates a real-time scored that is based on over 500,000 calculations. Homes in each city are weighed and are scored against each other. We will discuss more about housing investing and how

Zumbly can help you find the most worth-it home, in our next section below, “Can You Invest.” What are you waiting for? Start searching!

Would You Live in the Airbnb Investment Property?

When it comes to buying the right house for house hacking, you want to make sure that the house is what it appears to be on the internet. When you have narrowed down your search, in terms of potential neighborhoods that you like or know are best to invest in, make a list of the houses that you want to take a closer look at.

When you find something that you particularly do not like in a specific house, make sure to ask yourself if it is an easily fixable and simple cosmetic issue. If this is the case, then you have to weigh the pros and the cons; is this cosmetic issue worth having me not buy this property? The answer is usually no, so it is something that you want to keep in mind when looking at houses and properties.

Do You Need a High Credit Score before House Hacking?

Before you begin your home search and homebuying process, is it a good idea to check your own credit. Most lenders see your FICO score, so make sure that you are using a FICO score. This will grant you the time that is necessary to work on further building your credit score if required. Even the slightest increase in your credit score can make a big difference for you in the long run.

Related: Mezzanine Loans – Everything You Need to Know

Have Proper Documentation Before Buying Your Airbnb Investment Property

If you are applying for a mortgage, the lender will ask you for several documentation. If you make sure to gather all of the necessary documentation ahead of time, you will surely be buying yourself time and expediting the process. This will help you to obtain your approval sooner. Below is a list of necessary documents that you will need when applying for a mortgage:

  • Tax Returns: Your last two years’ tax returns are necessary documents because your mortgage lender will want to obtain a full history of your current financial situation. Your lender will want to see that your annual income is consistent with your listed reported earnings, and that there are no especially large fluctuations from year to year. By singing a 4506-T Form, you will grant your lender the permission to request a copy of your tax returns from the IRS.
  • Credit History: Your credit history report is a necessary document. It is needed for your lender to asses you as a borrower. In order to do this, your lender will need your written or your verbal permission. If your report has blemishes, which might include a previous foreclosure or sale, they will need to be explained. As the borrower, you have to be prepared to write a statement, in which you explain any negative items that exist on your credit history report.
  • Photo ID: Your photo ID is a necessary document that you have to provide for security purposes. This is so that you can prove that you are exactly who you are claiming to be. Your driver’s license, or Social Security card are also acceptable.
  • Employment or Income Verification: This includes the documents of your last two years’ tax returns, W-2s, 1099s, and your last few paychecks.
  • Renting History: If you already own a home, lenders may request proof that you will be able to pay your mortgage on time. Documentation of your renting history may include a year’s worth of canceled rent checks, or documentation which shows that you have been able to pay your rent by the due date. If you do not have an extensive credit history, then your renting history is critical.

It is important to keep in mind that your lender may ask for additional documentation and information to what is provided on this list.

Hire an Inspector for Your Investment Property

Getting inspection should be an important part of your Airbnb investment property. After you have chosen your ideal investment property, you get a short inspection period, which typically lasts from three to five days.

During this time, you are given the opportunity to hire a professional housing inspector to conduct a thorough inspection of your new property. This is important because if there is something that seems off, you will be given the chance to resolve whatever it is that is of concern without having to face penalties for house hacking and having others live out of your house.

Most home inspections are standard, and include the inspection of structural elements. These structural are comprised of your houses’ foundation, floors, ceilints, roofs, and walls. Inspections will check for parallel vs horizontal cracks on your floors, will make sure that your house’s foundation appears to be secure, that your roof does not have any leaks, and history concerning fires in your house’s attic.

Your professional housing inspector will typically also conduct an exterior inspection. This exterior inspection includes the evaluation of landscaping, elevation, wall coverings, drainage, grading, fascia, sidewalks, fences, windows, doors, exterior receptacles, tims and lights.

If your house has an attic, this is typically inspected together with your roof, to evaluate your roof’s construction, the framing and the ventilation. This will cover questions such as the length of time in which the roof must be replaced, its average life expectancy, and the number of layers that it is composed of.

Appliances are also inspected during your housing inspection. This includes the close examination of your range and oven, any built-in microwaves, smoke detectors, garbage disposals, and your builtin dishwasher. Washers and dryers may be included in this inspection; however, it is important to make sure that these items are not the original owner’s personal property, and that he or she will not be taking the items with them.

Is House Hacking Right for You?

Feeling motivated? Great! House hacking and using Airbnb to live the way you want and deserve is a great way to live life to the fullest.

Just remember, before any decision is made with large sums of money, you need to do your research. Don’t worry. Research doesn’t have to be hard, nor do you have to be an expert. Zumbly will help you do research just like any other expert.

If you’re pumped like we are and want to do your research for the next house hack then we recommend you sign up to Zumbly.

Related: The 10 Best Real Estate Tech Startups in 2019