There's a toggle at the top of the app that lets you choose whether you want to send your contacts an SMS or an IM.

I've been using the Hangouts app for a few weeks now and am pretty impressed with it so far. It's become my go-to messenger. All of my friends usually keep their Gchat open during work, so switching seamlessly between chat and SMS has been a pretty good experience so far.

The app, though, is a little slow to load and send SMS's, but not enough to warrant disuse.