For many people in the U.S., it is expensive to own a house. This is especially the case when it comes to properties that are located in desirable areas.
From the monthly mortgage payments to maintenance fees, there’s always money involved one way or the other. So, are you looking for how to get a house the most cost-effective way? House hacking may be your best bet.
With house hacking, many people have found that it is the best way to invest in real estate without spending too much of their own money.
Overview of House Hacking
House hacking is a real estate investing strategy where people rent out units of their primary home with the intention of using the income to offset expenses like mortgages and other costs that come with owning a home.
This way, many people can live in areas that are usually expensive and even generate income as homeowners. It is also proof that you don’t have to buy separate properties to enjoy the benefits of being a real estate investor. Especially if you don’t have enough money to get started right off the bat.
Related: Real Estate Investing: 5 Ways to Get Started in 2021
Benefits of House Hacking
The general idea of house hacking is that you are able to afford a home that you would ordinarily be unable to afford, by allowing other people to pay for associated costs. Whether you’re hearing about it for the first time or this approach is something that you’ve been thinking about but don’t know if it’s right for you, here are some reasons why you should consider it as your real estate investing strategy.
1 – A Great Way to Kickstart Your Real Estate Investment
If you’re looking for how to get into real estate, house hacking is a great entry into that lucrative world. One of the best ways to get experience with real estate investing (like most things in life anyway) is by getting involved in the action. This is the kind of experience that hacking properties offer you. Simply because you’ll be living in the property as your primary residence while it also doubles as an investment property.
So, yes, it requires you to work as a landlord but it will also equip you with everything you need to manage tenants, especially as your real estate portfolio increases in the future.
2 – Regular Income With Low Risk
Compared to more traditional real estate investment strategies, house hacking offers a lower-risk way to generate monthly income. Again, you will have to be the landlord and tenant at the same time but because you live on the property, you can easily discover issues with the house faster than when you live away from it. With this type of income, albeit not passive income, you also get to pay down on your mortgage while saving funds for more real estate investment opportunities and building equity.
3 – Low Down Payment
One of the major advantages of house hacking is that you don’t have to put down 25% of the payment to purchase a home. For instance, residential multifamily apartments that are owner-occupied can be bought with a low down payment of 3.5% – 5% of the property value via an FHA (Federal Housing Administration) loan.
Typical real estate investment loans on duplexes require a 15% down payment and up to 20% down payment for a 4 unit building. And if you, the owner, would not be living in it, it goes as high as a 25% down payment. And while higher down payments will increase your cash flow, a lower down payment is great for when you need to set aside an emergency reserve for unforeseen capital expenditure after purchase.
However, you should know that there are different pre-qualification requirements for FHA loans such as “owner occupancy” for a year. The FHA loan limits also depend on where you live. So, it is advisable to check FHA Mortgage Limits to know the loan limits for your area.
4 – Tax Benefits
With house hacking, you can save money on tax returns as long as you can prove all expenses related to your rental income. The most significant tax benefit is depreciation. The IRS allows annual deductions based on the distribution of the total purchase cost spread over a period of 27.5 years. The assumption is that the value of your property is reducing throughout this period because of wear and tear. As a result, if you are house hacking, you can show a loss on your returns but in reality, your property is generating cash flow.
Deductible costs range from maintenance to operating expenses and utilities and other costs that can be attributed to the improvement of the rental property. These are the costs that can be redeemed through depreciation.
Read More: Real Estate Taxes: Everything a Beginner Investor Needs to Know
The Downsides of Hacking Houses
Like every other real estate investing strategy, house hacking comes with immense benefits as well as some drawbacks. But these should generally not be a discouragement, they are just things to keep at the back of your mind before getting started.
1 – It’s Not Just You Now
With house hacking, the home becomes the residence of other people – not just you. This is true especially if the property is a single-family apartment. You and your tenants literally live together. And this may be uncomfortable if you’re a private person or you’re coming from an apartment where you’ve always lived alone.
It is a lot better if the investment property is multifamily where each person has their own unit. It is also great if you already have a family and need more privacy. Usually, duplexes and triplexes are the perfect property types to get into this strategy.
2 – Landlord Duties Can Be Exhausting
House hacking involves you doing the work of a landlord, which can sometimes be a lot if you’re managing many tenants. From filling vacancies to getting maintenance requests, making new purchases, and so on, there’s always something to be done.
Hacking a house also means that you have to attend to issues a lot faster than you normally would if you lived alone. Add this to the fact that you most likely work a day job. You eventually have to learn to manage the additional workload.
This can involve setting up a process for how tenants should make any kind of requests and how they will be addressed. For instance, you can use property management software to manage the issues and resolve them within a set period.
Guide to Hacking: What Is the Best Strategy?
There are different home hacks out there, and they work differently depending on factors like location, property type, your kind of family, and income level. However, they all work to serve the same purpose — to generate income and reduce costs. And for some, it’s just how to get a free house.
With this in mind, here are some of the best house hacking strategies to consider, and also if you’re renting out a house for the first time.
1 – Multi-Family House Hacking
This is a popular house hacking strategy among real estate investors and one of the best ways to house hack. You basically look for a multifamily property for sale, purchase it, and live in one of the units while renting out the rest of the residential units. You can find the best deals on multifamily homes by using a multi family deal analyzer.
One benefit of this is that you do not have to share a unit with your tenants. This strategy is great for real estate investing for beginners as you can charge higher rents and still enjoy lower down payments since you also live in the property.
Related: How to Generate Passive Income With Multifamily Real Estate investing
2 – Single-Family House Hacking
For a single-family home, how to hack a house requires having multiple bedrooms in your property. You can then rent out the spare rooms to tenants as an alternative means of generating income.
Renting out parts of your single-family home or apartment is also great for short term rentals like Airbnb. The major benefit of this is that it allows you to choose when you want tenants in your house. For instance, this can mean picking out peak periods in the year when people mostly visit your neighborhood for events or tourist activities. Then, you open your apartment up for short-term rentals during this period and earn extra income.
Related: House Hacking with Airbnb: How to Live for Free
3 – Live-In Flip
With the live-in flip strategy, you purchase a property that needs some improvement and live in it while fixing the property. Once the work is complete, you sell it off for a profit. However, you need to live in the property for a minimum of two years. This is so that you don’t pay huge capital gains on rental property when you finally sell the house. And you don’t pay any capital gains tax on the first $250,000 of net proceeds (500,000 if you’re a married person).
Some people’s real estate investing strategy is entirely based on a live-in flip. And they’ve made a lot of money doing it. One great advantage of live-in flip is that you can combine it with other strategies such as renting out parts of the property while work is ongoing on other units. This way, you can use the rental income to augment the costs of fixing the entire property.
4 – Luxury House Hacking
This house hack leverages properties with one extra dwelling. You can do this in two ways. You can purchase a property that has an existing extra dwelling or you can build one from scratch. The idea is that the additional dwelling should have the basics such as a kitchenette, bed, and bathroom.
Then you can rent it out either as a long-term rental or an Airbnb depending on what works best for you, your location, and your family.
Top Tips for Successful House Hacks
Yes, having the right strategy is integral to succeeding at house hacking. But there are other things to note regardless of which strategy you adopt. So, we’ve prepared a list of tips that will help you get the most out of this real estate investment strategy.
1 – Find The Best Property
Like other real estate investing strategies, property type and location play a great role in the success of your house hacking endeavor. They determine other things like property price, rental income, quality of tenants, and so on. So, you want to ensure that the property you’re buying is in a location that meets certain conditions like job growth, social amenities, population growth, as well as an active renting population.
To make this process easier, you can use a tool like Mashvisor’s property finder to find the best cities for house hacking. This way, you can quickly discover properties that are suitable for house hack purposes, as well as the ones that fall within your budget.
2 – Manage Tenants Professionally
You may not realize it immediately, but you’re now a landlord and so everything has to be streamlined to maintain a good relationship with your tenants. This starts right from your screening process and includes application reviews, interviews with prospective tenants, real estate lease agreements, property maintenance, and income collection.
3 – Research Income Projections
Another mistake that many new investors make is to buy houses without having an idea of what they can make from such purchases. But in reality, you should be aware of how much you can make from investing in a property, whether it is a traditional rental or Airbnb property. Hence, the need for an investment property calculator like Mahsvisor which provides you with key information about a property such as rental income, average property price, cash on cash return, occupancy rate, and daily rate. Everything you need to make the right investment decision.
4 – Check Your Finances
Remember that the idea of house hacking is to tap into the income-earning opportunity that real estate investing provides. But equally important is your financial readiness. For instance, you should ensure that you have enough money stashed away for a down payment as well as additional start-up costs required to fix the property should remodeling be required.
You also want to ensure that you have enough to take care of rent in the event that a tenant moves out and a vacancy ensues. Also familiarize yourself with tax deductions generally available to landlords and unique to your state, county, and city.
The whole idea of this is so that you don’t find yourself in limbo with funds when you finally make your purchase.
Conclusion: Is House Hacking for You?
As mentioned earlier, house hacking is one of the best strategies for getting started with real estate investing, especially if you’re looking for how to live for free. So, if you want to start real estate investing but don’t want to pay the mortgage on your own, house hacking is a good strategy for paying it off. Just ensure that you get the right property in a location that offers great returns and where you can easily find tenants ready to move into your apartment, whether it’s a multifamily or single-family home.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.