Have you heard the term house hacking recently?
The term was first conceived in 2013 by real estate investor, Brandon Turner, from Bigger Pockets. Although the term is relatively new, the concept has been around for ages.
Incidentally, many millennials are now resorting to house hacking as a springboard to their financial careers.
What Is House Hacking?
Simply put, house hacking typically consists of buying a multi-unit real estate property (typically a 4-plex, triplex, or duplex), living in one unit, and then renting out the other units. However, in my opinion, one does not necessarily need to purchase a multifamily property to succeed in house hacking (more on that later).
In most scenarios, it would be ideal that the income from the additional rental units would cover most (or all) of your mortgage, along with some other living expenses.
Now, let’s dive into the benefits of house hacking.
Benefits of House Hacking
For most people, just getting started in real estate investing can be the toughest part.
It can take years of discipline, debt elimination, frugal living, and smart budgeting to save up for your first investment property. But, engaging in house hacking can be a powerful catalyst to beginning in the world of real estate investing. Here are a few (of the many) benefits to house hacking:
Entry Level To Real Estate Investing
In today’s current economic market, first-time homebuyers are finding it challenging to get into their first home. Saddled with student loan and consumer debt, it can take years to save up for their first home, let alone able to afford the mortgage. And that’s just the first home. Saving up for an investment property can seem like it’ll never come if you can barely save up for your own home.
Fortunately, house hacking offers a hybrid solution that allows a would-be real estate investor to buy their own home (likely at an earlier age) while also purchasing their first investment property.
Low(er) Risks Associated with House Hacking
In addition to easier entry into real estate investing, house hacking can also provide a lower amount of risk when compared to traditional real estate investing. Yes, you still have tenants that you need to manage. Yes, you will still have expenses. And yes, you will still have some risk. But, instead of purchasing an investment property that’s out of town or the next state over, you’re actually living at the property. This gives you the opportunity to see problems before they happen. You’ll be living with or near your tenants and can tend to issues that may arise over time.
In addition to potential lower risks, house hacking can also provide many tax benefits. While homeownership brings many tax advantages, owning an income property can also bring many tax benefits as well. Certain tax benefits might include:
- Mortgage interest tax deductions from income
- Depreciation (non-cash expense) deduction from income
- Private Mortgage Insurance deductions
- Cost of repairs, maintenance, and upkeep
- Cost of services (e.g., legal consultation or other related services)
- Deferring capital gains via 1031 exchange
- Property tax deductions
Be sure to consult with your Certified Public Accountant (CPA) for tax advice.
Cash Flow Through Passive Income
House hacking can also serve as a terrific opportunity to generate passive income. Depending on the number of units you have, you may be able to generate enough rent to pay off your mortgage (and then some).
And given that a mortgage is typically the highest expense item for most individuals, you now have the margin to save faster for a downpayment on your next property, while still saving building your first asset.
Early Exposure to a Growing Asset
House hacking can also provide you with early exposure to a growing asset. Because the barrier for entry is lower when you have paying tenants, you get to start building an asset sooner. Whereas it may have taken years to secure your first investment property, getting started with a multi-unit property allows you to get started early on.
Opportunity to Earn Sweat Equity
In addition to early exposure to a growing asset, you also have the ability to add value to that asset with little or no money. If you bought a property that needs some rehabilitation, you can slowly add value over time by making reasonable upgrades.
Single Family Homes Work Great Too!
In my opinion, you don’t have to solely invest of multi-unit properties to make it work. While it would be nice to have more units generating more cashflow, there are some expensive locations where purchasing a multi-family property can be cost-prohibitive. For example, in my geographic location, I’ve seen duplexes go for upwards of $600,000. ?
Therefore, house hacking can also occur within a single family residence. For instance, a single person could purchase a 4 bedroom house, and rent out the other 3 rooms (and maybe a converted garage for additional income). Many times, renting out those other rooms is enough to cover most (or all) of the mortgage.
House Hacking with a Family
All of these benefits sound great in theory. Especially for someone who may be young, flexible, and single. Is house hacking someone who’s married with kids at home?
House hacking can work for families as well, but there are some considerations you may want to keep in mind– especially when there’s children involved. And always make sure your spouse is on board with what you want to do.
A few questions you can ask yourselves might include:
- Is the property located in an area we want our children to live in?
- Is it near the schools that we desire?
- Do we want to share a wall (or home) with our tenants?
Some Excellent Resources on House Hacking
- Choose “House Hacking” Over Starter Home – by Grant Sabatier
- The Tax Implications You MUST Understand Before House Hacking – by Brandon Hall
- An Intro to House Hacking: Here’s How I Get Paid to Live for Free – by Brandon Turner
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