Unsurprisingly, savvy real estate investors are always looking for interesting new strategies, techniques, and opportunities to get an edge over their competitors.
In essence, they want to “hack” the real estate market.
As you might imagine, making such a lucrative and well-known market for investors is practically impossible. There aren’t a lot of shortcuts that are effective without proportional risk, and most real estate investing techniques are well documented and widely understood.
As such, the term “house hacking” is a bit misleading.
But at the same time, when utilized properly, it can be an impressive strategy to help you make better use of your capital and build the real estate portfolio you’ve always wanted.
Contents
The Basics of House Hacking
What exactly is house hacking?
Basically, house hacking is purchasing a multifamily property, such as a duplex or triplex, and living in one of the units as a primary residence. In this way, you’ll function as both the primary owner and resident of the property and its landlord. When you’re ready, you can rent out the other unit to a tenant, collect the rental income, and use that income to pay for some or even all of your mortgage.
If utilized correctly, this can be a great way to break into the real estate investing game. You’ll pay a bit more for a multifamily property than you would for a comparable single family property, and obviously, if you’re renting out one or more of the other units, you’ll have less space to yourself. But as a result of your efforts, you can get away with counterbalancing your mortgage payment while simultaneously building equity.
It’s technically a strategy you can take advantage of multiple times, but most people employ it only once, at the beginning of their real estate investing careers. We shall examine the benefits and detriments of house hacking to determine why this is the case.
Why Is House Hacking an Attractive Real Estate Investing Strategy?
These are some of the reasons why house hacking seems like such an attractive real estate investing strategy:
- Accessibility. One of the highlights of this strategy is its accessibility. It might sound like “house hacking” is a sophisticated technical strategy accessible only to the most seasoned, brutally clever real estate investors, but it’s something you can use even if you have no prior real estate investing experience. Half your motivation will be finding a primary residence where you (and your family) can stay; accordingly, it’s not much more complicated than buying a primary residence for yourself. Depending on where you’re buying, a simple duplex may not be much more expensive or harder to buy than a comparable single-family home. And because you’ll only be managing one or two other units, attached directly to your primary residence, the management side of the equation is very accessible as well.
- Loan options. When buying a primary residence home, there are multiple loan options available to you – beyond what you’ll likely find for purchasing a pure investment property. For example, you might qualify for an FHA loan or a loan through the VA. Depending on your financial circumstances, this may be greatly advantageous to you; you may qualify for a much lower interest rate or more favorable terms, reducing your expenses in the process.
- Equity building. House hacking gives you an opportunity to build equity passively. In many situations, you’ll be able to charge rent that covers or mostly covers your mortgage payment. In exchange, you’ll be responsible for managing the property, finding tenants, and keeping those tenants happy. While living (nearly) rent-free, your mortgage payments will gradually contribute to your share of “equity” in the property. With more equity, you’ll increase your net worth – and you’ll have available collateral you can use to take out more loans and lines of credit for future property purchases. Eventually, if you decide to continue holding it, you’ll pay the entire property off – and you’ll no longer have a mortgage payment.
- Expense mitigation. Let’s assume you’re interested in buying a home as a primary residence. In the absence of a mitigating strategy, you’ll exclusively shoulder the full burden of expenses related to the property, including your mortgage (principal and interest), insurance, property taxes, and repairs/maintenance. When house hacking, assuming you’re able to keep your other unit(s) occupied, you’ll have a recurring stream of income you can use to offset these expenses. Even if the multi-family property is more expensive than what you’d otherwise be able to afford, you can compensate for those extra costs with the extra revenue.
- Locality. With the help of property managers, you can own, manage, and capitalize on properties all over the country – or even around the world. However, there are benefits to investing in properties in the city or neighborhood where you live. You’ll understand the area better, you’ll be able to act quickly if there’s an emergency, and you’ll have more skin in the game, which could motivate you to help shape the neighborhood for the better. While there are certainly some downsides to sharing a property with your own tenant(s), being nearby is associated with some real perks. If there’s an emergency, you can spring into action right away. If you’re handy, you can take care of maintenance at your convenience. If your tenant has problems or concerns, they can talk them out with you incidentally.
- The learning experience. Real estate investing is challenging, especially as a newcomer. It’s difficult, and borderline impossible, to jump into the management of a portfolio with dozens of units and many different types of properties. But managing a single unit in a property where you also live? That’s not especially hard. This is why so many young, up-and-coming real estate investors begin with house hacking; it’s a newbie-friendly way to gain experience in the real estate investing game. In no uncertain terms, you will make mistakes and learn things the hard way while house hacking; this is all part of the broader learning process.
- Future potential. Living in this property is just the start. If you save up some money, build some equity, and get more comfortable with the real estate investing game, you can move to a different property and maintain ownership of your first property, which includes retaining the terms and conditions of your loan. In most cases, this means finding a tenant to occupy the unit where you lived, multiplying your income. You might even be able to use this income to pay for the entirety of the mortgage on your newer, bigger, more expensive primary residence; and if not, you’ll have a decent chunk of extra cash to use as you see fit each month. It’s the next step in snowballing the size and scope of your real estate portfolio, as this extra money can gradually help you fund subsequent purchases.
The Downsides of House Hacking
However, there are some important downsides to house hacking that we need to consider as well:
- Prices and competition. House hacking has a lot of benefits, and both novice and experienced investors realize it; the types of properties suitable for house hacking tend to be hotly contested. This pushes up the prices of house hacking-worthy properties and makes it more challenging to put together a competitive offer. Purchasing a home for house hacking is often much harder than purchasing one for yourself and your family exclusively. The higher price can sometimes be justified, since you’ll hypothetically mitigate the extra costs with supplemental income, but there are dangers here as well; if you’re put into a delicate financial position, any economic disruption could cause havoc in your investment strategy.
- Living arrangements. As we’ve already explored, there are some benefits to living in a property you’re also responsible for managing. But it’s not always comfortable to live immediately next door to your tenant(s) – and potentially share walls with them. If there are standing issues with the property, or if you have a problematic relationship with your tenants, it can make your living situation tenser and harder to manage. Fortunately, this issue can be strongly mitigated by choosing the right property for your strategy and thoroughly screening your tenants.
- Restricted scalability. House hacking is constructed to allow for real estate portfolio scalability. However, at this scale, growing can be tricky. If you can’t attract a tenant or if your tenant is unreliable, you may face higher expenses and temporary losses. Even under ideal circumstances, the extra unit(s) probably won’t give you much in the way of extra income each month. If this is your only path to generate extra money for your real estate investing plans, it could take a few years before you accumulate enough savings and equity to fund a new purchase.
How to Make House Hacking Work in Your Real Estate Investing Strategy
House hacking isn’t right for every real estate investor or every homebuyer. And even if it is a good fit for you, there are many ways it can go wrong.
These are some of the most important strategies for making house hacking work in your specific real estate investing strategy:
- Choose the right property. Some properties are functionally suitable for house hacking. Others aren’t; barring major structural renovations, single-family properties and massive apartment buildings aren’t going to work. Within the category of suitable house hacking homes, some properties will be better fits than others. Consider the purchase price, your ongoing expenses, the condition of the property, the attractiveness of the property to prospective tenants, and potential growth patterns. Don’t be afraid to be picky here; it’s often worth delaying a purchase by a few months or even a year or two if it means finding a better fit for your real estate strategy. Otherwise, you could end up with a situation that loses money.
- Know the local market. Not all areas are equally hospitable to house hacking. In some areas, the prices are too high to make this work. In others, there isn’t sufficient renter demand to generate the income you would need to stay profitable. Additionally, you’ll need to get a feel for local market dynamics before you attempt to time your purchasing decision. Get to know your local real estate market before you pounce.
- Evaluate your personal finances. Just because it’s possible to purchase a property doesn’t mean it’s a viable financial decision, given your financial situation. If you don’t have ample money coming in, or if you don’t have a bank of capital to handle emergency situations and ongoing repairs/maintenance, you may not be able to make house hacking work. Saving more money and seeking supplemental sources of income can help put you in a better position to strike.
- Consider other options. House hacking isn’t the only way to break into the real estate investing game. You can also buy a single-family property, then move and rent it out – or buy a multifamily property you never intend to live in so you can generate consistent income to fund another purchase in the future.
- Get expert advice. As a novice, it’s in your best interest to seek the advice and help of established experts in the field, including real estate agents and other investors. Ideally, you’ll talk to seasoned real estate investors to clarify your goals and build a strategy – and you’ll work with an agent or team of agents to find the best house hacking property for your needs.
- Create a long-term plan with contingencies. Don’t just think about your house hacking strategy for the next few years; think about your real estate investment strategy for the next decade or longer. Create a long-term plan for yourself, even if it’s just a sketch, and include contingencies for things that go wrong.
Finding a home worthy of a house hacking strategy can be challenging, even in relatively favorable markets. That’s why it pays to have a team of real estate experts on your side to help you find the best deals and build your investment strategy from the ground up. If you’re looking for some extra support, or if you’re in need of a seasoned real estate agent, contact us today!
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