House hacking is a real estate investing strategy where an individual or a group of individuals live in one unit of a multifamily property while renting out the other units to generate income. Or an owner may rent out rooms within their single-family home. This allows the owner to offset the costs of owning the property and potentially make a profit.
Essentially, house hacking allows an individual to live in their own home for little to no out-of-pocket expense while also building equity and potentially earning a profit. House hacking can be a good way for a first-time investor to get started in real estate investing, as it allows them to live in the property while learning about the business and gaining experience. The average house hacker saves approximately $500 per month on housing costs, according to a survey by the National Multifamily Housing Council.
It is difficult to determine the popularity of house hacking as it is a relatively new concept, and House hacking has gained popularity in recent years as a way for people to purchase a home and generate passive income. There are also many online resources and communities dedicated to house hacking, which may suggest that it is a growing trend among real estate investors.
What are the Benefits of House Hacking?
One of the primary benefits of house hacking is that it allows an individual to live in their own home without having to pay a traditional mortgage payment. This can be especially appealing for those who are just starting out in real estate investing or who may not have the financial resources to make a large down payment on a traditional single-family home. Additionally, house hacking can be a good way for an individual to build equity in a property and potentially earn a profit over time.
Here is a summary of the key benefits of house hacking that are appealing to many investors:
- Lower monthly expenses: By living in one unit of a multi-unit property, you can significantly reduce your monthly housing expenses by renting out the other units. This can allow you to save money on rent and other expenses such as utilities and maintenance.
- Potential for passive income: Renting out the other units in your multi-unit property can provide a source of passive income, which can help offset your own housing expenses and provide financial stability.
- Opportunity for real estate appreciation: House hacking can provide an opportunity to purchase a property that may appreciate in value over time, potentially providing a profit when you decide to sell.
- Ability to build equity: By living in one unit of a multi-unit property and renting out the others, you can build equity in the property through your mortgage payments. This can provide financial security and potentially serve as a retirement savings strategy.
- Potential for tax benefits: As a landlord, you may be able to claim certain tax deductions related to your rental property, such as mortgage interest, property taxes, and maintenance expenses. These deductions can help lower your overall tax burden and increase your overall financial return on your investment.
What are the Risks of House Hacking?
While house hacking can be a lucrative way to mitigate your monthly mortgage or even exceed your mortgage and start to collect serious rental income, it’s not without its risks. One of the primary considerations is the added responsibility of being a landlord. This can include managing tenants, dealing with maintenance issues, and potentially dealing with tenant-related legal issues. Additionally, the financial risk of house hacking is relatively high, as the individual is responsible for the entire mortgage payment if the units are not fully occupied.
If the house hack involves renting out a portion of the property, it is important to follow all relevant laws and regulations, including zoning laws and tenant rights laws. And if the house hack involves living with roommates, there is a risk of conflict or discomfort due to different lifestyles or personalities.
Types of House Hacking
There are several different types of house hacking, each with its own set of benefits and drawbacks. Almost anyone can house hack as long as they have available space for rent. Here are some of the basic types of setups for house hacking:
- Renting out Rooms – Even owners that don’t own a house with a separate living space can get involved with house hacking. Many tenants want to rent out rooms within a larger house to save money and because they don’t need a completely private living space. It’s an excellent way for the owner to pay down their mortgage if there are unused bedrooms in the house.
- Duplex – This involves purchasing a duplex and living in one unit while renting out the other. This allows the individual to offset the cost of their mortgage payment while also having the opportunity to interact with their tenants and potentially build a sense of community.
- Triplex/ Fourplex – This involves purchasing a multi-unit property with three or four units and living in one of them while renting out the others. This strategy allows for even more rental income, potentially making it easier to cover the mortgage payment and other expenses associated with the property. However, it also comes with added responsibilities as a landlord, including the need to manage multiple tenants and potentially deal with maintenance issues.
- Larger Multifamily Properties/ Apartment Buildings – In this situation, the owner resides in one unit or apartment and rents out the rest of the units to tenants. This can be a more complex and financially risky venture, as the cost of purchasing a larger multifamily property can be significantly higher, and there is a greater potential for vacancies and other issues. However, the potential for profit is also much higher, making it an attractive option for some investors.
Despite the potential risks, house hacking can be a lucrative and financially savvy investment strategy for those who are willing to take on the added responsibilities and are comfortable with the potential financial risk.
Learn Build Profit is a financial literacy blog providing expert insights on income investing and passive income generation through dividend stocks and real estate.