House hacking is an increasingly popular strategy that allows individuals to purchase multifamily properties, live in one while renting out others to generate rental income that covers mortgage payments and expenses.
Investment strategies offer an ideal means of building wealth and financial independence, but can present various risks and challenges.
What is house hacking?
House hacking refers to a type of real estate investment strategy in which an existing single-family home is rented out to tenants as an attempt to reduce or eliminate housing expenses faster and reach financial freedom sooner. House hacking also presents valuable property management experience, potential tax benefits, and an opportunity to learn how to maintain investments effectively.
Before making any definitive decisions regarding house hacking as an investment strategy, there are several key points you must keep in mind. First and foremost is understanding that no investment strategy is perfect and thoroughly researching each potential investment before making your choice.
House hacking offers several key advantages, the biggest being savings on mortgage costs and more money towards other property costs and future investments. Furthermore, multifamily properties generally come with lower interest rates than single family homes would.
House hacking may lead to increased wear and tear on your property, which may lower its resale value as well as decreasing rental income generated. Furthermore, your house may remain vacant during certain times, which will decrease rental income generated.
House hacking may prove challenging if it creates any significant backlash from friends or family, particularly if your parents hold different views about investing or property management than you.
House hacking can be an extremely rewarding and life-altering opportunity. It can shorten the path toward financial independence while giving you more freedom and control over how to live life.
If you’re considering investing in real estate, house hacking should definitely be on your radar as an effective means of creating wealth and reaching financial independence – and has numerous advantages over other investments.
What are the pros and cons of house hacking?
Before deciding to house hack, it is essential that you carefully assess all the benefits and drawbacks. Furthermore, you should carefully analyze which property type and strategy will best meet your investment goals.
House hacking’s most prevalent strategy involves purchasing multifamily properties and renting out individual units as rentals. This approach works especially well in duplexes, triplexes, or fourplexes as it’s often cheaper to do so than renting single family houses out.
As a beginner in real estate investing, an FHA loan is an ideal way to start off. Many investors have used FHA loans to house hack and put as little as 3.5% down.
House hacking offers another advantage in terms of saving money on monthly mortgage payments. By sharing the expense among multiple tenants, house hacking allows you to lower out-of-pocket expenses while simultaneously building more equity in your property.
Your tenants will provide additional income that can help build your cash flow and accelerate mortgage payoff, or use it to purchase additional properties for your portfolio.
However, landlording can present challenges. Being responsible for maintaining an investment property to code while making sure your tenants pay on time can be daunting task for new investors.
Being a landlord can be an excellent opportunity to hone your management and leadership skills for future endeavors, as well as an excellent way to acquire essential property management and legal knowledge that’s required by any Real Estate investor.
Is house hacking right for me?
Consider all aspects of house hacking before deciding if it’s right for you, including costs involved and meeting investment goals with an acceptable cap rate. Once you decide it’s suitable, utilize tools such as BiggerPockets to find properties locally that best suit your investment goals while learning more about how you can get started.
House hacking offers one of the fastest routes to wealth creation and financial independence. Although you must remain disciplined when contributing to savings and investments, you could see dramatic returns with this straightforward strategy.
However, it’s essential to keep in mind that real estate investment requires significant capital upfront – which may present challenges for those just beginning with real estate but it is certainly achievable with hard work and discipline.
As a beginner investor, one effective strategy to start is attending local real estate investing meetings and seeking guidance from experienced experts such as lenders, realtors and a Certified Public Accountant (CPA).
Beginner house hackers often encounter hurdles such as vacancy, non-paying tenants and limited capital. If your property sits vacant for too long it could lose value and prove hard to sell in the market.
Nonpaying tenants can also wreak havoc on your property and require costly repairs. If you lack experience managing real estate, hiring an outside service to handle these tasks for you may be beneficial.
Are there any risks associated with house hacking?
If you’re considering house hacking, carefully consider its location and amenities as well as local job market trends and population growth.
In a city with high housing costs, buying multifamily properties may not make financial sense; instead it may make more sense to purchase single-family houses and rent out an accessory dwelling unit, known as a granny flat, for extra income generation.
Converting your garage into extra living space is another home hacking idea to consider. Many homes feature detached garages or basements with separate entrances that could become income-generating rental spaces.
Your other option would be to create an in-law suite, guest room or in-home office to rent out on Airbnb for short-term stays and make some extra cash while traveling or working towards financial independence.
Additionally, you might be able to reduce housing costs by purchasing a smaller multifamily property and using any extra income generated to pay off your mortgage faster and reduce debt load faster.
Before buying property for house hacking purposes, it’s wise to consult an accountant and real estate agent. They can help explain all of the responsibilities that come with being a landlord, and determine whether this investment fits within your portfolio.