House hacking can take many forms. Traditionally, it means renting out extra rooms in a primary residence. But what about a commercial building? That is, can you house hack a 5 unit building?
House hacking means purchasing a property, living in one unit or part of the property, and renting out the remaining parts of the property. It’s a great way to offset the costs of homeownership and get started in real estate.
Can You House Hack a 5 Unit Building?
Yes, you can house hack a 5 unit building as long as the numbers make sense, you acquire good financing options, and you’re prepared to handle managing multiple units.
While it might not be the easiest way to house hack, you can make house hacking a 5 unit building work. As with any deal, the key is to find a property with a decent rental yield for a decent price.
Once you have that, it’s just a matter of doing your due diligence and making sure you can actually make the numbers work.
But don’t get too excited yet.
There are several major downsides to this strategy which make it much less appealing than house hacking a building with fewer units.
You might limit your financing options
When a building has 5 or more units, your financing options will be limited.
That’s because the best financing terms are available for owner-occupied buildings with 1 to 4 units. These properties can be financed with low down payment, low-interest, fixed-rate mortgages like FHA loans.
So terms will be significantly worse for a 5 unit property.
You’ll typically have to bring at least 20% as a down payment, if not 25% or more.
Your interest rate will probably be quite a bit higher as well.
And that’s not to mention the extra fees you’ll likely have to pay for a mortgage on a 5 unit property.
It will likely be more expensive
Naturally, house hacking a 5 unit building will likely be more expensive than house hacking a smaller property.
Thanks to the higher down payment for buildings with more than four units, you’ll have to hand over a lot more cash at the start.
And the building itself will probably be more expensive than a building in the same area with less units. You’re buying a bigger building, after all!
You’ll also have to pay for upkeep and repairs on the entire property. A bigger property means bigger maintenance costs.
You’ll also have to pay for upkeep and repairs on the entire property. A bigger property means bigger maintenance costs.
Then you’ll have to think about things like insurance and taxes. These will most definitely be higher for a larger property. And commercial properties often have significantly higher insurance premiums. More on taxes in a moment.
So, a 5 unit building will probably be a lot more expensive to own than a duplex or triplex.
If you’re not convinced you should think twice about house hacking a 5 unit building yet, the bad news doesn’t stop there.
Taxes may be significantly higher
Taxes will likely be much more expensive when house hacking a 5 unit building.
That’s because the assessed value of the property will be higher. Therefore, the tax bill will be higher too.
Similarly, a 5 unit property may not be eligible for certain local tax exemptions (like a homeowner exemption for property taxes).
Also, if you house hack a 5 unit building and then later decide to sell, you’ll likely have to pay capital gains taxes on the sale.
That is, since it’s not a 1 to 4 unit building, you likely won’t be able to waive a large portion of any capital gains through the IRS section 121 exemption. You may still be able to do a 1031 exchange to defer capital gains taxes, but that will limit your future options and require careful planning.
That said, you should still be able to take advantage of many of the other tax benefits that real estate offers.
More tenants may mean more pain
House hacking a 5 unit building versus hacking a smaller property with only one or two extra rooms means you’ll have more tenants to manage.
It’s important to consider the time and effort required to manage a larger property. After all, in a house hack you are the on-site landlord and property manager.
While more tenants means more rental income, it can also make your house hack more complicated. You’ll have to develop an effective screening process to ensure that the tenants you bring in won’t cause unneeded drama or repairs.
You might choose to hire someone to manage the extra units, especially if it would be too much for you to handle on top of your other obligations.
Simply put, more tenants means more work. Someone will have to do it.
It’s up to you to decide if you’re ready to take on the responsibility of managing that many tenants or hiring a property manager to do the same.
Does House Hacking a 5 Unit Building Work?
In short, house hacking a 5 unit building can work. But it will likely require a lot more things to go right than a 1 to 4 unit building.
Your financing options will be worse, the property will be more expensive to maintain, and you’ll have to be ready to manage a larger project.
But it can still be lucrative if you land a great deal.
Just make sure you know what you’re getting into before you jump in!
In any case, house hacking a 5 unit building, while challenging, can still be a great way to invest in real estate.
FAQs
Does house hacking work for 5 unit properties?
Yes, it can work, but the combination of limited financing options, higher upfront costs, and higher taxes means that you’ll be dealing with more challenges than a smaller deal.
While it can be done, it’s not the best option for everyone.
Your efforts might be better spent house hacking a smaller, more manageable building or house with better financing terms.
How is financing for a 5 unit property different than other options?
When it comes to financing options, lenders consider a 4 unit building to be residential. Therefore, financing options and terms are similar to what’s available for single-family properties.
Lenders consider a property with 5 or more units to be commercial. That means that financing options are usually a lot worse. These loans will probably require bigger down payments, shorter loan repayment schedules, and higher interest rates.
Does house hacking a 5 unit building defeat the purpose?
In many cases, yes. A 5 unit building might be better suited as a standalone rental rather than a house hack due to the higher maintenance costs, management needs, fees, and down payment requirements.
While house hacking a 5 unit building can still work well, be sure to run the numbers carefully.
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