Is house hacking a good idea?
If you play your cards right, house hacking can have you living for free, or close to it. House hacking is also excellent option for someone looking to start in real estate investing.
However, as with any investment, there are still risks.
Why House Hack?
When you house hack, you offset your housing costs with rental income. By doing so, you save more money and build equity at the same time.
Simply put, house hacking is a great way to save money while building wealth in real estate.
Let’s review in more detail the reasons that make house hacking a good idea:
1. Eliminate Your Net Housing Costs
House hacking can help eliminate your net housing costs.
When you house hack, you purchase a property and then rent out a portion of it to tenants. The income from the tenants ideally covers your mortgage payments and other expenses.
With a great house hack deal, you might even end up with a little extra money in additional profit each month.
Of course, there are always risks to renting out property. You have to make sure you take out measures to mitigate the risk of property damage or legal fees. You also don’t want your tenants to create neighborhood tension.
But if you take out appropriate measures to prevent or prepare for the potential risks, your house hack can save you a lot of money.
2. Access Low Down Payment Financing Options
There are plenty of low down payment financing options available for folks who want to start house hacking.
Here are a few to consider:
- FHA loans: These loans are insured by the Federal Housing Administration, and they allow buyers to put as little as 3.5% down. They’re a great option for first-time homebuyers, but there are some drawbacks – namely, the permanent mortgage insurance premium that must be paid as long as you have the loan. But FHA loans are a very popular option for house hackers.
- VA loans: If you’re a veteran or active-duty member of the military, you may be eligible for a VA loan. These loans don’t require a down payment, and they come with other benefits like no monthly mortgage insurance premiums. However, there is a funding fee that must be paid upfront, and it can range from 1.25% to 3.3% of the loan amount (depending on your service status). They’re a very powerful option.
- Conventional 97% loans: A conventional 97% loan is a type of mortgage that is allows buyers to only bring 3% as a down payment for a single family home. Unlike FHA and VA loans, and other options, these loans can only be used on single unit properties, while the others can be used on 2-4 unit properties. But they remain a potentially great option for house hackers.
There are other loan options out there. Try reaching out to a local loan officer to discuss what options might be best for you.
3. A “Training Wheels” Approach to Real Estate
House hacking is often touted as a great way to get your feet wet in the world of real estate investing.
It’s true.
House hacking can introduce you to the basics of owning and managing rental properties.
I like to think of it as a “training wheels” approach to real estate.
With house hacking, you live in the property. You’re there to fix issues immediately. You can keep a very close eye on things. And you still have a home to live in even if things don’t go super well.
Your financing options are also really great compared to more “traditional” real estate investing.
In short, house hacking is a great way to get started, even if it might not be the most scalable strategy.
You can learn the ropes and build experience (and equity) before taking the plunge into more advanced strategies.
4. Control Real Estate
One of the best things about house hacking is that you get to control real estate in addition to saving on your net housing costs.
That means you get all of the financial and tax benefits that come with being a homeowner.
For example, you can usually deduct the interest you pay on your mortgage from your taxes. You can also deduct the cost of any repairs or improvements for the rented portion of the property.
Of course, be sure to check with a tax professional before assuming you’ll be able to use every tax benefit. But real estate offers a host of tax benefits to homeowners and investors.
And you’ll get to profit from any appreciation in the meantime.
5. Acquiring a Long-Term Rental
Just because you bought the property as a house hack doesn’t mean that you have to live in it forever.
You’ll typically have to live in the property for a year before you move out in order to satisfy owner-occupied mortgage requirements.
After that, you can be a lot more flexible with how you use your property.
That means you can rent out the whole place if and when you decide to move out. And you can still keep the great financing terms.
Perhaps you’ll decide to house hack another property while hanging on to the previous one, slowly building your portfolio that way.
Simply put, you can build a substantial, long-term portfolio with a few house hacks.
Is House Hacking A Good Idea For You?
Yes, house hacking is a good idea if you’re looking to save money while building equity in real estate and if you want to learn the ropes of being a landlord.
Here are some of the reasons why house hacking might be a good fit for you:
- You’re looking for a creative way to finance your first home purchase.
- You don’t mind living with roommates (or strangers).
- You’re handy with tools and don’t mind doing some light renovations.
- You’re comfortable being a landlord and dealing with tenants.
- You’re not afraid of a little hard work.
Just one decent house hack can dramatically improve your financial situation.
Don’t be afraid to explore it as an option.
FAQs
How do I find a good deal on a property?
The best way to find a good deal is to start by looking for properties in your area every day. Figure out what properties might rent for and practice running the numbers on deals.
The more you practice, the easier it will be to identify great deals.
What are the risks of house hacking?
There are a few risks to be aware of when house hacking.
First and foremost, you’re responsible for being a landlord. This means dealing with repairs, late night calls, and potentially difficult tenants.
There’s also the risk that your tenants will damage the property or not pay rent on time, which could put you in a tough financial situation.
Be sure to have cash reserves before going in to any real estate deal.
What should I consider before making the decision to house hack?
First, you need to be comfortable with the idea of living with roommates or otherwise sharing a property.
Second, you need to be prepared to deal with the maintenance and repairs. If you don’t want to get your hands dirty, you might hire a property manager.
Third, you need to have realistic expectations about the rent you can charge. Run the numbers carefully before you buy the property.
This website, and any communication stemming from it, should not be taken as financial or legal advice for your specific situation. Consult directly with a licensed financial professional should you need investment advice and consult directly with a licensed attorney directly should you need legal advice. Assume all links are affiliate links. I am an Amazon affiliate.