Many people have built financial security by investing in real estate, but finding start-up capital can be challenging. House hacking might be the shortest, simplest path to beginning successful real estate investment. What is house hacking? How can it help you?
When house hacking is a good thing
House hacking is a new term for an old concept. You purchase a multi-family property — i.e., one including up to four apartments. Then you live in one part and rent out the rest to tenants. House hacking also encompasses renting a bedroom in a single-family home to a boarder, or listing bedrooms in the home where you live through Airbnb.
House hacking offers one of the easiest thresholds to cross into real estate investing. It makes great sense when it comes to your start-up cost, monthly cash flow and long-term wealth building.
Start-up cost
If you are living in part of the property and renting the rest, you can qualify for a lower mortgage interest rate than if you were buying a property strictly as a rental. You may also be able to purchase with a down payment lower than the 20 percent required for buying a purely rental property.
Monthly cash flow
House hacking can cover your monthly cost of owning a home. Say you purchase a fourplex with a monthly mortgage payment and property expenses of $1,800. You live in one unit and rent each of the other three out for $600 per month. You’ll make enough each month to cover your monthly housing expenses. Rent those additional units for $800 a month and you’ll pocket $600 extra for your living expenses or to invest in additional property.
Long-term wealth building
With house hacking, your tenants are also building your home equity. Over time, you increase your ownership stake in the property without using your own money. You can use this equity growth or your freed-up monthly cash as leverage to invest in a second, purely rental property.
What you need to know about house hacking
There are important considerations to house hacking beyond just the financial benefits.
- As always in real estate, location is key. Choose a neighborhood in which you want to live, and you’ll have no trouble finding tenants who will feel the same.
- Find and use a knowledgeable tax professional. House hacking will give you the tax benefits of home ownership but impose on you requirements for reporting rental income.
- The rules are complex, so seeking expert help is crucial.
- Renting to tenants requires rental contracts with all their accompanying legal obligations. It’s important you understand these, as well as the local, state and federal laws governing responsibilities for both you and your tenants. Understanding the law is especially important if you must evict a tenant. This is another aspect of house hacking where you should seek professional expertise.
- Being a landlord can be a headache. Maintenance of tenants’ apartments will be your responsibility, and the work of finding new tenants when previous ones move out can be difficult.
- Tenants usually don’t treat a dwelling with the same care the owner would, so be prepared for increased wear and tear to your property.
- Be sure to carry enough liability insurance to protect you as a landlord.
Related – How to Use Your Home to Make Money
