House hacking is gaining popularity as a means for new investors to get into the real estate investment world without breaking the bank. Put simply, house hacking is the act of purchasing a property, living in it, and renting out part of that property to cover your expenses. It’s a smart way to maximize your first property purchase, learn the ins and outs of real estate investing, and potentially live for free while building equity.
This comes as a very attractive first step for many people who are interested in growing their property portfolio and minimizing a huge expense in their budget: housing. Many budgets suggest spending 30% of your income on housing, although most Americans spend closer to 40%. With the cost of living constantly increasing, it makes sense that many folks are trying to find creative ways to lower this cost and house hacking is a great option!
Not only could this practice save you some money it can also:
- Allow you to build wealth in an asset
- Get better financing terms than a sole investment property
- Put a smaller down payment with an FHA loan that only requires 5% down compared to the traditional 20-25%
- Produce tax benefits, as expenses related to the rent of the property are tax deductible
Overall, an important first step to house hacking is developing a solid plan for how you will do it and making sure, you are organized and professional. Below, we’ve broken down some of the options when it comes to house hacking.
Single Family Home
In a single family home, you can most definitely house hack! In order for this to work, however, you will need to secure a property that has multiple bedrooms. Also, keep in mind that finding a tenant that you like is very important since you will be sharing common spaces. If you don’t mind having roommates, this could be a great option! Although, make sure you still draft up and sign contracts to cover your bases.
If you are hesitant to share your space with someone 24/7, Airbnb is also a good option. This way, you can reserve times without a tenant, for instance holidays or other times you chose to have the space to yourself. You could also consider a rental in the basement of a home, even more convenient if it has a walk-out option. Another option could include a carriage house or a room/loft above a detached garage.
Multi Family Home
Duplexes, Triplexes, and even Fourplexes could work really well for a multi-family unit. This way, you could occupy one unit and rent out the others. This would result in a higher rent than just a single room and would allow for more privacy since you will not have to share common spaces. This is a great option for folks getting started in real estate investing, because if you plan to occupy part of the property as a primary residence, you can still qualify for an FHA loan, with lower interest rates and lower down payments.
Renting out Space
This option might take some extra creativity, but it’s amazing what ‘less-thought of’ needs exist! For instance, if you chose not to rent out a room, or just don’t want to deal with tenants in general, you could explore the option of renting out parking space on your property. Websites like pavement.com or justpark.com are great options to hack your property without the hassle of dealing with long-term tenants. You could also choose to rent out garage or shed space and even more creative is the idea of renting out space for bicycle parking. This is becoming more and more of a need in our communities and websites like neighbor.com could give you some ideas on how to maximize this option and see what the need is in your own community.
RV and Mobile Homes
Another option for house hacking would involve RVs or mobile homes. If your property has a big enough lot, you could allow for these vehicles to be parked on your property and collect rent. However, this is not an option that is possible in all locations. It’s advised that you check with your local municipality to make sure this is a legal option for you. Some areas, like subdivisions in suburban areas, might not allow this.
Fix n’ Flip While you Live
The last option we will explore on the topic of house hacking is the live-in fix n’ flip. Many investors start in the fix n’ flip arena, outside of house hacking, but there could be an added benefit to combining these two options. In general, fixing a house up while you live in it, is not the most comfortable, but could definitely have a huge return on investment! If you find a property that has good bones, but needs some cosmetic fixes, you could buy it cheap so your mortgage payments are low, fix it up, and then sell it for a large profit! An important caveat to this strategy is the fact that you will need to live in the property for at least 2 years to avoid paying high capital gains tax when you sell the property. If you are a handy person, you can save even more money by doing the work yourself and only paying for materials instead of paying for both materials and labor.
Now combining this fix n’ flip option with house hacking could be next level! Imagine buying a low priced property that has a carriage house or basement apartment with outside access, renting those spaces out to cover as much of your property expenses as possible while also fixing up the house and living in it. This strategy could feed two birds with one biscuit: utilize a house hacking strategy to cover your mortgage payment and make a big return on your investment two years later when you sell the property. You could also keep the property and rent the full property out if you’re able to build enough equity and find financing for a second property.
Overall, with House Hacking there are lots of options! This is a great opportunity for younger folks, or folks who are flexible with their living situations and don’t mind compromising to save some money and get ahead! It is an ideal situation to start off your career in real estate investing, especially when you don’t have the cash reserves to buy both a residential and investment property.
Happy House Hacking!