Carrying on from our conversation about real estate investing today, I wanted to talk about house-hacking. House-hacking is a great way for real estate investors to start their real estate investing career, so I figured it would be a great idea for us to start talking about this here.
What is House-Hacking?
House-hacking is a popular real estate investment strategy that involves purchasing a 1-4 family house with the intention of living in one part of the property and renting out the rest. This will allow an investor to generate rental income that can help cover the cost of the monthly mortgage, property taxes, and perhaps additional expenses associated with owning the property. This strategy allows new investors to gain valuable experience as a landlord while also benefiting from the perks of homeownership.
House-Hacking Advantages
A big advantage of house-hacking is the increased ability of affordability to start a real estate investing career. Typically, an owner-occupied property can offer lower down payment requirements and interest rate options than a commercial or investment loan. This opens the door of opportunity to a wider audience than say a typical investment property. A lower down payment on a property that is an actual investment property is a great idea because it means that the cash in the game is lower, which will increase the cash-on-cash return. Additionally, this allows an investor to rent out the other unit(s) of the property, which can cover most, if not all, of the monthly mortgage expenses. This can be attractive to those that might not have a lot of cash to invest in real estate and want to begin their real estate investing career. This method can also help a budding investor learn how to properly manage tenants. Being close to the property will allow the landlord to resolve issues quickly and develop systems and processes that can only help them in the long run.
House-hacking can also be a great way to build equity in a property. As tenants pay down the mortgage, the investor’s equity in the property grows, which is a great way to build wealth and set oneself up for future real estate investments. It is a great method for a new real estate investor to build a portfolio. Most conventional loans will require the owner to live in an owner-occupied property full time for a set period, such as 12 months or 18 months – please consult with a lender on these requirements – and then the house-hacker could find another property to buy and house-hack. As one can see, doing this will compound a portfolio quite quickly. Suppose someone purchases a duplex, lives in one unit, and rents out the other. After the required amount of time to live in the property has passed, suppose the owner then finds another duplex to live in one side and rent out the other. After two years, that house-hacker has four tenants and might have lived in both duplexes for free or relatively cheap.
House-Hacking Disadvantages
As with everything in life, we have to talk a little about the bad so people do not think that this is just a sales pitch and do not fall into the trap of “everything is all lovely up in here”. So let’s talk about some of the disadvantages to house-hacking. First, there is a lack of privacy. As a landlord, you will see tenants doing things that you might not agree with on the daily and they might also feel like they can just reach out to you at any time because you are close. This can be stressful for a new investor. It will be important that the house-hacker properly manages expectations for tenants. Additionally, there might even be shared spaces in the unit(s). For example, there might be a shared laundry room, which can also be an additional layer to the lack of privacy.
Another disadvantage comes with all rentals, and that is having to manage tenants. Managing tenants can be difficult for a new investor, this includes having to handle tenant turnover, rent collections, maintenance requests, and anything else a tenant might want from the landlord. This can be time-consuming and could require a significant amount of effort from the landlord. But if anything is ever worth anything, it is not achieved without effort. It is recommended to set some kind of “office hours” with tenants so that the landlord is not being bothered at all times of the night, but sometimes that is just not possible when there is a major issue in the unit(s).
Additionally, finding a good property can be difficult. In times where people are selling homes quickly, it might be difficult for someone to find a multi-family home in an area that they desire. This can drive up prices, which can also affect someone’s return on the multi-unit property. Of course, someone can find a single-family home and rent out a room, but that would further decrease the level of privacy between landlord and tenant – especially if the tenant is a stranger and not a friend.
Additional Considerations
It is important to find a property in a desirable location with a high rental demand because that can only help ensure a steady stream of tenants. This will help with dealing with tenant turnovers and hopefully decrease the time between when an old tenant moves out and when a new tenant moves in. Additionally, a desirable area can also ensure that the property’s value continues to increase over time. The goal would be to at least keep rents and the property’s value up with inflation over time, but, of course, it would be even better if the rent beats inflation. Finally, a desirable property can also improve an investor’s chance of success in the real estate investing game. High demand in a good and desirable area will allow the investor to learn the area best and build a strong portfolio of properties that will hopefully last for a long time.
Is House-Hacking Right For You?
That would depend. You must consider your options and your personality. It might be a viable way to begin a real estate investing career or at least start to see if this is right for you. The affordability of house-hacking makes this strategy a great way to start real estate investing. Find a lender near you to see how affordable this strategy can be and see if they can help you obtain the right loan for you.
Coming Up
We will talk about how to evaluate a property to do your best to determine a property’s potential for generating rental income. However, we want to keep this post digestible enough. When we do cover the evaluation process, we will go into details with some specific examples and include a spreadsheet/Google Sheets calculator so that you can plug and play with numbers to better understand the math behind this process.
Disclaimer: I am not a financial advisor. The content on knowxchange.com or “this site” are for educational purposes only and merely cite my own personal opinions and experiences. In order to make the best financial decision that suits your own needs, you must conduct your own research and seek the advice of a licensed financial advisor if necessary. Know and understand that all investments involve some form of risk. There is no guarantee that you will be successful in making, saving, or investing money. Additionally, there is no guarantee that you won’t experience any loss when investing. Please seek the advice of a financial professional and do your own research.