House hacking has become an increasingly popular real estate investment strategy in recent years, particularly among first-time home buyers. This approach allows individuals to offset their housing costs by generating rental income from part of their home, or by purchasing a multi-unit property and renting out the other units. We’ll explore the ins and outs of house hacking, including its benefits and how to get started.
What is house hacking?
At its core, house hacking involves using your primary residence as an investment property. This can take a few different forms, such as renting out a spare bedroom, basement apartment, or detached unit. Or it could mean buying a multi-unit property and living in one unit while renting out the others.
By doing so, you can offset or even completely cover your housing costs. This makes homeownership more affordable and allows you to build wealth through real estate investing on your first home purchase.
Related: What is Seller’s Assist?
Benefits of house hacking
There are a number of benefits to house hacking that make it an attractive option for many people. First off, it allows you to earn rental income from the other units, which can help cover your mortgage payments and other expenses. This can be a huge plus for your own personal budget.
Depending on your location and the type of property you’re renting out, you may be able to generate enough rental income to cover your entire mortgage payment or even turn a profit. Imagine what reducing or entirely eliminating the housing expense on your monthly budget would do for your personal cash flow. Freeing up extra cash every month for additional saving and investing is key to a good budgeting strategy.
Along with saving on housing expenses, house hacking will help you build equity in your home. Every time a mortgage payment is made to the bank, part of the payment goes towards your loan balance. What’s even better about a house hacking situation is that your renters are helping pay down that principal loan balance. You can build equity in your house by using other people’s money!
House Hacking Example
This strategy of house hacking can be especially valuable if you plan to buy in a high-cost market or neighborhood. Instead of waiting years to get in the real estate game, you can jump in much earlier than expected.
Let’s use an example of this working even in the high interest rate world of 2023 we’re living in:
You want to buy a house in a more expensive neighborhood that you wouldn’t typically be able to afford. Currently, you pay $1,500 in rent and a mortgage payment (including taxes and insurance) on a house in the area would total around $2,500 per month.
This is too steep of a payment for you but what if you could rent two of the rooms out to your friends for $750 each? Or if you buy a multi-family house in the area and rent one unit out for $1,500? Now, you’re only paying $1,000 total per month, which is less than your current rent. But you’re also gaining all of the benefits of owning a house, including the equity gain.
From buying a house to investing in real estate
Although buying a house that is your primary residence isn’t a true investment, utilizing house hacking definitely is. You can start utilizing tax benefits that real estate investors use because part of your home is technically an investment property.
Tax deductions can include depreciation, mortgage interest, property taxes, and repairs and maintenance costs. These will help with the taxes that you will owe on your rental income at the end of each year.
Another big perk to house hacking is the introduction to property management. You’ll get to experience what it’s like running an investment property while also being someone who lives in one. It’s a great crash course for land lording 101 without the extra frustration.
Since you’re living in the property, you won’t have to worry about additional time spent on traveling back and forth to the place. You’re already there! Understanding what goes into managing a property, what types of repairs are to be expected, and how much everything is going to cost are crucial things to learn in your real estate journey.
All of this will help you transition from being just a homeowner into becoming a rental property owner once you move out of the place and officially turn the house into a true real estate asset.
