How Does House Hacking Work? An Investment Strategy
Real estate investing is one of the surest ways to grow wealth for the future. However, becoming a real estate investor requires you to overcome sizable obstacles, not the least of which is the monetary entry barrier.
New real estate investors often need to put down large deposits. But finding creative finance options to do this isn’t as easy as it used to be. For these reasons, house hacking has become a popular strategy for young and new real estate investors.
This type of strategy enables new real estate property investors to gain experience in the industry and build equity with minimal money required upfront.
Keep reading to learn how house hacking works, what the benefits are, and how to house hack successfully.
What is House Hacking?
Put simply, house hacking is the process of creatively turning a property you own into a revenue stream. Generally, this means renting out space in a property that you own and occupy.
Such strategies allow you to generate cash flow and minimize your living expenses and overheads, while also gaining experience in the real estate industry at the same time.
There are various house hacking strategies you can engage in. But the overall goal of each is to build wealth in a property, reduce your living costs, and develop your real estate portfolio.
What are the Types of House Hacking Strategies?
1. Single-Family Homes
House hacking a single-family home is when you live in a property and rent out the spare rooms to long-term or short-term tenants. This is one of the most common types of house hacking. It allows the owner-occupier to cover overheads, such as their mortgage payments and bills. House hacking also enables new property investors to gain industry experience without significant risk.
Real estate flippers and wholesalers commonly use this strategy for investing. You can learn how to wholesale real estate while buying a few of the homes for yourself as investments. Cherry-picking good deals for yourself can help you create long-term wealth through real estate investing and house hacking.
2. HMO House Hacking
House hacking an HMO is when you buy a multi-unit property, such as a duplex or triplex, and you live in one of the units while renting out the other units. Similarly to house hacking a single-family home, this strategy allows you to cover the majority of your costs. Money can also be made using this strategy.
3. Rent Out Space
Another popular house hacking strategy is to rent out space that you own for residential or commercial purposes. There are various ways to rent out space to generate profit from a property. For example, you can rent out the garage or basement as storage space for other people. Or you can rent your driveway for use of commuters (provided you live in a desirable area near a subway station or bus stop).
4. Live In Flip
A live-in flip is exactly what it sounds like. This house hacking strategy means living in a property you intend to flip. The main benefits of flipping a property are that you can get a house or plot of land for below-market costs and maximize your gains by improving the property. By living on the property, this also minimizes your own living expenses.
5. Mobile Homes or RVs
Another common house hacking strategy is when you purchase land and rent out mobile homes or RVs on that land. This can be in a large, desirable area (like in a tourist town or by the beach) or on the grounds of a property you own/live in. Before choosing this strategy, it’s important to check local ordinances to ensure that it is allowed in your state, on your mortgage, and that the land is suitable for such use.
What are the Pros & Cons of House Hacking?
Pros of House Hacking
The pros of house hacking include:
- Owner-occupiers get better financing options than real estate investors. There are several favorable schemes, such as the FHA loan, which only requires a 5% deposit, as opposed to the traditional 20 to 25% down.
- Learn about real estate investing. First-hand experience is the best way to learn the ins and outs of real estate investing. House hacking is a hybrid strategy that allows you to become a real estate investor without adopting the associated risks.
- Create cash flow. Ideally, your house hacking investment will cover your mortgage and bills and allow you to generate extra income too. This means you’ll be living in a property for free whilst building equity in an appreciating asset and generating money at the same time.
- Build a portfolio. House hacking is seen by many as the first step to becoming a real estate investor. It allows you to reduce your living costs and build equity. Once you’ve built up enough equity, you can leverage it to invest in future properties. This is a strategy that numerous investors have used to quickly build large real estate portfolios, worth millions of dollars from nothing.
Cons of House Hacking
The cons of house hacking include:
- Sharing your space. For many, the main appeal of owning a house is that you have your own space and privacy. This is especially important for young families, for example. But, with house hacking, you have to share the space of your new home with renters.
- Your house is not your home. The decisions you make about maintenance, repairs, or future developments on the property have to be made with your rental business at the forefront of your mind. For example, it might be your dream to have a games room. However, for an investment property where space equals money, this would mean losing out on revenue.
- Stress and hassle. Rental income is anything but passive. When you’re running an owner-occupied rental property, you’re going to have to engage with your tenants on a regular basis. You’ll also need to find and screen tenants, manage rental listings, understand legal requirements, and maintain the day-to-day admin tasks, such as income and expense tracking, rent collection, and communications with your tenants.
- Short-term rentals require even more work. One strategy people explore in order to minimize the impact of having strangers staying in their homes is short-term rentals. This allows you to rent your spare room when it’s most convenient for you. You can also charge a higher nightly rental rate compared with residential rooms for rent. However, running a short-term rental requires you to offer a tailored service, and your success is highly dependent on reviews.
- Not every property is suitable. Not every property is suitable to be house hacked. When reviewing properties to house hack, you have to put aside what you want in a home, and instead, look at viable investment properties.
How to House Hack Successfully
There are no secret tricks to house hacking successfully. You need to put in the time and effort to make it a success. Your home needs to be treated your rental like a business and personal sacrifices have to be made. Part of running a business in this way also means learning about how to manage a rental property and using professional tools for each stage of your rental property management.
Property management tools you can utilize include things like a rental listings management tool to find and manage prospective tenants and a tenant screening tool. You may also want to use a rent collection tool. This will ideally be one that allows your tenants to automatically pay online. This reduces the chances of late rent (and missed mortgage payments) and ensures you have an accurate record of all transactions.
Finally, you will need to track your income and expenses. This ensures you can take full advantage of the tax benefits that come with being a real estate investor. Not keeping accurate and up-to-date records of all of your income and investment-related expenses could mean overpaying taxes by $1000s.
Summary: Is House Hacking Worth It?
House hacking is a hands-on strategy that will allow you to build wealth for the future through an appreciating asset. It can also be the first step you take on the road to building your real estate portfolio.
However, house hacking isn’t for everyone. It requires commitment and work to house hack successfully. Plus, not every property is entirely suitable, meaning you have to do your research and plan accordingly.
It’s a good idea to formulate a plan to ensure that whatever property you choose is suitable for your house hacking strategy. It’s also crucial to get all the tools you need to minimize the work required and mitigate potential risks and tax liability.
Thinking about selling a house fast for cash to start house hacking? Brotherly Love Real Estate are your local property experts. Contact us today to discuss your property investment plans and how we can help at (215) 769-9875.