Do you dream of investing in real estate, but aren’t sure how — or if you can afford — to get started? Consider house hacking.
This clever REI strategy allows you to own and live in a property while earning income by renting extra space. It’s a great strategy for beginning real estate investors, as it allows you to leverage property you already own.
For the typical American, rent or mortgage payments eat up 18 to 30% of a family’s income. But hacking your home can drastically lower your mortgage payment; in some cases, you may live rent-free or even make money. House hacking‘s opportunity cost means you can invest the money you save on your rent or mortgage.
But is house hacking worth it? Read on to learn how to analyze a house hack and determine if this REI strategy is right for you.
Benefits of House Hacking
There’s a reason (several, actually) why many financial experts recommend house hacking to new or young investors. Of course, the most obvious is that payments from tenants will pay down your mortgage while your house appreciates in value.
House hacking also offers tax savings. Often, you can deduct a portion of home expenses. You may also be able to save by accounting for depreciation.
Bonus: If this is your first time buying a home, you may not have to make a large down payment. Research special loans and options for first-time buyers.
Types of House Hacking
When it comes to house hacking, you’ve got a few options.
Traditional House Hack
You may choose to go the traditional route, a.k.a. purchasing a multi-family property, such as a duplex, triplex, or quadplex, and becoming a landlord. (Pro tip: Share your own unit with a roommate to make additional income.)
This method offers more privacy than other house hacking methods. Just keep in mind that multi-family properties tend to cost more, so this method works best in lower-priced markets.
Rent the Rooms
If you can’t (or don’t want to) buy a multi-family property, purchase a larger home than you need and rent out extra bedrooms. Purchasing a single-family home (especially as a first-time buyer) opens up several potential financing options.
Another bonus: single-family homes generally appreciate more quickly than multi-family properties. Finally, renting by the room often brings in significantly higher rent.
Short on space? Consider moving into the living room or another non-bedroom part of the house. Now you’ve freed up your bedroom for rental.
This is also a smart solution for short-term rentals, such as Airbnb.
Add a Unit
If you’ve got the space and the means, build a guest house or locate a trailer or RV on your property to create additional living space. Similarly, convert a basement or garage into a separate living area.
Remember, any units that are separate from the house need to have a bathroom, a kitchen(ette), and enough space to be comfortable for tenants.
Avoid these Pitfalls of House Hacking
When analyzing a potential house hack, keep these common mistakes in mind.
House hacking tends to cost less than some other REI strategies, but it still takes money to make money, so don’t underestimate costs. Build vacancies and repair costs into your budget; if the property needs a fix, it should be done ASAP to avoid losing a tenant.
Research local laws on residence and rent restrictions. Not following the rules can be pricey!
Consider how much you value your privacy. Your tenants will be your close neighbors or roommates, so it’s crucial to establish boundaries early on.
Finally, realize that house hacking isn’t a form of passive income. It will require time, effort, and financial investment in order to turn a profit. That said, house hacking can be a great choice for new or young investors, as it doesn’t require as much start-up funding.
Find Your Perfect Property with New Western
Overall, house hacking offers a flexible REI strategy with options that can work for different lifestyles.
When you’re ready to take the house hacking plunge, contact your local New Western agent. Especially when you’re just getting started and do not have a lot of experience, it can be difficult to find the right property.
Luckily, you can rely on a local, licensed New Western agent to guide you to your next property. Let us put our expertise and knowledge to work for you and find you the perfect property to hack.