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 and may find it harder to get creative financing options. For this reason, house hacking has become a popular strategy for young and new real estate investors, allowing them to gain experience in the industry and build equity with minimal money required upfront.
What is house hacking?
Put simply, 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. This allows you to generate cash flow and minimize your living expenses and overheads whilst at the same time gain experience in the real estate industry.
There are various strategies when it comes to house hacking, but the overall goal of each is to build wealth in a property, reduce your living costs, and develop your real estate portfolio.
House hacking strategies
House hacking a single-family home is when you live in a property and rent out the spare rooms to either long-term or short-term tenants. This is one of the most common forms of house hacking, as it allows the owner-occupier to cover overheads, such as their mortgage payments and bills.
House hacking an HMO
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. Much like house hacking a single-family home allows you to cover the majority of your costs.
Rent out space
There are various ways that you might be able to rent out space to generate profit from a property that you own. For example, you might rent out the garage or basement as storage space for other people.
Live in flip
A live-in flip is exactly what it sounds like, living in a property you intend to flip. The main benefits of something like this are that you can get a property for below-market costs, maximize your gains by improving the property, and it allows you to minimize your living expenses.
Mobile homes or RVs
This is when you purchase land and rent out mobile homes or RVs on that land, this could even be a mobile home in the garden of property you occupy. You will have to make sure that you check local ordinances to ensure that this is allowed.
What are the pros and cons of house hacking?
- Owner-occupiers get better financing options than real estate investors. And 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 all of the risks associated with this investment strategy.
- Create cash flow. Ideally, your house hacking investment will not only be able to cover your mortgage and bills but allow you to generate a little bit of extra income as well. This means that you are 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.
- Sharing your space. For many, the main appeal of owning a house is that you will have your own space and privacy. This could be especially important for young families, for example. With house hacking though you will be required 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. And when you’re running an owner-occupied rental property you’re going to necessarily have to engage with your tenants on a regular basis. Other things to consider other important factors to consider include things like finding and screening tenants, managing rental listings, understanding legal requirements, and maintaining 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 out your spare room when it is most convenient for you. And allows you to charge a higher nightly rental rate. 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 looking at properties 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 will need to put in the time and effort to make it a success. You need to treat your rental like a business, and part of that means finding professional tools for each stage of your rental property management.
Property management tools you utilize might include things like a rental listings management tool to find and manage prospective tenants and a tenant screening tool. You might also look for a tool for collecting rent, ideally one that allows your tenants to automatically pay online to reduce the chances of late rent and to ensure you have an accurate record of all transactions.
Finally, you will need to track your income and expenses, so that 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.
House hacking is a hands-on strategy that will allow you to build wealth for the future through an appreciating asset. It could also be the first step that 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. And not every property is entirely suitable, meaning you will have to do your research.
Therefore, it is a good idea to formulate a plan to ensure that whatever property that you choose is suitable for your house hacking strategy and that you have all tools your need to minimize the work required and mitigate potential risks and tax liability.