Entering the world of real estate investing can be a lucrative move. With the right acquisitions and a careful hand in managing your assets, you can make a great deal of passive income while simultaneously benefiting from consistent property appreciation.
The trouble is, many people struggle to find a good entry point. Houses are expensive and buying one can be confusing, especially for inexperienced investors.
One solution is house hacking. But how exactly does it work and is it the right move for your situation?
What Is House Hacking?
House hacking is essentially purchasing a property that functions both as a primary residence for you, the investor, and as an investment property. If you were planning on purchasing a property anyway, the extra burden will be minimal, but it could give you the financial platform you need to make other, even better investments in the future.
According to Eddie Garcia of Estate.co, “The most common approach is to purchase a multifamily residential property and occupy one of the units, while renting out the others. It’s simple, straightforward, and accessible to anyone who can afford such a property.”
How House Hacking Benefits You
These are some of the most prominent benefits of house hacking:
A place to live. When house hacking, you’ll have a place of your own. You can live in your own property while simultaneously using it as an investment property. If you’re already searching for a house, this is a significant advantage.
Killing two birds with one stone. Most people go through the process of finding a home for themselves, then go through the process of finding an investment property. House hacking allows you to kill two birds with one stone, using only one round of due diligence and financing instead of going through two. It can save you a lot of time and money, especially if you plan on investing in real estate eventually anyway.
Better financing options. If you’re purchasing a property to serve as your own residence, you could qualify for lower interest rates. Also, if the property you’re buying already has tenants and a consistent history of income, you could have an easier time securing financing for it. There are many options available for house hackers.
Subsidization of your mortgage. Some people are drawn to house hacking because of the potential to subsidize their mortgage. For most people, your monthly mortgage payment is your biggest expense, so finding a way to mitigate it is crucial for long-term financial success. In some cases, as long as your other units are occupied, the rental income they generate can pay your entire mortgage.
Immediate access and control. As a house hacker, you’ll double as a landlord. If and when something goes wrong with the property, you’ll likely know it and you’ll be able to take action immediately. This is an especially powerful benefit when it comes to emergency situations, since you won’t need to travel far to take care of things.
Unlimited future possibilities. House hacking also offers many possibilities for the future. You can eventually move out and rent the unit you used to occupy. You can sell the property and invest in something different. You can even just maintain the status quo indefinitely.
Key Drawbacks to Keep in Mind
However, there are some important drawbacks to remember:
Fewer options overall. Because house hacking has specific demands and you have a finite budget, you’ll have fewer options than if you were searching for a simple, single-family residential property. This can stifle your search and force you to make sacrifices.
Initial capital demands. Buying a house with the intention of house hacking typically means spending more than you would on a conventional property. The affordability equation also changes when house hacking, because you’ll presumably have additional income to supplement and reinforce your earnings, but it’s still something to consider as you plan your approach.
Increased competition. Many people are interested in house hacking, pushing the prices for suitable properties much higher than they otherwise would be. This increased competition can be a problem when you start making bids.
Tenants as neighbors. Some people are also turned off at the idea of having tenants as neighbors. The social and business ramifications of this can get complicated quickly.
Potential retention issues. Many of the benefits of house hacking are dependent on your ability to retain tenants, which isn’t always cleanly possible.
House hacking is a viable strategy for many aspiring real estate investors, but there are enough weaknesses and drawbacks to make it inadvisable for others. The potential of this strategy depends heavily on your personal financial situation, your current investment portfolio, the state of the economy, and the market in which you’re trying to buy. Consider all these factors and all your options carefully if you want to be successful.
