If you haven’t already, subscribe to our newsletter here to get our articles directly to your inbox and follow us on Twitter, Instagram, and YouTube! In our Educational Series we will be taking a deep dive into different ways to invest your money in hopes that one or multiple of these methods strikes you as interesting and encourages you to invest your money to grow your wealth.
So what is House Hacking?
House hacking (which I described in a few previous articles: first house hack, overview of real estate investing strategies, & in’s and out’s of the FHA loan), involves purchasing a property and living in it while renting out other units or bedrooms to try to cover the expenses (or cash flow, if possible). This strategy is advantageous for new investors because you can utilize low money down options such as FHA or VA loans (if you’re a military member) to purchase a single family or multi-family property up to four units. In order to fully house hack you must live in a room or a unit and rent out the other rooms/units, whether it is to long term renters or short term rentals such as Airbnb or VRBO. You may be asking yourself, why is this an advantageous strategy? We will highlight some of the pros and cons to this strategy below.
Pros of House Hacking
Low Money Down
The most common way to house hack is to use a low down payment loan such as an FHA, which requires only 3.5% down, and then live in the property while renting out the rooms or other units. This strategy is great for new investors, who may not have access to a large enough sum for a traditional down payment (e.g., a recent college graduate). Although the down payment is significantly smaller than that needed for a traditional loan, you will still need a decent sum of money for a deposit and might not be able to live in the most desirable neighborhood (more desirable properties may be out of your price range). However, if you’re strategic about renting out rooms/units, the numbers may make it possible to live in more desirable neighborhoods without paying an astronomical amount monthly. That’s part of the beauty of house hacking!
Lower or Eliminate Housing Expense
The average American spends 30% of their income on housing expenses. With house hacking you can significantly reduce or eliminate your housing expense all while gaining equity in a tangible asset. You will also be paying down the mortgage with your tenant’s rent, whether short term or long term, and gaining appreciation. If you play your cards right, you can essentially get paid to live in a property while gaining equity in a property. Sounds like a pretty great deal to me.
Landlord on Training Wheels
If you are somewhat tentative about renting out rooms or units, you will have immediate access to your property because you are living in close proximity to your renters, which may help put the worries of being a landlord at ease. You will now see daily how the tenants are treating the property and will be able to determine noise, cleanliness and other factors that may have you worried about becoming a landlord.
Cons of House Hacking
Live in Property for 1 Year Minimum
This could be a positive for some who are looking to house-hack and need a place to live, but living in a single family home with roommates or in a multi-family with limited space may not be feasible or desirable for everyone. If you have a family, it could be difficult to convince a spouse or if you have children you may need more rooms. There are also options to get a side-by-side duplex or get a larger multi-family complex, but it still might take some convincing.
First Time Home Ownership
Similarly to the first con, this may be seen as a positive. You will now be a homeowner and with that comes more responsibility and potentially some unexpected hurdles. I’d advise making sure you get a thorough home inspection prior to closing on the house to try to avoid any unexpected maintenance calls. This will also allow you to figure out things with your lease - for example, about whether or not to include a clause about the estimated costs of maintenance requests. For example, I have heard on podcasts that some write in their lease that the tenant is responsible for maintenance requests under $100, therefore you will not get calls to change light bulbs or other small tasks like that.
Slower to Scale
This is somewhat true but also could be avoided depending on how much capital you have, but generally those who househack do not have as much access to capital. By house hacking you will be living in a room or unit therefore you will not be gaining a profit from that unit/room. That lack of profit will cut into your potential cash flow but you also need a place to live. You would also be saving the amount of money you would normally be putting into rent either into equity in the house or saving for your next potential property!
These are some of the pro’s and con’s of house hacking. I currently live in a house hack and I believe it is a great tool to help grow your wealth!
Have a great rest of your week!
Brandon & Dan
Disclosure: The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock, asset, or cryptocurrency. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.