This statement might upset a lot of real estate investors, but there are way better ways to get into real estate investing than house hacking.
Here's why you should NEVER house hack and what you should do to become a successful real estate investor from the ground up.
But before we dive into the negative, let's talk about what house hacking is and why it's become such an incredibly popular strategy that homeowners use to turn their primary residence into a rental property.
What is house hacking?
Over the past two decades, a new trend has emerged in the real estate industry, gaining popularity among homeowners and investors. This trend is called "house hacking," and it's a unique strategy that's designed to help build wealth through real estate.
House hacking involves:
- Buying a property.
- Living in one part of it.
- Renting out the other parts to generate income.
Think of it like buying a duplex, living in one unit, and then renting out the other unit. This can be an easy way to become a rental property owner and homeowner at the same time. It allows homeowners to generate passive income and build equity in a property while living rent-free, or at least getting some help with the monthly mortgage payment. It's an attractive option for first-time homebuyers, as well as experienced house hackers looking for a creative way to make money in real estate without having to make too many sacrifices.
When did house hacking become so popular?
The concept of house hacking has been around for a while, but it has gained momentum in recent years due to the rise of rental platforms like Airbnb and VRBO. These platforms have made it easier than ever to rent out a spare room or a whole unit to short-term renters, providing an additional source of income for homeowners.
Many overpopulated metros are loosening their restrictions on accessory dwelling units (ADUs, previously known as granny units). This trend has made it possible for homeowners in areas like San Francisco, Seattle, and Los Angeles to add ADUs to their properties, turning their single family home into a rental property.
How do you house hack?
There are several ways to house hack, depending on the type of property you have and your goals.
One popular method is to buy a multi-unit property, such as a duplex or a triplex, and live in one unit while renting out the others. A residential property with up to four units is considered a residential multifamily property and is the most sought-after for house hacking because property owners can still use conventional financing.
Owning a multi family property is a popular strategy that allows you to generate rental income that can cover your mortgage and other expenses while also building equity in the property over time. But more often than not, buying a multifamily property is way out of budget for buyers.
Here are some of the other popular ways to get started with house hacking:
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Renting out a spare bedroom: This is perhaps the simplest and most straightforward way to get started with house hacking. If you have an extra bedroom in your home, you can rent it out to a tenant to generate extra income. This can be particularly lucrative if you live in a high-cost-of-living area with high rental rates.
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Renting out a basement apartment: If you have a basement that is finished and has a separate entrance, you can turn it into a self-contained apartment and rent it out to tenants. This can be a great option for those who want more privacy and independence from their tenants.
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Renting out a garage or storage space: If you have a garage or storage space that you don't use, you can rent it out to someone who needs extra storage. This can be a particularly lucrative option if you live in an area where storage space is in high demand. Furthermore, renting out storage space means you don't have to deal with another renter at your primary residence. It's a great way to generate income to contribute towards your monthly mortgage payment.
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Renting out a vacation home: If you own a vacation home in addition to your primary residence that you only use part of the year, you can rent it out to vacationers (through Airbnb, VRBO, or a local vacation property management service) when you're not using it. This can be a great way to generate extra income while offsetting the costs of owning a vacation home.
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Renting out an ADU: An ADU is a self-contained living unit on the same property as your primary residence. ADUs can be created by converting a garage, building a separate structure, or repurposing an existing space on the property. This can be an excellent option for those who want to have a more defined separation between themselves and their tenants and who prefer not to have shared walls. Depending on your area's local laws, an ADU can be an easy addition to a single family home. ADUs are ideal options for both long term and short term rentals.
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Renting out part of your home as a short-term rental: With the rise of services like Airbnb, it's become easier than ever to rent out part of your home as a short-term rental. This can be a profitable way to generate extra income to contribute to your mortgage payments, particularly if you live in a popular tourist destination. Before you set up an Airbnb listing, check your area's short term rental laws to ensure this kind of rental property is permitted.
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House hacking with roommates: If you're not ready to buy a property on your own, you can still get in on the house hacking game by finding roommates to share the cost of renting a larger property. This can be a great way to reduce your living expenses and build equity over time so that you can have the capital to buy an investment property in the future.
One of the biggest advantages of house hacking is the potential for significant cost savings for homeowners. By renting out a portion of your property, you can offset the cost of your mortgage and other expenses, effectively living reduced- or rent-free. As a result, house hacking can be a huge financial benefit, particularly for those who are just starting their homeownership journey and may be struggling to save money.
Tax Benefits of the House Hacking Strategy
In addition to generating income and saving money, house hacking can also provide valuable tax benefits. For example, you may be able to deduct mortgage interest, property taxes, and other expenses related to your rental units from your taxes. Additionally, you can claim repair and maintenance costs as a deduction, which you wouldn't be able to do if the property was solely used as a private residence. The tax benefits created when you house hack can significantly reduce your tax liability and provide additional savings.
The Risks of House Hacking
Of course, like any investment strategy, house hacking comes with its own set of risks and challenges.
Legal and Zoning Issues
Before you decide to house hack, it's important to research the legal requirements and zoning regulations in your area. Many cities and towns have restrictions on renting out a portion of your property or operating a business from your home. Violating these rules can result in fines, lawsuits, and even the forced removal of tenants.
Tenant Risks
Renting out a portion of your property also comes with the risk of dealing with problem tenants. While many tenants are responsible and respectful, others may cause damage to the property, disturb neighbors, or fail to pay rent on time. Therefore, it's important to screen tenants carefully and have a solid lease agreement in place to protect yourself. A property management company can be a great resource for obtaining a lease.
Before you turn your single family home into an investment property, learn about your local laws and the requirements you'll need to meet as a landlord. For example, in some regions, it can be extraordinarily difficult to evict tenants. The last thing you want is to be stuck with a problem tenant right in your backyard, as it can be costly and draining to get rid of them.
Maintenance and Repair Costs
Property owners are responsible for maintaining the property and addressing any repairs that arise. Ongoing maintenance and repairs can be costly, especially if you're not prepared for unexpected expenses. Homeowners will often tolerate discomfort while they save funds for necessary repairs. However, a tenant will not be so accommodating. House hackers need to have a solid budget in place to cover maintenance and repair costs and to regularly inspect the property to catch any issues before they become major problems.
Market Risk
The real estate market is constantly changing, and there's no guarantee that the value of your property will continue to increase or that the rental market will appreciate. If the market takes a downturn, you may find yourself with a property that's difficult to rent out or sell. Therefore, it's important to carefully consider the local real estate market and have a backup plan in case of a downturn.
Personal Risks
Finally, house hacking can come with personal risks, especially if you're renting out a portion of your primary residence. You'll be sharing space with tenants, which can be challenging if you value your privacy. You'll also need to develop strong communication skills and personal boundaries. For many, the personal risk and sacrifices required to house hack are not worth the cash flow potential of house hacking, so they choose an alternative real estate investment strategy.
Despite these challenges, house hacking can be a great way to start your wealth through real estate if you're happy to settle for slow and steady growth. By renting out a portion of your property, you can generate passive income, save money on living expenses, and build equity in a property over time. So whether you're a first-time homebuyer or an experienced investor, house hacking is worth considering as a strategy for building wealth through real estate.
Now, let's talk about why you should NEVER House Hack - unless you want to be on the slow boat to wealth building.
They say slow and steady wins the race, but in real estate investing, you want to be the hare, not the tortoise. Time is money, and time compounds money. The longer you have capital invested in the market, the more potential for capital growth.
While house hacking can be a successful strategy for some people who appreciate homeownership and security, it is SLOW and definitely not for everyone. You need to remember that other real estate investing strategies can help you achieve your goals without having to rent out your spare bedroom. While house hacking is helpful if you want to buy a property with a conventional loan or if you want to leverage FHA and VA loans, it will take decades before you accumulate sizeable wealth.
Your money should be working for you!
You want all your money out in the market and making more money for you – that's why at Oz Realty, we recommend renting where you live and using your free capital to operate as a real estate investor. The difference between true real estate investors and house hackers is that an investor knows that their money can make them more money if it's not tied up in a single family home.
If you put a hefty deposit on a duplex or fourplex in the area you want to live, you're anchored to that asset, and so are your funds. Money makes money. If you want to get on the fast track to wealth, you need to be prepared to sacrifice some comfort and the dream of homeownership (for now) to build your real estate portfolio. By renting, you'll likely have lower housing expenses and more free capital to use as a down payment on your next investment property purchase or renovation.
It takes sacrifice to achieve success and financial freedom.
To become a successful and wealthy real estate investor, you're far better off working hard, renting as inexpensively as possible, and using your funds for real estate investing and improving your assets.
Don't anchor yourself down to a particular location with the idea of home ownership and investing combined into one because there are far more lucrative investment options. House hacking is for homeowners who also want to be passive real estate investors, not active and aggressive investors who are laser-focused on building wealth.
Adapt and be mobile.
Most investors can't find great deals where they live. Nothing will reward you more financially than being able to adapt and move to the areas where there are great deals in the market. If you live in San Francisco and want to stay in San Francisco, that's great, but you'll be missing out on the highly lucrative deals the midwest has to offer. You need to find investment markets where the numbers make sense for the capital you have to invest and where you can make value add improvements that will quickly grow your net worth.
House hacking locks you down.
House hacking is an easy way out that doesn't produce fantastic returns. Instead, rent, be mobile, keep overheads at a minimum, and make sure you have funds to take advantage of investment opportunities that have the best returns so you build your real estate business.
For many, the dream of being a successful property investor who can replace their salary with rental income will come at the cost of living in a market where buying a rental property is far more affordable.
Buy, fix, and flip properties to build your portfolio.
When you're just starting in real estate, you need to build capital quickly. The idea behind a flix and flip strategy is to buy distressed properties, fix them, and sell them for a great profit.
Unless you're starting with a bucket of cash that you're ready to deploy into buying rental properties, the best way to build up a real estate portfolio in the least amount of time is by purchasing fix and flip properties. This strategy can generate income with each sale, and while you're not getting passive rental income just yet, the profit potential is far greater than with rental properties or house hacking.
When should you buy and hold?
Once you've acquired enough capital to hold rental properties while continuing your fix and flip properties, it's time to become a landlord. There are tons of benefits to being a landlord, primarily that your cash flow should cover the monthly mortgage payments allowing you to passively build wealth while focusing on other more profitable ventures.
If you want to get a highly successful investor, you need more than just one single family house or one income stream generated by a tenant in your ADU. By making sacrifices and prioritizing building a portfolio with high cash flow, you can build the portfolio of your dreams.
Do not get into property investing with the idea that you just need to buy and own one property. Only buy and hold once you are confident that you have enough capital to continue flipping properties while owning your rental properties.
We said it once (or twice), and we'll say it again: money makes money. Flipping and owning properties helps you buy more properties. Once you start building your portfolio and stay laser focussed, you can make it grow exponentially.
When should you buy a house? The 10% rule.
We all want to own a primary residence, a place to call home. But homeownership will set you back and slow your growth portfolio growth progress because it significantly increases your personal housing expenses. Look at buying a home as a reward for your hard work, not as an investment.
When less than 10% of your net wealth buys you your dream property, that's when you can focus on buying a home to live in. Until then, use your money to make more money.
House is hacking for passive investors.
House hacking is for passive investors who don't want to grow their real estate investing business quickly. If you want to own dozens of properties and find financial freedom, then never house hack. Instead, make buying, flipping, and owning properties your business.
