When I first became interested in real estate investing, I was surprised to learn about the many real estate investment strategies out there. I was familiar with the traditional fix-and-flip model but never had I considered flipping houses while living in them. It wasn’t until a colleague told me how she was able to pay off her first home by renting out a portion of it that I entertained the idea.
Though I was intrigued, I also understood that it wasn’t that simple—like most strategies in this industry. I decided to dig a little deeper to weigh the pros and cons. And while I ultimately decided to take another approach, I discovered a few benefits that really had me on the fence. I’ll share them with you.
Understanding House Hacking
Renting out a portion of a house while you’re also living in it is called “house hacking”—a term coined by BiggerPockets podcast host Brandon Turner a few years ago. The concept has been around for a very long time and it’s often a way for young investors to raise capital.
Real estate investing isn’t inexpensive. The costs associated with flipping a house speak to that. When purchasing a house to flip, there’s the initial cost of the property, financing costs, vacant or unoccupied property insurance, monthly utilities, and taxes. Then, there are all the costs associated with fixing the house: construction, renovation, etc. Oftentimes, when you’re paying these costs, the house itself isn’t generating income. House hacking—flipping houses while living in them—can be an attempt to mitigate these costs.
There are two primary types of house hacking:
- The Live-In Flip: This is when you buy a house and move into it, and fix it while you are living there. You don’t have to pay extra bills, and you aren’t in as much of a hurry. You can actually take your time to get the work done.
- The Rent-Out Flip: This is when you buy a house or multi-unit property, live in a portion or unit, and rent out the rest. You might rent out a room, a unit, a finished basement, a garage, or an in-law suite, for example. By renting out portions of the home in which you’re also living, ideally, the income can assist with the mortgage payments.
In addition to cost mitigation, there are many potential benefits to flipping houses while living in them.
Potential Benefits of Flipping Houses While Living in Them
House hacking can offer many benefits for real estate investors, including the following
- A chance to earn income while waiting for the right time to sell. If you are renting out part of where you are living, you can hold onto a property until the market is right (or until you’re prepared to move).
- The potential to avoid capital gains taxes. In some cases, if you live in a house for a certain period of time, you can avoid paying capital gains taxes after selling it since it is not strictly an investment property.
- The opportunity to take your time with the fix. When you are rushing a flip, you have to make a lot of decisions balancing timeliness and thoroughness. By living in the house you plan to flip (and renting it out), you may be able to spread renovations out over a longer period of time—renovating room-by-room, for example.
Depending on the type of property you choose to “house hack”—and the area—there could be many more potential benefits. But with every strategy, there are also drawbacks to consider.
Potential Drawbacks of Flipping Houses While Living in Them
When determining whether or not house hacking is for you, consider the following:
- You may have stricter financing terms. Because you will be renting out a portion of the home, it’s considered an investment property. There are specific types of loans for investment properties and you must make sure you follow the guidelines when leveraging one.
- You have to live in the house for one year. In most jurisdictions, selling before you have established a year of residence can eliminate some of the financial benefits. If you don’t plan to stay in the house for a year, this could limit your options.
- You might not be allowed to rent where you are living. Many states and localities—in an attempt to curb the power and housing-stock-limiting nature of Airbnb—have tightened their regulations about renting homes. Be sure you check the laws where you’re looking to invest to avoid fines and penalties.
- If you’re renting out your flip, there will be people living with you. If there aren’t multiple units, you’ll likely have to share common areas such as the kitchen and living room. This may not be ideal.
- You’re going to be fixing up where you live. If you’re taking your time to fix up your flip, you’ll likely be living with construction, unfinished rooms, dust, noise, and everything else that comes with renovating a house.
When house hacking, you may come across all or some of these issues. If you aren’t prepared, you could land yourself in serious legal or financial trouble.
Flipping houses while living in them can be a good strategy for some but it doesn’t have to be the only approach to real estate investing. If you’re not sure that the house hacking strategy is the best approach for your business, there are other options.
Find the Real Estate Investment Strategy That Works for You
If you’re on the fence about whether or not flipping houses while living in them is a good strategy for you, explore other options. One of the best ways to start a real estate investing business is to set yourself up with the resources and support of the HomeVestors® network of independently owned and operated franchises. As a franchisee, you’ll be running your own business, but with a seasoned HomeVestors® Development Agent to coach you through your first few investments and along the way. You’ll also gain access to the UGVilleSM platform of real estate investment software tools, including a proprietary lending portal that allows you to find and compare loan options from hard money lenders. Becoming a HomeVestors® independently owned and operated franchisee will give you some of the best tools and support to help you confidently begin your real estate investment business without needing to simply rely on house hacking strategies.
Are you ready to join a nationwide network of experienced real estate investors? Contact us today to find out how to become a HomeVestors® franchisee.
Each franchise office is independently owned and operated.