The concept of “house hacking” has been around for a very long time but the term was coined by BiggerPockets podcast host Brandon Turner a few years ago.
When I was just starting out and researching real estate investment opportunities, the idea seemed very compelling. On the surface, house hacking seems to be a way for regular people to get involved in real estate investing because you can purchase a property to live in and rent out the extra space. But, like most things in the world, it’s not that simple.
So, what is house hacking? And is it the right real estate investment strategy for you? I’ll cover the basics of the most popular house hacking strategies and discuss some of the potential benefits and drawbacks so you can decide for yourself whether or not getting started in real estate investing with a house hacking strategy is a good idea.
Types of Real Estate Investing House Hacking Strategies
House hacking has become a catch-all term for any real estate investing strategy that involves renting out a property while you’re still living there. These are some of the most popular house hacking strategies.
Traditional House Hacking
With the traditional form of house hacking, you purchase a multi-unit property—an apartment building, duplex, etc.—and live in one of the units while renting the rest out. The idea is to make enough money from the rent that your mortgage is completely covered, with a little leftover. This strategy may work well in lower-priced housing markets where it’s still possible to purchase inexpensive multi-unit properties. However, in higher-priced housing markets and areas with a lot of renters (like major cities and college towns) multi-unit properties tend to be prohibitively expensive for this type of house hacking.
Rent by the Room
Another house hacking strategy is to purchase a single-family home, live in one of the bedrooms, and rent out the rest of the bedrooms individually. Purchasing a single-family home—especially one you plan to live in—opens up more financing options than you’d likely get purchasing a multi-unit property, and renting by the room usually provides more than enough money to cover the mortgage. However, you’ll likely have to share the common living areas in the house with your tenants, which isn’t always ideal.
Rent the Whole House
Some house hackers take things a step further and rent out the entire house, choosing to live elsewhere on the property such as a trailer or a pool house. Generally, this is used as a short-term strategy to cover the cost of the mortgage while you renovate the property for a flip or save money for your next investment. You could also use this strategy for short-term rentals through apps like Airbnb.
Rent Out an Additional Dwelling
Another popular house hacking strategy is to purchase a property with an additional dwelling unit, such as an “in-laws suite” or a pool house, or to build an additional dwelling unit in the basement or garage of the house. With this strategy, you get a little more privacy than renting by the room but can still partially offset the cost of your mortgage.
Is Real Estate Investing With a House Hacking Strategy a Good Idea?
House hacking can be a good way to offset the cost of a mortgage while you’re living on a property, assuming you’re able to consistently rent out your space to responsible and considerate tenants. It can often be easier to obtain financing for this type of real estate investment than for a flip or other investment, especially if you’re a first-time homebuyer; a lot of mortgage lenders require you to live on the property for at least a year. However, there are considerable drawbacks to real estate investing with a house hacking strategy.
If you’re looking to start a real estate investing business, house hacking can really slow your momentum. Here are a few potential drawbacks to consider:
- It could take a while to start seeing consistent cash flow from your renters, which can make it difficult to move on to the next investment.
- For new investors, having a new mortgage in your name can make it hard to get another loan for a second investment property, so you may have to wait a year or two before getting another traditional real estate loan. Typically, with real estate investments, you want to move properties quickly and jump on good deals as soon as you spot them, so house hacking can really gum up the works.
- It can also be harder to emotionally distance yourself from a property and treat it like a business if you’re living there, because everything likely feels more personal. You could end up spending too much money on improvements because you want to make your own living arrangements more comfortable or because you’re emotionally attached to the property and want to make it perfect.
- There’s also the chance that it’s harder to emotionally distance yourself from your tenants if you’re living on the same property, which can make things awkward if someone is late on the rent or if you can’t address repairs or other issues right away.
For these reasons, house hacking may not be the best entry into the world of real estate investment if you’re serious about turning it into a business. There are better ways to get started as a new investor even if you don’t have much real estate experience.
A Better Way to Get Started with Real Estate Investing
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