Ever thought of investing in real estate but would like to break in the game with a smaller but still powerful leap?
House hacking is gradually becoming a brilliant and lucrative way to begin investing in real estate, ideally for new investors who want to own a home and also plan to invest in real estate. Of course, this is not for everyone as not all have this desire. Maybe you already own your own home or you love where you rent, in that case, house hacking is not a strategy that you will want to entertain. But for those who have the desire to purchase a home and begin investing, this real estate investing strategy along with its powerful benefits makes it very attractive for someone to consider. Maybe you don’t want to take the traditional step and buy your first investment home and assume those risks that follow, it may be too much too soon but you still want to invest. What do you do? You house hack!
First of all, What is house hacking? House hacking refers to a real estate investing strategy that involves renting out a portion of your primary residence to offset expenses associated with owning a home. The concept behind this venture is to entirely reduce your cost of living or possibly get paid for it. This means that income generated from this house ownership would partially pay for your mortgage and other property expenses as you focus on growing your equity, expanding your portfolio and increasing your property management skills if you chose to do so.
The question remains, is house hacking a good strategy? Perhaps, if this question affects your thought process, this article will empower you. Take it from someone who has done this creative strategy.
Though the value of house hacking comes in many different forms and the investment strategy has various methods, it all depends on the kind of property you acquired, your lifestyle and of course and most importantly, how much you pay. Nevertheless, here are the 3 main reasons why house hacking is an ideal way to begin investing.
1. Reduce your housing costs or even better, get paid as a result while becoming both a homeowner and a landlord at the same time
The largest benefit of house hacking is that you significantly reduce your cost of living as the tenants will provide you with streams of direct income in the form of rent, so long as they pay of course. This will help you offset the costs of owning the property and the extra money you save as a result can be used to directly fuel your plans to scale your real estate portfolio.
For instance, if you own a two-unit house (duplex) and you rent out the other unit for $1,000 per month, and your cost to own the home (mortgage, taxes, insurance, etc) is $1,400 then you are essentially paying a low cost of $400 a month for housing! Where else will you be able to find housing for that cheap? Keep in mind that this is just one example deal, some deals actually result in even lower housing costs or even income, essentially getting paid to live in the home that you own!
On top of that, it’s important to also remind yourself to factor in the equity buildup you accumulate as you own the property. Once you take the leap and jump on your first house hack deal you also in a way, take full advantage of time because you essentially do both, become a homeowner and become an investor. This is a better use of your time when doing both as opposed to doing one at a time. In real estate, the longer you have in the game the more time you allow for compounding interest to occur for growth.
2. Property management is a whole lot simpler
Much like your cost of living automatically gets reduced in a house hack, so does the property management demand, as it automatically reduces and becomes a whole lot simpler. In case you forgot, property management is one commitment you automatically assume no matter what when investing in real estate. It’s like when you buy a car, you know you will need to pay for maintenance, repairs, and gas down the road, there’s no way around it. Even if you outsource your property management, you still have to manage the property manager, even though outsourcing property management in a house hack deal doesn’t make much sense, especially when you consider how the house hack strategy makes it easier for you to manage. Here are the best ways it does just that.
- Commute: Property management involves commuting to the property, something that is often overlooked and will be painfully noticed when one has to make long commutes back and forth to visit the property for whatever reason. In a house hack, you’re as close as you will ever get to the property that you are managing because you live there! You save on gas and most importantly time.
- Upkeep: You tend to take more care of the property because you benefit from “homeowners pride,” again, because you live there. This motivates you to take better care of the property that you also use as a rental, especially the exterior. Keep in mind that although the rental market in the area is the main influencer in determining what you can rent your property for, you may be able to get above that due to this point, because some people may be willing to pay a little more for a well taken care of unit when choosing a place to rent. A neglected unit is harder to rent above or at least at the fair rental market value over a well-maintained unit.
- Lower property maintenance expenses: Property maintenance expenses are lowered because you combine your personal and investment maintenance expenses into one unit. Because both you and your tenants live under the same roof you only have that one property to maintain. If you change the roof on the property you are house hacking, it’s like you put a new roof in both your own house and your investment property ( like in a duplex ). The more doors, or units under one roof, the more you save on maintenance expenses as opposed to having to replace two roofs, two sidings, two fences, etc.
3.Still benefit from the amazing tax advantages of real estate investing
Let’s talk about Uncle Sam and what all advantages one can look forward to and expect from a house hack deal. In particular, how to legally pay less. Let’s keep in mind that taxes cut into the gains of investing and strategically finding ways to legally reduce your tax obligations is very wise. Uncle Sam is not going to tell you that you can be paying him less, he will gladly take more than what you owe him. Without getting too technical about tax accounting, the following two are the most relevant advantages that you can leverage to cut down on tax obligations and save more to scale your portfolio.
- Depreciation: This means that you get to deduct a certain amount of money each year because the government considers the value of the property (only property, not the land) to depreciate yearly due to normal use and wear & tear. Although in most cases, property values behave the opposite way and appreciate over time, especially over the long term. If you are reporting any income from holding the property then deducting this from your gains allows you to keep more of those gains, again, you give less to Uncle Sam. Keep in mind that even if you force appreciate the value of the property with any significant improvements, this tax advantage continues to apply, but only if you take advantage of it. This is an exclusive tax advantage for those who invest in real estate, which, as a house hacker you technically are.
- Rental expense deduction. Aside from depreciation, you also get to deduct from any reported gains any expenses associated with the unit you rent, such as maintenance expenses, tenant screening expenses, etc. You may also be able to deduct expenses that were significant to the rental unit but also to your own personal unit such as deducting a new roof expense. Taking a look at the earlier example of the duplex house hack scenario, If you replace items that are common to both units like the roof, siding or gutters, you may also be able to deduct that in the form of rental expenses come tax time. Of course, this is not tax advice and it’s always wise to add a good CPA who specializes in real estate tax laws to your team. You’re going to need one as you scale and having the right one pays for themselves after considering how much they can save you in taxes.
Overall, house hacking done correctly can provide you with low cost, free or even paid housing, as the tenants’ rent can offset some of those undesirable costs to a great extent. And as a hybrid of investment and residence, with good financing terms and the possibility to cash flow your personal residence, house hacking remains a golden opportunity for creative and motivated real estate investors looking for the perfect opportunity to break into the market and who also want to own their own home or move to another.
Hi, I’m just an inspired recent real estate beginner investor named Miguel Rivera from a modest town neighborhood called Pigeon Hill in Aurora, Illinois, the City of Lights! I have 3 years in so far investing in real estate and excited to continue to walk my chosen path to reach my ultimate financial goal of living off my rental income before I reach 35 years old! Driven by infinite growth potential and guided by my mentor, I managed to get started and make it work with just a modest salary, practically no education in the field, learning and applying some key habits. This website is a collection of all things that I have learned so far that I wish can help other recent real estate investors! Click here to view more about my story.