House hacking is a real estate investment strategy in which you live in a part of the home or property and rent out the rest of the living space. You buy the home for a low percentage down and then charge the tenants or roommates enough to cover your housing expenses.
Table of Contents - Thinking About House Hacking? Set Realistic Expectations and Avoid These Pitfalls!
- House hacking requires cash upfront
- You have to work for that income
- Your new place may not be the nicest
- If the market turns, you may be stuck
- You may not love your tenants
- You need to stay professional
- Tenants must be trustworthy for house hacking to work
- How to finance your house hack?
- House Hack: How to live FOR FREE by investing in multifamily real estate
House hacking has more benefits than just covering your housing costs. House hacking allows you to start your real estate investment portfolio when you don’t have enough to purchase a second property. You’ll also be building equity in your property while meeting your own housing needs, and gain tax advantages for property ownership.
Despite these benefits, house hacking can also have drawbacks if you aren’t careful. You’ll need to set realistic expectations before delving into this real estate investment strategy.
House hacking requires cash upfront
House hacking as a solution falls somewhere between renting and owning your own home, and like those options, it also requires cash to get started. With house hacking, you’ll provide a lower down payment than you normally would for buying a property—about 3 to 5 percent. You’ll also need a few thousand for closing costs and whatever maintenance you need to perform before move-in day for you and your tenant(s).
For a $400,000 property, you’ll need $12,000 to $20,000 for a down payment and closing. Depending on the state of the property you could spend another $30,000 fixing the place. That’s all before you get your first rent check from your tenant! You’ll need to prepare for being without income for a few months while you close on and move into your new place.
This may seem daunting compared to renting. However, the beauty of investing is you’ll likely make this money back many times over. You’ll pay down your home loan with rental income, you won’t have any of your housing costs and your property will likely appreciate.
You have to work for that income
If you’re living in the home or property that you also rent, chances are you aren’t using a property management service to deal with your tenants. If something goes wrong, you’ll be the one responsible. Conveniently enough, you’re there at 2 a.m. to deal with the burst pipe because it’s your problem too!
Renting out part of your home requires you to think like a business owner—because you are one. It’s not a bad idea to establish a sole proprietorship for handling expenses related to your real estate business. As a businessperson, you’ll need to think about marketing for vacancies and upkeep and maintenance on your property to maximize your profit potential. You’ll also need to file taxes differently for your business.
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Your new place may not be the nicest
The benefit of house hacking comes from maximizing your profits, so you’ll look for a less expensive property for which people are still willing to pay high rent. This may require you to live in a lower-quality space than you’d normally prefer. Your discomfort may only be temporary as you earn enough profits to truly buy your place and build your portfolio, but until then you’ll need to manage your expectations for where you’ll be living.
Because you smartly budgeted for fixing up the property upon purchase, you have some room to make the space more desirable. Forced appreciation, or improving the property value through your work, will help you feel better about the large investment you’ve made.
If the market turns, you may be stuck
The hope of buying a nice place in a few years may help you settle into a fixer-upper, but as with all investments, there are risks. If the economy sees a recession, you may be stuck in your investment property for a while until you can sell. If the economy gets particularly bad you may need to lower rent as well. Make sure you buy a property you could still afford even if you have no tenants. Having savings set aside is crucial for weathering any storm the real estate economy might bring.
You may not love your tenants
If you previously lived alone, moving back in with “roommates” is a difficult adjustment. Depending on the size and setup of your property, you may have prospective tenants who are solo business travellers or a family with small children. If you have your own family, you may need to make some adjustments or set boundaries when inviting a stranger to live in your space.
When sharing with your tenants, whether it’s a two-bedroom condo or a multi-family property, you need to establish clear protections around everyone’s comfort, privacy and safety. Screening candidates will give you peace-of-mind about who’s living with you. You may be surprised at what you learn from new people you may not have otherwise met!
You need to stay professional
If you’re sharing a living room, kitchen and bathroom with someone, it can be hard to draw the line between roommate and tenant. While it’s great if you enjoy your tenant, becoming too friendly means the tenant may be able to take advantage of you. You may let rent payments slip by because you know his or her circumstances are tough, or you may refund the full security deposit for fear of souring a friendship. If you want to manage your investment as a business, you need to keep your relationship friendly and professional.
Tenants must be trustworthy for house hacking to work
If tenants aren’t paying, you aren’t making any money. This is a risk all property investors and landlords take. You can minimize risk by screening your candidates, which will flag things like a poor credit score that signal the candidate has trouble paying on time.
To avoid late payments, set up a service that automatically withdraws rent money on the same day each month. This will also help you avoid awkward run-ins in the kitchen.
House hacking is an excellent way for real estate investors to get started when they aren’t ready to buy their property just yet. Though it requires a bit more work, the investment will be worthwhile.
How to finance your house hack?
Not all banks or brokers have access to lenders or platforms where they can lend money for renovations. Some lenders will only provide improvement funds for owner occupied homes with only a small handful that will fiance rentals.
House Hack: How to live FOR FREE by investing in multifamily real estate
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