What exactly is house hacking?
Many people still hold on to the dream of home ownership, yet it’s an increasingly distant dream for many. Since 2000, the average cost for a home rose more than 100% from around $125,000 to around $260,000. The cost for residential real estate rose even more in hot urban areas, frequently driving up rental costs as well.
For those who want to live in work in these cities but don’t command massive income, property ownership can feel entirely out of reach. To combat this problem, many would-be property owners employ house hacking to bring the dream back into reach.
What Is House Hacking?
The core of house hacking isn’t a revolutionary idea. It may, however, seem a little unusual to those who picture property ownership as living with your family in a house. In essence, you give up — at least temporarily — on the dream of living in a house with just your family.
Instead, you portion out part of your property and rent it out to someone. The exact terms will vary depending on your home’s setup. If you have two full baths and a spare bedroom, you may share kitchen space and designate that bathroom and bedroom as tenant-only spaces.
If you only have a spare bedroom, you’re effectively entering into a roommate situation in terms of sharing space with you pulling double duty as the landlord.
Of course, knowing what it is is only part of the equation. You also need some sense of how to house hack, which we cover in the following section.
Cost-Covering House Hacking Strategy
For those living in areas with extremely high real estate costs, the house strategy essentially looks to cover real estate costs and maybe your basic expenses. It lets people own real estate in these markets without bleeding themselves dry every month.
It also lets people who don’t want to own property find an arguably better and more affordable place to live. For example, let’s say someone gets recruited out of college for a Silicon Valley job. One-bedroom apartments in San Francisco and the surrounding area are some of the most expensive in the country at about $3500 per month.
Let’s say that you locked in a $3000 a month mortgage payment for your San Francisco home before mortgages skyrocketed. If you charge $3000 a month in rent, you cover your mortgage. You’ll also likely get a river of well-paid applicants who will prove very happy indeed to pay what you’re asking.
This means you can bank $36,000 a year. Even after you pay your property taxes, you should still end up with a tidy sum in the bank.
House Hacking Investment Strategy
In areas of the country with less absurd real estate prices than areas like San Francisco, New York City, and Boston, house hacking serves as a real estate investment strategy for first-time buyers. The secret of this approach is typically an FHA loan for first-time buyers. You use a first-time buyer loan to acquire a property that lends itself to house hacking, such as a home with extra bedrooms.
Of course, these loans typically come with stipulations. For example, you must typically move in to the home within a specific period of time and remain in residence for at least a year. So, you should make sure you pick a property in an area you are willing to live for the required amount of time.
You defray your costs with the rent for a couple of years and save up for a down payment on a second property. You use your history of rental payments, along with your regular job, as evidence of income for a more traditional loan to acquire a straight investment property.
You can rinse and repeat the second phase of this process until you own a small real estate empire that supports itself.
House Hacking a Duplex
A duplex is probably the ideal property for the strategy described above because it offers a number of benefits. While you share a building with your tenant, you don’t share actual living space. That means you and your tenant can lead largely separate lives, assuming the walls provide good noise insulation.
Living next door to your tenant means you’re close by for any emergency or minor repairs. It also means you can more quickly and easily assess whether you must call in a professional for a problem.
Tenant selection is of utmost importance if you buy a duplex with the intent of house hacking. While a self-sufficient tenant will feel like a dream, a needy tenant will haunt you day and night.
House Hacking Ideas
House hacking works best with a multi-unit property, but it’s not the only way you can do it. The only real requirement is that you have a space in your home that you’re willing to sacrifice to a tenant. Any house with an extra bedroom will do the trick.
Does your house have a garage? It may cost you something initially to insulate, run power, and run water, but you can convert a garage into a tidy little apartment. You can do the same with a reasonably sized attic, though you’ll face some regulation hurdles to make it happen.
How big is your backyard? Those with a spacious backyard might consider adding a tiny house to it.
Again, you’ll likely face some hurdles in terms of regulations if you plan to rent it. At a minimum, it’ll need power, water, and sufficient insulation. This approach will definitely take an up-front investment, but it also eliminates the need to share living space.
House Hacking and You
House hacking offers one option for people to acquire property in hot real estate markets or begin their journey into real investment. In many cases, this proves easiest for first-time buyers who can leverage FHA programs to get that first property.
You must go into the situation with open eyes, though. It can mean everything from having a tenant right next door to sharing your living space with a tenant. If you don’t think you can manage those, house hacking probably isn’t for you.
If you think the tradeoff is worth the payoff, though, it can get you started in real estate ownership.
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