Important takeouts:
House hacking is a real estate investment strategy where you live in a part of the property while renting the remaining space. House hacking can be done in multi-unit residences or in detached houses. When searching for a home to hack, it is important to check the zoning laws and HOA regulations for investment permits.
Have you ever dreamed of living for free or have you ever cut your biggest monthly expenses significantly? For many, housing costs represent a significant portion of your budget. What if you could turn your home into an income-generating asset?
This concept is known as “house hacking” in real estate. This is a strategic approach to homeownership to leverage major housing and generate rental income, often covering all or most of the mortgage payments and associated costs. This Redfin Real Estate Guide explores what house hacking involves, its benefits, and how you can get started.
What is real estate house hacking?
House hacking is a real estate investment strategy where you live in a part of the property while renting the remaining space. This can take several forms, such as buying a multi-unit residence (double, triple, or limbs) or living in one unit while renting other units.
Alternatively, you could purchase a detached house and rent a spare bedroom, or convert parts of your home to another rental unit, such as an underground apartment or an accessory residential unit (ADU). The core idea is to offset your cost of living with rental income, make homeownership more affordable and make your building fair.
House hacking perks
House hacking offers many benefits and has become an attractive option for aspire to become a homeowner or real estate investor.
1. Reduce or reduce housing costs
This is definitely the biggest perk. By collecting rent, you can significantly reduce or even eliminate monthly mortgage payments, property taxes and insurance. This frees up capital for other investments and personal goals.
2. Make your building equity faster
When your tenants are contributing to your mortgage, you build equity at an accelerated pace in your property. This asset valuation can be a significant source of wealth over time.
3. Gain experience as a landlord
House hacking offers a hands-on experience in the relationship between real estate management and tenant, along with the convenience of local living. This can be invaluable if you plan to expand your real estate portfolio in the future.
4. Low down payment options
For multi-unit properties, you often have financing that is occupied by a favorable owner, such as FHA loans that require a drop compared to investment property.
5. Tax benefits
As a homeowner and landlord, you may be eligible for various tax deductions related to rental income and property costs. Talk to a tax professional for personalized advice.
6. Financial flexibility
Lower housing costs will increase financial flexibility, allowing you to save on other goals, pay off debts, and invest more.
Scenarios of examples of house hacking in real estate
Jacob hopes to buy his first home while building a path to real estate investment. He decides to house Hack. Jacob will buy the duplex for $400,000 and secure an FHA loan with a low down payment. His monthly total mortgage, taxes and insurance amounts to $2,500. He moves to one unit and rents the other units for $1,800 a month.
In this scenario, Jacob’s out-of-pocket costs will be reduced to just $700 a month ($2,500-$1,800). This is a huge savings compared to paying the full $2,500. Over time, rental income could increase, potentially covering his entire mortgage. This strategy allows Jacob to live in his property, build equity and gain experience as a landlord.
How to find a home to hack
Finding the right property for house hacking requires a specific approach.
1. Define real estate goals
Decide which type of house hacks are suitable for your lifestyle and financial goals. Do you like to rent multi-unit property or rooms in detached houses?
2. Investigate local markets
Find areas with strong rental demand and areas that suit your budget and house hacking strategy. Talk to a Redfin real estate agent who specializes in investment property.
3. Consider zoning methods
Especially if you are considering converting parts for a detached house, make sure that property zoning allows the types of rental activities you plan to pursue.
4. Please contact the HOA
If the property is located at the Homeowners Association, double-check that house hacking is permitted.
5. Evaluate the status of a property
Consider potential renovation costs. Some small improvements can add value, but important repairs will eat up your profits.
6. Calculate potential rental income
Work with your agent to estimate realistic rental income for the unit or room you plan to rent. This is important for determining profitability.
7. Explore fundraising options
Research loan programs such as traditional mortgages that favor multi-unit properties occupied by FHA, VA, or owners.
Now, decide if house hacking is right for you
If investing in real estate is passionate about but worrying about barriers to entry, house hacking can be a great starting point. This real estate investment strategy is a phenomenal option for beginners looking to reduce their overall living costs while increasing their cash flow. However, do not limit yourself to one investment option. Explore other real estate investment strategies to decide which one is best for you.
FAQ:
Q: Is house hacking legal?
A: Yes, house hacking is generally legal, but it is important to comply with local zoning laws, rental ordinances and landlord tenants regulations. Always check with your local government.
Q: How much money can you save with house hacking?
A: Savings vary widely depending on the location of the property, the rental income generated, and mortgage costs. Many house hackers aim to cover rental incomes that cover the overall mortgage and related expenses.
Q: What is the biggest challenge with house hacking?
A: Challenges include tenant management, repair and maintenance handling, potential privacy concerns, and an initial learning curve for being a landlord.
Q: Can I hack hack with an FHA loan?
A: Yes, FHA loans are a popular option for house hacking, especially in multi-unit properties (up to 4 units).
Q: Will lenders consider rental income outlook for mortgage approval?
A: No, lenders will not help you get mortgage approval, taking into account potential rental income. Funding approval is determined solely by the owner’s income.
