There are a lot of people talking about house hacking these days, so we wanted to shine some light on the subject for those who don’t really know what it is.
House hacking involves purchasing a property with the intention of living in one part of the property while renting out another part, for example, a room, entire floor, or accessory dwelling unit. We have two clients who recently got into the house hacking game; both purchased a property with the intent to rent out one bedroom and bathroom to a tenant while sharing the living spaces, kitchen and laundry. House hacking is a creative and more affordable way for people to acquire real estate and build wealth and it is appealing to Gen Z and Millenial buyers.
Here is how it works:
1. Acquire a property: As a prospective house hacker, you want to look for a property with extra bedrooms, a basement suite, an Accessory Dwelling Unit, or even a duplex or tri-plex.
2. Live in one Unit: You move into the property as your primary residence whether that be in one of the rooms or units. This is crucial because it allows you to take advantage of lower interest rates and down payment requirements since the property will be your primary residence.
3. Rent out to others: The additional rooms or units are then rented out to tenants. The rental income generated from these rooms or units helps you cover your mortgage payments and other expenses.
Why are people embracing house hacking?
1. Affordability and low down payments: House hacking allows you to enter the real estate market with minimal upfront costs. You can secure a mortgage with as little as a 3% to 3.5% down payment, thanks to conventional and FHA mortgage loans for residential purchases. Interest rates for primary residences are typically lower than those for investment properties. By living in the property, you qualify for both the lower down payment and lower interest rates.
2. Income generation: House hacking enables you to offset or completely cover your monthly mortgage payments since you are using the rental income from the other rooms/units to directly cover your housing expenses. Instead of paying rent to someone else, you’re building equity in your own property. Over time, property appreciation and mortgage paydown contribute to your wealth accumulation.
3. Strategic real estate investment: House hacking provides an opportunity for investors to expand their portfolio over time; with the goal of creating a passive income stream through real estate.
4. Flexibility and adaptability: House hacking is flexible. If your circumstances change (e.g. job relocation or family growth), you can adjust your living situation accordingly. Rather than renting out just part of your current property, you can rent the entire property and use those funds to help you find your new home.
As with any sort of investment, you need to consider the challenges of house hacking to make sure it is right for you. Being a landlord requires time and effort. You will need to manage tenants, handle maintenance, and address any issues promptly. Living in close proximity to tenants means shared common areas and potential privacy considerations that you will need to be thoughtful about. Lastly, you will need to understand the local laws and zoning regulations related to rental properties.
In conclusion, house hacking offers a unique blend of financial benefits, real estate investment, and lifestyle flexibility. By strategically leveraging part of your living space, you can embark on a path toward financial independence while enjoying the comforts of home.
Whether you are a first-time homebuyer or an experienced investor, house hacking is worth exploring. Remember, the key to successful house hacking lies in finding the right property, understanding your local market (which we can help with), and being prepared for the responsibilities and commitments that come with it. If you would like more information on house hacking, please reach out!
Kelly & Mark Williams, Wiliams Group, MODUS Real Estate
