House hacking is a term that’s been gaining traction in recent years, but what does it mean?
Simply put, house hacking is the practice of owning or purchasing a multi-unit property, living in one unit, and renting out the others in order to generate income that covers your mortgage and other expenses like property taxes and insurance.
This innovative approach to homeownership allows you to essentially live for free while building equity in your property—something that could easily become a win-win situation.
Here’s your introduction to the world of house hacking—exploring its benefits, strategies, financing options, and more.
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The benefits of house hacking
There’s no denying that the concept of house hacking comes with obvious benefits.
First and foremost, it allows you to live for “free”—or at a significantly reduced cost.
Renting out your additional units means you could generate enough income to cover ALL of your housing expenses: mortgage, property taxes, etc.
House hacking can also be a great way to build equity. As your tenant(s) pay down your mortgage, you’ll gradually own a larger share of your home. Equity can be leveraged for future investments or even used to fund major life expenses, such as education or home renovations.
Another major benefit of house hacking is the potential tax advantages.
As a landlord, you may be eligible for various tax deductions including mortgage interest, property taxes, insurance, and maintenance costs. Be sure to consult with a tax professional to determine which deductions you may qualify for
Finally, house hacking serves as an excellent introduction to real estate investing. By managing your own rental property, you’ll gain invaluable experience and knowledge that can be applied to future investments.
Plus, as a homeowner, you’ll build your credit and demonstrate to lenders that you’re a responsible borrower, which can help you secure better financing terms in the future.
How to find the perfect property for house hacking
Eager to find the perfect property and get started? This process may seem overwhelming at first, but with careful planning and research, you can find a property that meets your needs and sets you up for success.
- Who are your ideal tenants?
- What type of property would best suit their needs?
- Are you looking to rent to families, young professionals, or college students?
By identifying your target market, you can narrow down your property search and focus on the ones that will be most appealing to your potential renters.
List out potential locations
Look for areas with strong rental demand, such as:
- Near universities
- Close to major employment centers
- Areas with popular amenities
Additionally, consider the neighborhood’s growth potential, as this will impact your property’s long-term appreciation.
Crunch the numbers
Thoroughly evaluate each property’s financial potential, considering factors such as:
- Purchase price
- Projected rental income
- Potential expenses
- Mortgage payments
- Property taxes
You want to ensure that the property you choose will generate enough income to cover your expenses and provide a comfortable living situation for yourself and that you can actually afford to make all the payments/costs associated with the home.
Reach out to the pros
Don’t be afraid to enlist the help of professionals. A knowledgeable real estate agent or mortgage lender can help you navigate the market and find properties that align with your goals.
The Scotsmans Guide is also a great tool to use when looking for the right mortgage lender.
Different strategies house hacking
There is no one-size-fits-all approach to house hacking. Goals, preferences, and financial situations will vary along with the strategies you can employ to make the most of your investment.
This is the most common form of house hacking, involving the purchase of a duplex, triplex, or fourplex. You’ll live in one unit and rent out the others, generating income to cover your mortgage and other expenses.
Single-family home with extra rooms
If you prefer the idea of living in a single-family home, you can still take advantage of house hacking by renting out extra bedrooms to roommates or on platforms like Airbnb.
Accessory dwelling units (ADUs)
ADUs, sometimes called in-law suites or granny flats, are smaller living spaces located on the same property as your primary residence and they have their own private and separate entrances. By renting out an ADU, you can generate additional income without sharing your living space.
This strategy involves purchasing a fixer-upper, living in it while making improvements, and then selling it for a profit. While this approach doesn’t generate rental income, it can lead to significant profits if you’re able to increase the property’s value through renovations.
Rent by the room
Instead of renting out entire units, you can maximize your rental income by renting individual rooms within your property. This approach can be particularly lucrative in areas with high rental demand, such as college towns or major cities.
Financing a house hacking investment
Securing financing is a critical step in the house hacking process. While traditional mortgages are an option for many house hackers, there are also several alternative financing options to consider:
- FHA loans
- VA loans (only for those with military eligibility)
- Home equity loans (HELs or HELOCs)
- Hard money loans
Hard money loans for house hacking
These are short-term, asset-based loans offered by private lenders or groups. Hard money typically has higher rates and fees than traditional mortgages—but also has some valuable advantages.
- Quick closing: Faster turnaround time than traditional mortgages, allowing to secure the property before someone else. Closing times for hard money loans can be as quick as 2 weeks.
- Poor credit: Hard money lenders typically focus more on the property’s potential value than the borrower’s credit score. Borrower’s with low credit scores need to provide a letter of explanation regarding why the scores are low and how they are planning to increase their scores
- Property flips: For the live-in flip strategy, hard money loans can provide the financing to purchase and renovate the property quickly.
- Mulit-unit property advantage: Compared to traditional banks, hard money lenders like Marquee Funding Group will often give you more credit toward the loan when you’re renting out one-half of your home.
Be sure to talk with an experienced loan officer to advise you whether a hard money loan is the right choice for your situation before moving forward.
Legal considerations and regulations for house hacking
As with any real estate investment, there are legal considerations and regulations to be aware of when house hacking.
Common legal considerations include:
- Zoning laws regulate the use of multi-unit properties. Research your local zoning laws to ensure that your property is compliant.
- Landlord-tenant laws outline your responsibilities as a landlord and your tenants’ rights.
- Obtain appropriate insurance coverage for your property, including liability insurance and property insurance—be sure to shop around for the best rates and coverage.
- Landlords may be subject to various taxes, including property taxes, income tax, and sales tax—consult with a tax professional to ensure you comply with all applicable tax laws.
- A lease agreement should outline your tenants’ terms, including rent payments, lease length, and any specific rules or expectations—have an attorney review your lease agreement before using it.
Taking the leap into house hacking
House hacking is a unique and innovative approach to real estate investment, offering the potential for significant financial benefits or even a path to homeownership.
While it can be a challenging endeavor, with the right research, planning, and approach, anyone can transform their home into a money-making machine.
Whether you’re a seasoned investor or a first-time homebuyer, house hacking is an option worth considering.
By leveraging the power of rental income, you can reduce your financial burden, build equity in your property, and gain valuable experience in real estate investing.
At Marquee Funding Group, we’re here to help you achieve your long-term financial goals. We prioritize relationship-building and mutual respect, working with you to find the financing solution that best fits your needs.
Photo by Ahmed Abdelaziz