A house hack basically means that you buy a small multi-unit real estate property, live in one unit, and rent out the others. The property for house hacking could be a duplex, a triplex, a fourplex, or even other creative property uses like garage apartments or mobile homes. The income from the rental units can pay for some or all or expenses while you live there. Then once you move out, the property could also become a great long-term rental investment.
As full-time real estate investors for several years, we’ve personally benefited from house hacks. Our first home was a small multi-unit property that we fixed up and lived in before moving out and keeping it as a rental (see our blog post on buying your first property on a budget).
House hacking is the ideal housing choice for young homeowners who are willing to take the extra effort to learn how. If you start with house hacking as a young adult instead of the normal housing options (renting or buying a house), you can build much more wealth over the years. Housing is one of the biggest expenses of every budget, so if you can cut that expense, save the money, and invest it wisely, you’re giving yourself a HUGE head-start towards becoming wealthy and even retiring early.
Now let’s take a look at more benefits of house hacking.
Occupants get the best financing terms – Owner occupant financing has lower interest rates and more attractive terms than investment financing. If you keep the property as a long-term rental, this is a huge benefit because you can keep the owner-occupied loan in place even after moving out (usually the loan terms state you need to stay in the property for about a year, but of course exceptions can apply)..
Smaller down payments are possible – If you check out our blog post on buying your first property on a budget, you can see how smaller down payments of 0% to 5% are possible with programs like VA and FHA loans. Typical investment loans require 20-25% down.
Learn how to invest in real estate – House hacking is a hybrid of a residence and an investment. You live in the property while learning to invest. Everyone makes mistakes while learning, but it’s easier to recover when you’re on site and personally involved.
Smooth transition to rental properties – When you live in a property, you get to know it well. You also get to know the type of tenants your property attracts. So, once you move out you will have an increased comfort level with the property and your tenants as a landlord. With your low-interest loan, you’ll likely also make the best possible cash flow from the property once it’s fully rented.
House hacking is not for the faint of heart, but the feeling of living rent free is often worth the effort all on its own. You can use the rent from your tenants to reduce your housing payment and save money. So, whether you live rent free or just save a lot of money, the concept is still beneficial.