By now, most of us have heard of the term that Brandon Turner infamously coined called “house hacking.”
For those of you who have not heard, it is when you purchase a property, live in part of it, and rent out the rest. That way, your roommates and/or tenants are paying a significant portion (or all) of your mortgage.
There is no question that house hacking is the single best way to generate wealth for those of you who are in the beginning stages of your journey towards financial independence. Here is why:
It either dramatically reduces or eliminates one of your largest expenses—your living expense.
You build equity for free as your tenants pay down your mortgage while the property (in many cases) appreciates.
You save in taxes, as you are able to deduct a portion of your house expenses as well as account for depreciation.
You can get into a house hack for very little down if you’re a first-time home buyer. With such little money down, it will be tough to find cash-on-cash returns higher on any other type of investment.
Now that you can see how powerful house hacking is—and before you start making excuses as to why you can’t do it—read this article.
We are going to outline the different types of house hacking that I have seen. I hope that a variation of one of these house hacking strategies can work for you.
1. The Traditional House Hack
Definitely the most popular and the one that almost everyone has heard of is the traditional house hack. This is when you purchase a two- to four-unit property with a low down payment residential loan. The 3.5% down FHA is popular here, but there are others, especially if you are a first-time home buyer.
You live in one unit (perhaps with a roommate) and rent out the other unit(s). The rent from your roommate plus your other units should either cover the mortgage or come darn close to covering the mortgage. That way, when you move out, the property cash flows nicely.
This strategy works in most lower-priced markets, but it is almost impossible to find a deal that works in the higher-priced markets, where rents will usually not be enough to cover the mortgage.
2. Calling the Living Room Home & Renting Out the Rest (Seriously)
They call it a “living” room for a reason, right?
With this strategy, you rent out the upstairs unit like a traditional rental. Since you are not occupying my bedroom, you can now rent it out on Airbnb. This works extremely nicely, allowing for some extra cash flow every month, depending on the seasonality of Airbnb.
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3. Renting by the Room
The idea is to purchase a large single family home that has at least four beds and two baths and live in one bedroom while renting out the others. You can typically get significantly more in rent when you rent by the room.
Purchasing a single family home (especially as a first-time home buyer) opens up a lot of potential financing options. With a low down payment, increased rent really boosts your cash-on-cash returns.
We haven’t even gotten to appreciation yet. Single family homes are known to appreciate more quickly than multifamily ones. This is the case because both investors and non-investors are interested. With more demand comes higher prices, not to mention that non-investors will typically pay a premium given they are looking for a home—not a deal.
4. Living in a Trailer/RV & Renting Out Your Primary Residence
This strategy is for the hustler who is clearly willing to do what it takes to achieve early financial independence.
In Denver, where the price point is relatively high, this makes a lot of sense for the young, single folks looking to eliminate their housing expense.
5. Renting Out an Additional Dwelling Unit
Ben Leybovich, an active user on BiggerPockets and a good friend of Brandon Turner, calls this “luxury house hacking.” This is on the opposite end of the spectrum as the trailer and works well if you have a family.
You either purchase a property with an additional dwelling unit or build one yourself. It’s helpful if the unit can have at least a small kitchenette, an operative bathroom, and a comfortable bed to sleep in.
Then, you guessed it—rent it out! You could rent it full-time or on Airbnb.
This way, you and your family can have your own personal space in the main house while your guests enjoy their own space in the guest house.
6. The Live-in Flip
This is where you purchase a property that needs some TLC, ideally with a low percentage down loan. You live in the property for at least two years, and while living there, you fix it up. Once it is all fixed up and after the two-year timeline, you sell it and pay no capital gains on the first $250K of net proceeds ($500K if you're married).
You may be wondering, why two years?! For every other strategy, it is just one. Well, to avoid paying a significant amount of capital gains tax, you are required to live there for two years.
The live-in flip strategy is nice because it could be combined with the other strategies (with exception to the trailer/RV) to create a compounding effect. When combined, you will significantly increase the value of the property while also garnering more rental income.
In a traditional house hack and the living room strategy, you can live in one unit and fix it up while renting the other. Then switch!
If you choose to rent by the room in a large single family home, maybe you add a couple extra bedrooms, redo the basement, etc. This is obviously easiest because you have access to the entire property all the time.
On the ADU, you can build your own ADU or turn the shed in the back into one. Either way, you’ll be able to rent it out, and this will increase the value of your property.
Conclusion
There are a lot of different investing strategies out there. House hacking can be a strategy if you are looking to have the greatest odds at earning the highest possible return on your investment.
The question then becomes not whether you should house hack but what strategy you should deploy. Well, it obviously depends on your situation, what you can afford, and how you are willing to live. There’s typically a tradeoff with luxury and returns.
For more information, go to BiggerPockets.com
