What is House Hacking?
House hacking is the idea of combining your investment property with your personal residence. Although it is possible to do with just a single family house (by doing a “live-in flip”), the phrase is more often used to describe the practice of buying a small multifamily property (a duplex, triplex, or fourplex), living in one unit, and renting the other units out.
My first rental property was a small duplex that I bought for $89,000. The property needed some “sweat equity,” which my wife and I spent a few weeks doing. Then we rented the property out. Although we had stumbled across this “house hacking” strategy accidentally, we quickly realized the power of this method when the mortgage payment of approximately $630 per month was fully paid by the tenants in the other unit who were paying $650 for rent. In other words, the tenants were allowing my wife and I to live for free, before operating expenses.
House hacking has several distinct benefits that make it an especially terrific investment for first-time investors
• Low (or No) Down Payment Financing: When you plan to live in a property for at least one year, financing becomes much more friendly for the borrower. For example, an FHA loan allows for just a 3.5% down payment and the USDA (United States Department of Agriculture) loan allows for $0 down if you are buying in a rural area. Traditional 20% down loans also work in this pricing structure and can do even more for your wealth building plans.
• On-the-Job Training: House hacking is a great introduction to the world of landlording. You buy the property, and suddenly you are a landlord—so you’ll learn very quickly what to do and what not to do!
• Close Monitoring of Your Investment: When you live in your investment property, keeping an eye on the property and making
sure it’s running at peak performance is easy. It’s unlikely that the lawn will get overgrown, the tenants will move in a pit bull, or maintenance will go unreported for months.
• Saved Expenses: Because you live at the property, you can manage the other tenants yourself very easily and don’t have to worry about paying a property manager who will do substandard work!
The following plan that you and I are about to walk through follows a serial house hacker. We’ll pursue the house-hacking strategy for numerous properties to reach our goal. In this case, let’s set a goal of simply “living for free,” so we can save money and pursue other investments in the future.
To start the first year, we…