House Hacking: A Quick Overview
What is House Hacking?
House Hacking is a phrase coined for the strategy of renting out a portion of one’s primary residence in order to offset a portion of the mortgage and property expenses. While the idea itself is nothing new, its popularity has increased significantly in recent years as housing affordability continues to dwindle. In parts of the country such as parts of the Midwest or the South, is it totally possible for a buyer to purchase a property to house hack and entirely offset their mortgage. In higher cost areas such a Southern California, particularly San Diego, the expectation is to be able to offset a significant portion of the mortgage payment.
Who can benefit from House Hacking?
From a first time buyer to a savvy real estate investor and everyone in between can benefit from House Hacking. For First Time Home Buyers this can be a great way and much more financially palatable route to purchase a home as your roommates or tenants will be helping to pay the mortgage. Even for the long time investor or high income earners, renting out a portion of their primary residence, whether it is beach front property or other prime piece of real estate to offset part of the mortgage is just financially savvy.
What types of properties can be purchased for the purpose of House Hacking?
There are several different ways that House Hacking can be accomplished with different types of properties:
Option 1: A Condo or Single Family Home with two or more bedrooms
In this scenario, as long as there are at least 2 bedrooms, a homeowner can live in one bedroom and rent out additional bedrooms to help offset a portion of their mortgage. This works for those who are comfortable sharing common areas such as kitchen, living room and bathrooms with others. If this is not for you, keep reading for other options for those that desire more privacy.
Option 2: A Single Family Home with an Accessory Dwelling Unit (ADU)
With increasingly lax laws surrounding the building of Accessory Dwelling Units or ADUs in states such as California, the demand and popularity of these structures has exploded within just the last several years.
This option is great for those who still want to live in a single family home and rent out the ADU to tenants without having to share any portion of the home with those tenants. ADUs are a complete separate unit from the main home and they can come both physically attached to the main home or detached. ADU’s are typically a garage that has been converted into a separate unit or can be a completely separate structure that is built in the backyard of properties that have enough space to do so.
This option has lots of flexibility since a buyer can go out and find a single family home that already has an ADU that has been built or can just purchase a Single Family Home and plan on adding an ADU afterwards.
Pro Tip: Finding a single family home with a detached 2 car garage to convert into an ADU is significantly more cost effective than having to build one from ground up in the backyard.
Option 3: A Residential (2-4 unit) Multifamily Property
Multifamily properties, namely those with 2, 3 or 4 units are still considered to be residential property in the lending world which allow for low down payment options. The attraction this type of property provides is the multiple units that a homeowner can rent out to help offset their mortgage while still enjoying the privacy of being in their own unit and not sharing any common space. This is the option that will likely offset the highest portion of the mortgage/expenses. This options allows for the most amount of income generation as one unit can be lived in while renting out put to 3 additional units.
What are the different types of Financing available for House Hacking?
There are numerous low money down options available for those looking to house hack, including but not limited to Federal Housing Administration (FHA) loans that allow as little as 3.5% down payment, Conventional loans with 5% down payment or Department of Veteran Affairs (VA) loans with 0% down payment for Service Members and Veterans.
The low down payment options above make it much easier to start House Hacking and ultimately invest in real estate without having to have a ton of money.
Why House Hack?
There are many great reasons to house hack. The obvious reason is that it helps to offset one’s mortgage and housing costs which allow for a higher savings rate. Furthermore, this can be a great way to grow generation wealth and net worth through the appreciation of the asset as well as the principal pay down of that debt each month. Everyone has to pay a mortgage whether it's our own mortgage or someone else’s mortgage. Renting is simply paying another real estate investors mortgage for them.
If you’re ready to get started with your own House Hack - get in touch with us here.