There are a number of real estate investing strategies that can help you grow your income and even create a wealth-building real estate portfolio. Each investor is different, so while one strategy may work well for one, another may choose an entirely different strategy. Today, we’re going to take a closer look at a popular real estate investing strategy for beginners – house hacking.
House Hacking Defined
At first glance, you might think house hacking refers to the demolition days on a fixer-upper home. However, it’s really a simple, low-risk, low-cost strategy for getting into the world of rental properties. You buy a single-family (four units or less) or multi-family rental property (five units or more) and live in one unit while you rent out the rest.
There are several different types of house hacking:
- Traditional – Buy a duplex, triplex, or fourplex and rent out all units but the one in which you live.
- Rent by the room – Rent out unused bedrooms in your single-family house.
- Accessory dwelling units – Rent out a basement, garage, mother-in-law apartment or other separate living space on your property.
7 Reasons Why House Hacking Could Be a Great Real Estate Investing Strategy
Not sure if house hacking makes sense for YOU? Take a look at these advantages and then you’ll be able to make an informed decision based on your unique situation and real estate investing preferences.
- Reduced living expenses – When you live in one unit and rent out the others, your tenants’ rent should cover your mortgage and any other property expenses. That means you could essentially live there for free or at the very least, at a significantly reduced rate.
- Ideal for new real estate investors – If you’re a beginner and just learning how to buy your first rental property, house hacking is a great place to start. You’ll not only have a primary residence but you’ll also have a very low-risk mortgage. With tenants covering your mortgage and property expenses, you’ll be free to learn the ins and outs of being a landlord. You’ll also be able to save up for additional properties to add to your real estate investment portfolio.
- Cash flow and passive income – Cash flow is KING in the real estate world and having one or more rental units can absolutely give you that. Plus, your cash flow and passive income will increase with time as the mortgage is paid off. If you’re a real estate investor looking to achieve financial freedom, you’ll want to take advantage of passive income opportunities such as this!
- Use someone else’s money to build wealth – One of the greatest things about real estate investing is the ability to leverage someone else’s money to create and increase your own wealth. You start by using the bank’s money, via a property mortgage, to buy the property you want. Then, you use your tenants’ money, via rent payments, to pay off that debt. What does that leave you with? An income-generating, wealth-building asset that costs you very little out of your own pocket.
- Housing flexibility – Even if you utilize real estate investing for passive income, there’s a good chance you also have a source of earned income, whether that’s through a job or your own business. And, as the days of the COVID pandemic taught us, things can change very quickly in the world around us. If you use house hacking as a real estate investing strategy, you’re free to live in one unit for as long as you like. If you find that your housing needs change and you need to move due to your job, business or personal reasons, simply rent out the unit you were using as your own.
- Manage your property firsthand – Living at your investment property makes it easy to keep an eye on things, and on your tenants. In contrast, if you have an investment property in another city or state, you’ll have to hire a property management company or make frequent trips to that property to make sure everything is taken care of. When you live on the premises, you can easily make or hire out needed repairs, deal with tenant issues, and ensure that the property is not poorly treated by tenants. If your investment goals include owning larger properties in the future, such as a multi-unit apartment building, house hacking can give you valuable landlord experience on a smaller scale.
- Reap the tax benefits – Between depreciation and mortgage interest tax deductions, real estate investors can significantly reduce their overall tax liability through owning rental properties.
How to House Hack the Right Way
If you know what you’re doing, house hacking can save you a lot of money in terms of your own living expenses while simultaneously getting you into the world of real estate investing. There are some common mistakes you should avoid, however, to make sure your investment works the way you intend it to. Here are some do’s and don’ts to remember along the way.
DO:
- Pick a home in a desirable neighborhood.
- Have money set aside for repairs the property might need.
- Familiarize yourself with local regulations, laws, and ordinances.
- Remember that you are the landlord.
DON’T:
- Pick a property that’s a great price but in a less-than-ideal neighborhood.
- Forget to budget for upgrades and/or repairs to the property.
- Assume you know all the renting rules and regulations in a community.
- Get too casual with your tenants.
Real Estate Investing Tips For the Savvy Investor or Entrepreneur
There’s no doubt that investing in real estate is a great way to grow passive income and even help you achieve financial freedom – the ability to do what you want, where you want, and with whom you want to do it. My wife and I can speak from personal experience – we went from owning $0 in real estate to $5 MILLION in real estate by the age of 30. If we can do it, you can too!
Want to learn more about our journey and the real estate investing tips we’ve learned along the way? Simply subscribe to our YouTube channel and we’ll show you the exact steps we’ve taken to become successful real estate investors in the Detroit metro area.
