7 Key Advantages of House Hacking

House hacking has become an increasingly popular real estate investment strategy, especially among millennials and first-time homebuyers. But what exactly is house hacking and what are the main benefits of this approach? Here we will explore the concept of house hacking and outline 7 key advantages it offers.

What Is House Hacking?

House hacking explained refers to buying a property with the intention of renting out part of it to cover your housing costs. Oftentimes, people will convert a single-family home into a duplex or triplex. Or they may buy a small multifamily building with 2-4 units and live in one while renting the others.

The goal is to have rental income from the other unit(s) cover or exceed your entire monthly housing payment. This allows you to live for free or very cheaply, build equity, and get started in real estate investing without needing a large down payment or capital reserves.

Benefit #1: Reduced Living Expenses

The most direct financial benefit of house hacking is reducing your living expenses by having tenants help pay the mortgage, taxes, insurance, utilities, and other costs. Ideally with house hacking, your rental income will cover your entire housing payment and allow you to live rent-free. Even if it doesn’t fully cover all costs, house hacking still subsidizes your housing and frees up more money to save or invest each month.

Benefit #2: Faster Path To Homeownership

For many millennials and first-time buyers, coming up with a down payment is the biggest hurdle to homeownership. House hacking can speed up the process of saving for a down payment. You’ll only need enough saved to cover a fraction of the full mortgage if you know renters will make up the difference.

Additionally, house hacking allows you to qualify for a larger mortgage than you could afford on your own because the rental income counts toward your debt-to-income ratio. This makes it feasible to buy your first property sooner.

Benefit #3: Building Equity And Wealth

As you pay down the mortgage on a house hack property, you build equity with each payment instead of paying rent to a landlord. Furthermore, as the property appreciates in value over time, so does your equity stake.

While renters help you pay off the mortgage, you get to keep all the equity. So house hacking accelerates the speed at which you create wealth through real estate. Renting out just part of the property allows you to gain the benefits of ownership.

Benefit #4: Maximizing Deductions And Tax Benefits

There are also tax benefits to house hacking. When you rent a unit on your property, you can deduct expenses like mortgage interest, repairs, utilities, insurance, and depreciation. These deductions offset the rental income you receive and lower your taxable income.

You can also potentially defer capital gains taxes through a 1031 exchange if you decide to sell and move up to a new multi-unit sometime in the future. So house hacking helps maximize tax deductions.

Benefit #5: Getting Started With Real Estate Investing

For those new to real estate investing, house hacking represents an appealing entry point. As your first investment property, house hacking lets you dip your toes in without having to commit to buying and managing an entire building right away.

You get to gain experience as a landlord with just one unit at first. House hacking offers a great way to get started in real estate while minimizing risk. If you self-manage, it also lets you learn the ropes without relying heavily on a property manager from the start.

Benefit #6: Potential Appreciation Of Property

Depending on the housing market conditions where you buy, your house hack property stands a good chance of appreciating over time. Real estate has historically gone up in value, so the equity you build should grow as the property gains value.

The rent you collect will rise as you increase rents over time too. So house hacking helps grow your net worth through property appreciation.

Benefit #7: Flexibility In Future Options

Finally, house hacking leaves your options open in the future. After living there and house hacking for a few years, you may be ready to cash out the equity, move out entirely, or convert more units to rentals.

You could refinance to pull cash out while keeping tenants or sell the property. If you’ve used an FHA loan, you can move out after just one year without penalty. House hacking gives you more flexibility.