House hacking is a strategy for buying a property and living in it while also generating income from it. There are a few different ways to do this:
Rent out a room or a portion of your home to a tenant.
Rent out your property on Airbnb or a similar short-term rental platform.
Buy a multifamily property and live in one unit while renting out the other units.
By generating rental income, you can offset the cost of your mortgage and potentially even earn a profit. House hacking can be a great way to get started in real estate investing and build wealth over time. It's important to do your research and carefully consider the pros and cons before jumping into a house hacking strategy.
What Are the Risks of House Hacking?
There are a few risks to consider when it comes to house hacking:
Financial risk: If you are unable to find a tenant or your property is not generating as much rental income as you had hoped, you may struggle to cover the cost of your mortgage and other expenses.
Legal risk: As a landlord, you are responsible for following local laws and regulations, including those related to tenant rights and safety. If you fail to do so, you may face legal consequences.
Maintenance and repair risk: As a homeowner and landlord, you are responsible for maintaining and repairing the property. This can be costly and time-consuming.
Tenant risk: Dealing with tenants can be challenging, and you may encounter difficult or unreliable tenants.
It's important to carefully weigh the risks and potential rewards of house hacking before committing to this strategy.
Why should I house hack?
House hacking can build wealth in a few different ways:
By generating rental income: By renting out a portion of your home or a multifamily property, you can offset the cost of your mortgage and potentially even earn a profit.
By increasing property value: By maintaining and improving the property, you can increase its value over time. When you are ready to sell, you may be able to sell the property for a higher price than you paid for it, potentially earning a profit.
By leveraging leverage: When you buy a property using a mortgage, you are using leverage to finance the purchase. This means you are only putting a portion of the purchase price down and borrowing the rest. If the property appreciates in value, the return on your investment can be much greater than if you had paid cash for the property.
Using leverage works well with a house hacking strategy. The chart below shows what happens to your equity gain when the value of the house goes up 5%. The example below uses a $100,000 house whose value increases by 5% or $5,000.
Using leverage to maximize real estate gains in the house hacking strategy
By carefully considering these factors and taking a long-term approach, you can use house hacking as a way to build wealth over time.