House Hacking: A Guide to Building Wealth Through Real Estate

9/23/2024

House hacking is like being a landlord with training wheels. It’s the strategy of buying a property, living in part of it, and renting out the rest to cover your mortgage (or at least a good chunk of it). You can do this with 2-4 families, duplexes, triplexes, or even a single-family home by renting out rooms or a basement apartment. The idea is simple: your tenants pay rent, which helps you live cheaper, build equity, and maybe even pocket some extra cash. It’s like getting paid to live in your own house.

This approach is a great wealth-building hack. By living almost mortgage-free, you can save or reinvest the money you would’ve spent on housing. Over time, as your property value appreciates and your mortgage balance shrinks, you’re sitting on a pile of equity—basically, your future self’s piggy bank. Plus, real estate offers tax perks, so you’ll find deductions like a surprise gift from Uncle Sam come tax season. And let’s face it, nothing says "financial freedom" like having someone else pay your bills.

But house hacking isn’t all passive income and victory dances. You’ll have to play landlord, which might mean handling clogged toilets at 2 a.m. or explaining to a tenant why they can’t keep five cats in a one-bedroom unit. Privacy can also be an issue—especially if you’re renting out rooms in your own house. The dream of free housing can feel a little less dreamy when your tenants are throwing a house party next door while you're trying to sleep.

House hacking on steroids: House hacking experts can make a fortune by following the same system over and over again. They live in the house for 1 year+, move out, buy another property, and thus build a portfolio of income-producing properties.

Why would one prefer house-hacking over buying investment properties outright?

• Lower Entry Costs: House hacking allows you to purchase a property with a smaller down payment, often using residential financing options like FHA loans (as low as 3.5% down). In contrast, investment properties typically require a much higher down payment, often 20-25%. This makes house hacking more accessible to those just starting in real estate.

• Owner-Occupied Loan Perks: When you live in the property, you can qualify for better loan terms, like lower interest rates, than you would on an outright investment property. Lenders view owner-occupied homes as lower risk than rental properties, making financing more affordable.

• Reduced Risk: House hacking reduces your exposure to risk because you're not relying entirely on tenants to cover the mortgage. If you hit a vacancy period, you’re still living there, so you can more easily float the costs. With an investment property, if tenants leave, you're on the hook for the entire mortgage with no buffer.

• Personal Experience: House hacking lets you learn the ropes of being a landlord while living on-site, which can be less daunting than managing a distant investment property. It’s a hands-on way to gain experience in real estate while benefiting from lower costs and greater financial control.

So, if you're up for a little landlord adventure and don’t mind living closer to your tenants than your comfort zone might suggest, house hacking could be your ticket to financial freedom. Of course, check your local laws, zoning, HOA rules etc. to make sure you are able to house hack in that area. But with the right property and tenants, it’s one of the smartest, fastest ways to build wealth in real estate.