House hacking; the easiest way to start investing and reduce expenses!
Your journey to financial freedom starts here:
What is the average American’s biggest expense? That’s right; housing expenses! Americans spend about 30-40% of their income on either rent or mortgage payments, which holds many back from achieving financial freedom. But one way to attain financial freedom faster is to decrease expenses instead of increasing income, and one way to do that is something called house hacking. By doing this you’re not only reducing your largest expense but also starting your investing career. It doesn’t matter where you live in Connecticut, there’s a house hacking strategy that will help you prosper!
What is House Hacking?
Using your primary residence as an investment!
You may be asking “what is house hacking?”. House hacking isn’t a new concept, people have actually been doing it for years! The only new thing is the name itself, which was coined by Brandon Turner (The host of Biggerpockets podcast). The definition of house hacking is purchasing a property, living in one portion of it, and renting out the rest. By doing this you can reduce your monthly mortgage payments or, if done well you can live for free or be paid to live there!
There are so many benefits to house hacking; you can build equity without having to use your money, you get tax benefits from living in a home, it can be done without a lot of money down, you can move to a location you couldn’t afford before based on the rent payments, and you get to learn how to be a landlord/investor without too much risk. As the Bigger Pockets podcast says, “House Hacking is real estate investing with training wheels”.
Different types of house hacking
Didn't know there was more than one?
If you’re new to the house hacking world, you may not know that there are other ways of doing it than the traditional way of purchasing a multi-family home and renting out the other part. I will walk you through all the different types of house hacking, so you know which strategy works for you!
Traditional House Hacking
- This is when you purchase a small, multifamily home with either a conventional loan or an FHA loan with a %3.5 down, and rent out the other units and possibly one of the rooms on your portion of the house. Doing this is enough to cover your mortgage or get you very close to it! Once you feel comfortable moving out or want to purchase another house hack, you could rent out your unit and have a cash-flowing property!
Renting your room
- This house hacking strategy isn’t for everyone, so you can skip it if you aren’t comfortable with the idea. If you purchased a home and cannot cover the mortgage yourself, you can rent out your room and sleep on the couch! Just put up some sheets and cover the area that’s now “your room”. Depending on where you live you can either rent your room monthly to a tenant or Air BnB and again hopefully either cover the mortgage or get close!
Renting rooms
- Having a hard time finding a multifamily home to house hack? Don’t worry, house hacking also works with single-family homes. You can purchase a 4+ bed and 2+ bed single-family home and rent out the rooms – which sometimes pays you more than renting a full unit. The biggest benefit to this strategy is the appreciation, it is known that single-family homes appreciate faster and higher than multi-families do. On the other hand, there is a big negative too; you won’t only be competing with investors for this property, but also families who want to move there and are more likely to invest more since they are not looking to get a deal out of the house.
Primary Residence rented
- This is one of the extreme strategies to house hacking; renting out your whole primary residence and purchasing a low-cost trailer or RV and parking it in your parking spot or backyard. Again you can either rent it traditionally or use Air BnB to cash flow from it or to at least cover the mortgage!
Additional Dwelling Unit (ADU)
- This house hacking strategy is perfect for those who have a family and want to lower their expenses. What you do is purchase/build a small home somewhere on your land, and rent it out or again Air BnB it out! This strategy is better when the ADU has a small kitchenette, bathroom, and bed. This is also perfect for those who live in a more expensive or tourist area since lots of people would love to live in those areas for a cheaper price!
Live and Flip
- This one is a little different than the 5 other house hacking strategies. Instead of renting out portions of the house, you purchase a home that needs work and use it as your primary residence for at least 2 years. Throughout those 2 years, you would fix it up and then sell it! The reason you live in it for 2 years is that after living in a home for that amount of time you won’t need to pay taxes on the capital gains up to $250k ($500k if married) when you sell it!
There is no “best” house hacking strategy, it’s just a matter of which one you feel comfortable with and your stage of life. Don’t be afraid to combine any of these strategies, sometimes combinations work better than just using one at a time!
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