Is House-Hacking a Smart Move or Just Plain Dumb?
House-hacking is a term we seem to be seeing more and more of lately. Basically, it refers to living in a place that you’re also using as an investment property, and often getting someone to pay your rent or mortgage for you. How? By buying a duplex and living in one half while renting the other, buying a flip and living in the property while you fix it up, or even renting out a bedroom in your own home. In each of these scenarios, you’re making money where you otherwise wouldn’t, and having one of your biggest living expenses taken care of.
But is it a good idea?
Yes and no. Here are the pros and cons you can expect with house-hacking:
- Your living expenses may be reduced. This is arguably one of the biggest advantages of house-hacking. Let’s say you buy a duplex, and your monthly mortgage payment is $1,000, but you’re able to rent out one half for $750 per month. Boom – your mortgage payment just got reduced by 75%!
- You can write-off expenses for tax purposes. This is another great way you can save money by house-hacking. If your property is also serving as an income property, you can write-off repairs and depreciation, potentially saving thousands in taxes.
- You’re able to keep a close eye on tenants and respond to issues quickly. Being next-door neighbors with your tenants definitely has some advantages. Since you’re on-site, you’ll be able to tell if they’re taking care of your property or not. You’ll also be close by when things go wrong (and they will), so you can respond and deal with issues faster.
- It may be easier to finance. House-hacking comes with a few financing perks, too. Duplexes, triplexes, and fourplexes qualify you for owner-occupant financing, and FHA may also be an option depending on your history. Plus, with an expected income rolling in each month, you may not have to borrow as much, so it may be easier to get a lender to back you.
- Your tenants are your next-door neighbors. Yeah, I know this is listed as a pro, too. But it’s also a con, because living next door to tenants can be an exhausting, drama-filled complicated matter. What if every time you step outside, they pop out to alert you to problems, real and imagined? Or, what if they just come knocking at your door instead, simply to tell you their toilet is clogged? Most people aren’t like this, but there are plenty who don’t understand and respect boundaries, and there’s no escaping them if they’re right next door.
- You have to live in a construction zone. For those who are thinking of house-hacking via a flip, this is something to think about. The whole point of flipping a property is to fix it up, and doing this will mean there may be times when you don’t have a functioning shower or kitchen. This is no fun, and living in these conditions can be extremely stressful.
- Taxes become more complicated. Those sweet tax benefits I mentioned above come at a cost – it can be a nightmare sorting out what’s deductible and what’s not. When you’re house-hacking, you’re basically dividing one home into two (or more) – the portion you occupy and the portion your renters occupy – and you have to split expenses accordingly. If you’re not a stellar record-keeper, this can become a real pain to sort out.
House-hacking isn’t for everyone, but there are plenty of investors out there who swear by it. And they’re not wrong; their experiences with it have been positive, and they obviously understand the risks and are able to mitigate them. However, there are also some serious drawbacks that must be taken into consideration before you decide to move forward with a house-hacking strategy. Make sure you carefully weigh the pros and cons before implementing this strategy.