Become a real estate mogul by “house hacking”

Real estate, Money

Buy a multi-family property. Live in one unit and rent the others. Make enough money to move out and do it all over again. Do it right, and you’ll earn enough to pay your mortgage plus add to your monthly cash flow.

Will this strategy make you rich? Maybe, maybe not. The concept, dubbed “house hacking,” is nothing new, but real estate experts say it’s potentially a great way to learn the business.

Hacking, real estate-style

The term “hack,” meaning a quick and dirty way to do something better or easier, has become hugely popular across the web. There are life hacks, cleaning hacks, cooking hacks, and even IKEA hacks. House hacking, according to the real estate investment website Bigger Pockets, which coined the popular phrase, is about “buying an owner-occupied multifamily property and getting paid to live for free.”

Everyone has to live somewhere, and no one gets rich by buying and living in an expensive home. “House hacking,” according to Bigger Pockets, “is a great idea in the sense that you are trying to minimize your own housing expenses and use the money you save to acquire properties and generate wealth.”

The concept – viewing housing not as an ever-increasing expense (liability) but as an investment (asset) – is especially appealing to young, single investors who have more flexibility and are less concerned about finding a place to plant roots.

The pros

“House hacking is a fantastic way to use the advantage of home ownership to help keep your mortgage payments low,” says Brad Pauly, broker/owner at Pauly Presley Realty in Austin. “With interest rates still at an all-time low, the ability to own real estate and have a larger percentage of that loan paid off by your renter is a fantastic way to start and continue your investment strategy.”

Pauly explains that with the extra savings in monthly payments, you can make supplemental payments to the principal of your mortgage and lower your long-term note significantly. “Or,” he adds, “just enjoy a lot more disposable income.” reports that homeowners can gain up to a 7 percent annual appreciation rate by house hacking – a rate that, not coincidentally, is the same as the rise in rents. The site also found that sales of owner-occupied multiplexes increased 24 percent from 2014 to 2015 (versus just 16 percent for single-family homes).

Some multiplexes qualify for special financing. The Federal Housing Administration, for one, offers favorable terms for those borrowing money for multi-family properties. And there are tax advantages, too. Owners can take deductions for depreciation of the rented spaces, which helps offset the taxes that have to be paid on rental income.

“Also,” adds Pauly, “rarely in life do you get to choose your neighbors!”

No reward without risk

Being a landlord takes work. There is upkeep and maintenance. Vacancies to rent and rents to collect. Your neighbors are your tenants – which is all good, until it’s not. And mortgages on multi-unit properties are potentially larger than what you’d pay for a single-family home.

“House hacking has advantages over other ways of growing a real estate portfolio,” says Glenn S. Phillips, CEO of multi-state real estate company Lake Homes Realty, “but, like any approach, it doesn’t eliminate risk or work.”

By living next door to your renters, you can certainly limit some of the risk of their mistreating the property. But when you move to the next property, you lose this advantage. “As you have more properties, you’ll soon have to evaluate and take on renters you don’t live near,” advises Phillips. “While this is the same as other rental management approaches, it does mean that as you grow your portfolio you lose some of the early advantages of [the house-hacking] approach.”

And using a mortgage, instead of cash, for your first properties comes with risk. “Be careful to understand any limitations on the loan with regard to renting the property,” Phillips cautions. “And note that rental property loans can have higher interest rates – not necessarily a deal killer, but definitely something to anticipate.”

As with any large real estate purchase, you’ll want to have an experienced attorney review the transaction to ensure that everything is legally sound and that your interests are protected.

Will you get rich?

Perhaps, says Phillips. “House hacking requires patience to grow a portfolio of properties, but so does any other self-funded means of adding homes to rent.

“The key to success in real estate and rental portfolios is not necessarily the initial approach, but more the financial discipline required, the ability to scale and adapt, and the just plain hard work that most people will not do for long periods of time.”

Are you in it for the long haul?