House hacking is typically the purchase of a multi-unit property with the intention of occupying one unit and renting the remainder in order to reduce the overall housing expense while simultaneously building wealth.
That’s a mouthful! And it’s only one of many definitions.
In my work with clients, typically we’re talking about the above definition, which said more simply, is living in a duplex, etc that you own while renting out the other units. Though more broadly the term can be used to mean producing income out of a house you live in potentially be renting rooms, garage space, gardening space, or even leasing to a movie production for filming.
There are two big advantages to house hacking over both purchasing a single-family home and renting an apartment: keeping housing expenses lower and building wealth faster.
Duplexes (two unit buildings) don’t cost twice as much as single family homes. In most cases, you can expect the rents from the other units to push your out-of-pocket expenses down way less than they would be for a single family home. I’ve shown lots of math in past blog articles.
This is the primary consideration for most people looking to house hack. In many cases, house hackers can expect to save 50% or more on monthly housing expenses compared to purchasing a single family.
One example I use in the house hacking class we teach is with Ross and Rachel’s home search. With a budget of about $4000/mo for total mortgage payments, they could afford a 2 bed 1 bath single family in their target neighborhood of Fruitvale, Oakland. Ross and Rachel opted to instead purchase a duplex at a higher purchase price. Their total housing expense broke their budget at $5000/mo, yet they were able to rent their additional unit for $2800/mo bringing their effective housing payment way down to just under $2200/mo. Cheaper than renting!
Appreciation and Equity
If the housing market appreciates at 5% annually, would you rather own a $600,000 property or an $800,000 property? At 5%, the $600,000 property would grow the owners’ wealth by $30,000, while the $800,000 would grow it by $40,000. A difference of $10,000 in one year!
This simple example illustrates what can happen when investing in larger, income producing properties. And at the same time, your loan balance is being paid down (and thus equity is built) by a larger amount every month all while your out-of-pocket expenses are lower.
So there’s a glimpse of what house hacking is and why you may want to consider it. There are certainly reasons you may want to avoid it as well. There are risks involved including liabilities of having a destructive tenant, changing landlord rights and rent control ordinances, vacancies, and more.
Interested in learning more? Contact me below or attend one of our house hacking classes.