In recent years, the term “House hacking” has become quite popular. Despite this, it is still relatively unknown. So what is house hacking really, and is it even a good investment idea?
I have recently started house hacking (started about nine months ago) so I think I have a pretty good view on it.
What is House Hacking?
House hacking has been around for years. However, the term itself, is only a relatively new term. There are many people who hack their house, giving themselves the catchy nickname “House hackers”.
House hacking is where financially savvy people are buying deliberately “more house than you need”. Unlike most people, however, you are using that to make money or live for free.
By buying a much bigger house/apartment, or several houses/apartments, you can live in one room or house and rent the rest of them out.
If you can do this well enough, and have enough apartments/rooms at a good enough price, you could make it so that you don’t actually have to pay for your living expenses.
In some rare cases, or perhaps some not so rare cases, you can actually make money from renting out more apartments/houses and living in your own one!
Some have even said that it is the first step to becoming a real estate tycoon. Almost making renting out homes/apartments to your neighbors, your side hustle!
Pros
There are several pros of becoming a house hacker, and making money from living.
Live for Free
When you house hack, your tenants are essentially paying you, each month, to live in their house/apartment. If you can get enough in rent collectively from your tenants, you might just be able to live for free!
In some instances, and with enough properties as a part of your portfolio, you might actually be able to make a profit, just from living in your own house/apartment!
This extra income naturally comes with many benefits. Most notably, you can take this “extra” money and invest it, whether that is in stocks or real estate, is up to you!
Builds Wealth
It’s often said that real estate is one of the biggest untapped sources of wealth in the world. However, if you choose to become a “house hacker” you unintentionally (or intentionally) tap into that source of wealth.
By buying more than just one property, and continually paying it off each month, you build equity in that portfolio. That equity, increases your net worth in the eyes of banks and credit unions (and/or building societies in the UK).
This in turn, allows you to get mortgages on more properties and further build your real estate empire! This, then allows you to build more equity, to get more mortgages, and the cycle continues!
Gain Experience
If you want to make being a landlord your full time job but you’ve never tried it before, you might want to house hack. This will give you all of the experience you need without actually being a “proper” landlord.
You are able to have tenants and still have your day job. All the reward with little risk to it (or so it’d seem). Once you have more money to buy a multi unit property, the lessons you’ll have learned from house hacking will prove invaluable.
From there, you’ll be able to expand into your own real estate empire! Perhaps you’ll be the next big name in real estate, maybe the next Donald Trump or Simon McDowell!
Multiple Exit Options
Over time, the novelty of being a “house hacker” will wear off. Over time, it will become just like anything else, whether it is a new car, house or anything else, it becomes a factor of life.
If you then decide (for whatever reason) that you don’t want to house hack anymore, it is quite easy to stop. The easiest way is to sell your portfolio to another person interested in house hacking. This can be done similarly to selling a house, through a real estate agent.
The other main way to get out of house hacking is to sell the properties to your tenants. However, there are laws pertaining to this, mostly down to the fact that you can only do it at the end of the contract and not in the middle of it.
You Live Next to Your Tenants
If anything goes wrong, or you have an issue with your tenants, you live close enough to your tenants that you can simply go and fix it.
Let’s say that your tenants have broken something inside their apartment or house, they can just walk to where you live and tell you. You can buy the replacement and walk around and give it to them.
If a tenant hasn’t paid their rent this month, you can go around and ask them why. You an then work it from their, with you stood in front oft them, understanding whether or not they’re lying to you or not. Then, you can resolve the issue.
Cons
Despite its numerous pros, there are also as many cons towards becoming a house hacker.
Tenants may Fall Behind on Rent
Do you remember when I said that by hacking your house, you might be able to have other people pay your mortgage? This is where an obvious flaw comes in: what if they don’t/can’t pay?
Most people live paycheck to paycheck, which means that if they stop getting income from their job, they stop paying their rent. This, in turn, makes it so that you have to pay the mortgage, something you may not be able to do.
And who’s to say that even if you can, that you’d want to? Most months, this hopefully won’t be an issue, however, it is almost a certainty that it will happen at least once. And trust me, it will be at the worst possible time!
The Cost of Vacancy
This isn’t exclusive to being a house hacker, more being a landlord in general. However, it might be a major cost for house hackers in particular!
With vacancy, it almost defeats the entire point of being a house hacker. If even one of your rooms/apartments/houses are vacant for even one month, it could ruin your plans.
Think about it- if you’re spending $1,200 on your house hacker mortgage, but you’re making $1,200 from hacking your house and then you lose some of that rent through vacancy, you then have to pay for that mortgage.
Lack of Privacy
Because you live so close to your tenants, it’s quite hard to get away from them. If you don’t like a particular tenant (as in, they annoy you or find them rude etc.) you’ll likely bump in to them from time to time.
In some cases, this may make you, your spouse and/or your children uncomfortable for whatever reason.
As I said earlier, I would consider myself a “house hacker”, and I have an annoying tenant, let’s call her “Mable”. Whenever I see “Mable” anywhere, I try to hide, I find her obnoxious, rude and really annoying.
This has led to more than one altercation between my wife and I, sometimes in front of our children!
You Can’t Scale it Well
A common misconception is that if you house hack, you can do it on a larger scale. And whilst that’s partly true, it’s also partly wrong.
If you’re looking for the true “house hack” experience, where you live in the surrounding area from all of your tenants, you can never do that on a big scale. After all, you can’t live in 50 different places at once!
It’s at that point where you’ll likely become a property mogul, and where you’ll likely stop being a true “house hacker” and abandon your day job. However, if your end game is to become a property mogul, it’s certainly not a con!
It’s High Risk
When it comes to investing, Warren Buffett always says that you should avoid risk when it comes to investing. Regardless of what you are investing in and whatever invest philosophy you’re using (rule one or value investing).
On the surface of it, being a house hacker doesn’t seem very high risk. However, when you look at it in detail, there is a lot of risk to it. Most notably, it comes from the banks and the renters.
There is no guarantee that you will find renters, and even if you do find renters, there is no guarantee that they will even pay you. Of course, you can mitigate it, but you can’t eliminate it.
There’s also no guarantee that the bank will even allow you to take out such a big loan in order to buy several investment properties. There’s also no guarantee that they won’t increase the interest rate on your loan and make you house hacking venture a loss.
Is House Hacking a Good Idea?
This is naturally a difficult question answer. Many people will argue that it is a good idea, whilst equally as many will say it is not a good idea. I personally have my own (very strong) opinions on it.
I have spent the last nine months being a house hacker. Personally, I have found that it has its downsides, most notably “Mable” who I deliberately avoid because I dislike her.
However, on the whole, house hacking has been an enjoyable experience. I have made it so I actually profit from living in my own home! I have also made it so my house is in a nice area for my kids to grow up.
With that being said, a close friend of mine (and former business partner) has also tried house hacking. His attempt at house hacking failed miserably, he lost money, his tenants wrecked the property and he disliked all of his tenants.
As such, he vehemently dislikes and opposes the idea of people house hacking. If you were to speak to him about the prospect of hacking your house, he would tell you “Don’t even bother, it isn’t worth it” (an actual quote from him).
The best advice I can give you is that you should research the prospect of house hacking in detail. If you believe that you can make it work in you favor, do it. If you don’t believe that you make it work, don’t do it.
How do I Start House Hacking?
The process of becoming a house hacker is actually fairly easy, but it is extremely time consuming.
Search for Properties
This will be by far the most time consuming part of becoming a house hacker. However, if you can find the right properties in the right area, and for the right price, you will be at a great advantage!
You’ll want to find a series of properties that are one offer, but is on offer for the right reason. You’ll also want to find a property that is in a good area, it doesn’t have to be Beverly Hills, but somewhere that has room for growth.
The property should also be somewhere that you would feel comfortable living for several years- house hacking requires you to be consistent for years on end. You may have to raise your children at that house/apartment!
Search for Lenders
Once you’ve found the perfect investment properties, you’ll have found the price. Once you’ve found the price, you’ll know how much you’ll need to borrow and how much you’ll roughly need as a down payment.
Now you have the chance to search for the right lender. There are several factors that make the “perfect” mortgage and/or loan. However, only you will know what makes your “perfect” mortgage or loan.
You should search for the best loan or mortgage for you personally. Whether that is the one with the lowest interest rates or something else. Once you’ve found the right lender, you an get the mortgage and buy your property!
Learn and Start!
Before you start researching properties and lenders, it’s probably best for you to do some research on investment properties. You can read books, read dedicated investment property blogs, follow realtors like Grant Cardone and more.
Once you’ve read a few of these books, and you feel confident enough, start researching! When you have found everything that you need, get into it! I am a big supporter of “fire then aim” philosophy rather than the “aim then fire” philosophy that many others are a fan of.
Throughout your time as a house hacker, you will undoubtedly face a lot of setbacks. The result will be that you will be forced to continue to learn, which is actually something that many rich people do!
Have you ever tried house hacking? Tell me in the comments!
