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House Hacking 101

Writer's picture: Faith NicoleFaith Nicole

Updated: Jan 30

REALTOR, FAITH NICOLE 2-MINUTE READ

JANUARY 11 2023

 



House hacking is a real estate investment strategy where you live in one part of a property while simultaneously renting out part of it to generate income. This can be done in a variety of ways, such as renting out rooms, a basement apartment, or a separate unit on the property. Here are the key points:

  1. Strategy Overview:

  2. House hacking allows you to leverage your home to create additional income streams. Traditionally, this involved purchasing a multifamily property (such as a duplex, triplex, or quadplex) where you live in one unit and rent out the others.

  3. However, house hacking has evolved beyond just multifamily properties. You can also house hack by renting out individual rooms, converting a basement into a separate apartment, or even using short-term rental platforms like Airbnb.

  4. Benefits of House Hacking:

  5. Reduced Living Expenses: By renting out part of your property, you can offset your own housing costs. The rental income covers a portion (or all) of your mortgage, property taxes, insurance, and maintenance expenses.

  6. Equity Building: As you pay down your mortgage, you build equity in the property. Additionally, any appreciation in the property’s value contributes to your equity.

  7. Qualification for Larger Mortgage: Lenders often consider potential rental income when determining your loan eligibility. This means you may qualify for a larger mortgage than if you were buying a single-family home.

  8. Proximity to Rental Units: Living close to your rental units makes property management more convenient. You can address maintenance issues promptly and save on property management fees.

  9. Be creative! Consider your skills, lifestyle, and property features. Maybe you’re handy and can do a live-in house flip. Perhaps you have a large garage or barn that could be rented out. Research local zoning laws and homeowners association (HOA) rules to ensure compliance with your house hacking strategy.


Example Scenario:

  • Let’s say you purchase a duplex for $400,000. You put 5% down ($20,000) and secure a 30-year fixed mortgage at 6.5% interest. You live in one side of the duplex and find a tenant who pays $3,000 in monthly rent for the other side. This rental income covers your entire mortgage payment, leaving an excess of $477 (after accounting for insurance, taxes, and repairs). Over 5 years, assuming standard amortization and a 7% annual appreciation rate, your equity grows significantly:

  • By renting out one side of the duplex, you effectively cover your mortgage payments and build substantial equity, both from paying down the loan and from property appreciation. Over 5 years, this strategy can significantly enhance your financial position.

  • Monthly Rental Income from Tenant: $3,000

  • Monthly Mortgage Payment: Approximately $2,523

  • Monthly Excess After Expenses: $477

  • Total Rental Income Over 5 Years: $2,500 * 60 = $180,000

  • Total Mortgage Payments Over 5 Years: $2,523 * 60 = $151,380

  • Equity Gained by Mortgage Payments: $380,000 - $228,620 ≈ $23,747

  • Equity Gained from Appreciation: $561,437 - $400,000 = $161,437


House hacking is a powerful way to reduce living expenses, build equity, and potentially kickstart your real estate investment journey. It’s a smart move for those looking to maximize their financial resources while enjoying the benefits of homeownership.

For expert guidance and personalized strategies in real estate investing, reach out to us at 832-314-2713. Let's embark on this journey together and unlock the full potential of your real estate endeavors.


Faith Nicole, Your Local Luxury Realtor®

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