How to House Hack
There is no mistake about it, buying a property (house, condo) is expensive. In fact, the average house in the US costs $295,300[1] and $453,056[2] in Canada. With this in mind, many people – especially first-time home buyers – are considering house hacking to help them with expenses.
What is house hacking?
House hacking is the practice of combining an investment property with your personal residence and the phrase House Hacking was coined by Brandon the BiggerPockets podcaster.
Eventhough the phrase House Hacker is new, the concept has been around for a long time. Typically, house hacking is done by buying a multi-family property, such as a duplex, triplex, or a single house with a separate basement apartment. That way the owner can live in one unit while renting out the others. This is a great approach to offset the cost of the mortgage and other costs associated with the home.
How does house hacking work?
So many people get excited about buying a home but since house prices have gone up quite a bit, people are looking for other ways to help pay down the mortgage, taxes insurance, etc. The biggest advantage is that house hacking can help you to reduce your taxable income; for US readers: owning a multi-family property provides a mortgage interest deduction.
What are the possible pitfalls of house hacking
The COVID-19 crisis showed us that owning a property has many risks, you may lose a tenant or the tenant may lose his/her job and is not able to pay the rent. Thus , as the owner you will need to have the cash flow to be able to cover all the expenses for the property.
3 things to know before buying a multi-unit property:
1- Location, location, location
· Selecting a location for a property is key. It’s essential to choose a location that is in high demand for rentals, this can help you to secure tenants.
· Selecting a location that is close to amenities such as grocery stores, good schools, easy access to main roads/highways and close to public transportation are all important features for a rental property.
2- Do that math
· First, add up how much rent you will receive from each unit. Does this rent compare to other rental buildings in the area? Then deduct this amount from your mortgage, upkeep and other expenses for managing a multi-unit home.
· Does this provide you with any income? If the income can not cover the expenses, then the property is not worth investing in.
3- Tenants may not pay
· The most important thing to remember is that a multi-family property runs smoothly when your tenant pays their rent. But as COVID-19 has shown, even it people have 3-6 months of emergency savings, if they can not get back to work after 6 months, paying rent may be an issue. So be sure that you have enough money to cover all expenses.
Owning a multi-unit home can be a wise financial decision as it can provide the potential for good income. Be sure to do your homework and be prepared for any potential risks.
[1] 2020 National Association of Realtors (NAR)
[2] Remax Canada (March 4th 2020)