Benefit 1 – low down payment option
If needed, owner-occupied residential multifamily can be purchased with a low down payment for a low barrier of entry 3.5-5% down payment through an FHA (Federal Housing Administration). Typically, for conventional loans on a duplex, you’ll need to do a 15% down payment and for a 3-4 unit building you will need a 20% down payment. Furthermore, in general, if you were not living in it at all you will need to put a high 25% down payment. Of course, a higher down payment will increase the cash flow. The lower down payment would be helpful to keep aside a reserve just-in-case there is a major unknown capital expenditure needed within a few months after closing on the property. FHA loans have more restrictions and approvals with the underwriting process. Additionally, an FHA offer to a seller is not as appealing compared to a conventional loan buyer because of the drawn-out due diligence process.
***Check with your loan officer for the current rates and accurate information.
Benefit 2 – Tenants pay your expenses for you
Using a house hacking strategy would substantially reduce your personal housing expenses. This would be an individual’s highest expense ranging from 30-45% of their gross income. Housing expenses include utilities, taxes, insurance, regular maintenance, interest, and of course the mortgage. Renting out parts of your property allows you to not need to worry about the usual housing expenses. Tenants will be essentially paying a portion of your housing expenses with their rent. This will allow you to save a substantial amount of money.
Benefit 3 – A start to financial independence
Using a house hack strategy is a great way to create an additional income stream. It can be considered semi-passive or passive income to help retire early. A house hack strategy could act as your training wheels to grow a large real estate investment portfolio. By continuously investing the money you save from having your housing expenses reduced, overtime the residual income could cover more than just your housing expenses then maybe even exceed the income you make from your W-2 job. If you choose to do so, the extra income streams would enable you to retire. In theory, it is easier to save money than to get a return through investing. If you save $300 a month or $3,600 a year from a house hacking strategy, you would need more than $50,000 principle with the S&P 500 average return of over the last 15 years of 7%.
Benefit 4 – Holding an Asset has a stronger upside than renting
The property is a tangible that you own and once you sell most of the time you get your money back if not more. Below is a chart that shows rent added up over the years. When looking at the numbers below please keep in mind adding rental insurance on top of these numbers, adding on monthly utilities, and possibly other fees too.
Benefit 5 – The tax benefits
Another way to save money is on your tax return. Any expenses related to the income can be deducted against the income if they can be substantiated. This means the normal everyday money you spend to maintain or operate your house can have the rental portion of it deducted from the rental income. The biggest tax benefit is depreciation, which is a deduction when you file taxes to save money (helps to not owe money when you file taxes. The IRS allows a deduction each year based on allocating or distributing the total acquisition cost over a term of 27.5 years. The tax code is essential assuming that the property’s value is decreasing throughout the term due to wear and tear. Due to depreciation, a house hacker may show a loss on the return, but the rental property is actually cash flowing. You can deduct the normal everyday management, maintenance, rehab to keep in good livable/ operational conditions, costs of certain materials and the supplies used. A rental property is improved only if the amounts paid are for a betterment or restoration or adaptation to a new or different use. The cost of improvements is recovered through depreciation. Only a percentage of these expenses are deductible in the year they are incurred.
Benefit 6 – Gives you experience for larger investment properties in the future to scale
House hacking can be used to grow financially. One way to become financially independent is to have multiple rental units. Managing rentals comes with some challenging decisions, which you will learn thorough experience as each year goes by. Each year you can buy a new house hack and rent out the previous unit. Some say you can ramp yup to be a full time real estate investor with this type of strategy.
Benefit 7 – SAVE A TON of money annually
Overall, there are multiple ways to save money with house hacking whether it is from taxes, down payment, or the regular housing expenses. It ultimately increases your savings.
