It feels like there are “hacks” for everything these days – and real estate has not escaped the attention of linguistic hackers.
Have you ever heard of “house hacking”?
It’s a Millennial catchphrase for renting out a bedroom, or a portion of your home, to help cover the cost of a mortgage.
It’s especially popular with young buyers trying to find a little more cash to finance their lifestyles.
Research from the portal Zillow has found 55% of Millennial homebuyers believe it’s “very important” to have the opportunity to rent out part of their home to supplement mortgage payments.
House hacking is a legitimate strategy in the eyes of most lenders.
When applying for a loan, you can state your intention to rent out a portion of your home, and the lender will still regard the property as “owner-occupied”.
If this strategy sounds appealing, then it’s valuable to get its true definition: House hacking involves buying a property, living in one part of it and renting out the rest to generate income. Income generated can be used to offset mortgage costs and other housing expenses.
Be aware that there are tax implications, which I explain quickly below.
Here are the pros and cons of house hacking:
Pros:
Reduced costs – Your ability to cover the costs of your mortgage, property taxes and utilities will improve dramatically. Depending on the amount of the property you rent, you could even generate a positive cash flow.
Easier financing – House hacking properties are considered “owner-occupied”, which means you still qualify for a standard home loan. If you were buying an investment property, a lender usually charges higher interest rates and demands a 20% down payment.
Build wealth – Hacking gets you into a property faster because you’ll have more income. That’s great news if you believe property is an asset that builds wealth.
Landlord responsibilities – You’ll take on additional tasks, such as having to select a tenant, organize a lease agreement and handle repairs.
Tax benefits – You can deduct certain expenses related to the rental portion of your property, such as repairs, insurance and depreciation. This will reduce your tax bill. It’s a great idea to hire a licensed financial advisor, such as a CPA (Certified Public Accountant), to help you sort through all the tax implications so you stay on the right side of the IRS.
Cons of House Hacking
Lost privacy: Many young buyers are seeking their own space. The idea of sharing their new home does not appeal to everyone.
Being a landlord – You’re responsible for everything, including a midnight request to fix a dripping faucet. You might also have to handle noise issues and even late payments. Hacking is not a hands-off strategy.
Risk of vacancy – If you’ve banked on a tenant’s income, you need to minimize periods of vacancy when the tenant moves out.
Choose carefully – If house hacking is your preferred strategy from the outset, choose your property carefully. Not every property is suitable for house hacking. For example, in a small apartment you and the tenant would live on top of each other. A family home with a rentable unit would be ideal.
Legal questions – Some zoning laws forbid house hacking, just as they prevent Airbnb rentals. So check local regulations. If you’re in a complex or apartment building, seek out any relevant rules imposed by your Homeowners Association (HOA).
NOTE: The information in this article is general in nature and provided as a market overview only. Always consult your financial adviser or accountant for advice specific to your personal circumstances.