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What if I told you that you could live for free? Or close to it, are you interested? House hacking is a simple real estate strategy that could allow you to do this. And, the barrier to entry is minimal.
House hacking is a real estate investment strategy that involves renting out a portion of your primary residence to offset your mortgage payments and expenses.
House hacking a separate basement apartment is how we live almost for free in Colorado Springs. But, house hacking can take many forms, from buying a duplex and renting out one side and renting out the other to renting out a spare bedroom or basement apartment (what we do) to converting a garage into a rental unit. The key is to find a property that allows for this type of arrangement or perform a conversion to provide the ability to house hack. For example, we had a walk-out door dug out and installed so we could turn our basement into a separate private apartment. This cost us $18,500 but, added a lot of value to our home and allows our basement to generate over $20,000 a year in rental income!
Understanding House Hacking
What is House Hacking?
House hacking is an investment strategy that involves buying a property, living in one unit/room, and renting out the remaining units/rooms to generate income. The goal of house hacking is to reduce or eliminate your housing expenses while building equity and generating passive income. House hacking can be done with a variety of properties especially if you are creative. However, the most common property types for house hacking are single-family homes, a duplex, a triplex, or fourplex.
Benefits of House Hacking
Income Generation: One of the most significant benefits of house hacking is the potential to generate additional semi-passive income. By renting out a portion of your property or multiple units within it, you can offset or even eliminate your housing expenses. The rental income you earn can be used to cover your mortgage, property taxes, insurance, and maintenance costs, effectively increasing your cash flow. This can allow you to live almost for free! This allows you to take those savings and invest in more assets that will generate more passive income. Then, the race is on!
Leverage: As a Physician real estate investor you can take advantage of leverage. You can purchase a potential house hack with as little as 0% down with a physician loan!
Property Ownership and Appreciation: House hacking provides an opportunity to own a property that has the potential to appreciate over time. As you pay down the mortgage and the property value appreciates, you can build equity and create long-term wealth. Real estate has historically shown steady appreciation, making it an attractive investment asset class.
Flexibility and Scalability: House hacking offers flexibility in terms of the type of property you can choose and the scalability of your investment. You can start with a small. Such as renting out a spare bedroom, and later expand to larger properties or multi-unit buildings. This allows you to grow your real estate portfolio gradually and adjust your investment strategy according to your goals. House hacking is also less risky and has a lower barrier to entry offering an exceptional starting point for new investors.
Tax Benefits: Real estate investments, including house hacking, often come with tax advantages. Expenses related to property management, repairs and maintenance, mortgage interest, and depreciation can be tax-deductible, reducing your overall tax liability. Consult with a tax professional to fully understand the potential tax benefits specific to your situation and location.
Hands-On Learning Experience: House hacking provides an opportunity to live almost for free while gaining valuable learning experience in real estate investing. By managing tenants, maintaining the property, and navigating the rental market, you gain firsthand knowledge of real estate investing. This knowledge can be applied to future investments and help you become a more informed and successful real estate investor.
Types of House Hacking
There are several types of house hacking, including:
Traditional House Hacking: This involves buying a multi-family property and living in one unit while renting out the others.
Room-to-Room House Hacking: This involves renting out extra bedrooms in a single-family home to generate income.
Short-Term Rental House Hacking: This involves renting out a portion of a property on a short-term basis, such as through Airbnb or VRBO. This can often generate more cash flow but requires more work.
Live-in Flip: This involves buying a property that needs work, living in it while making improvements, and then selling it for a profit.
Overall, house hacking can be a great way for investors to get started in real estate, reduce their housing expenses, and generate passive income. House hacking is the best way for a new physician real estate investor to get started investing in real estate!
Cons of House Hacking
Lack of Privacy: Living in close proximity to tenants or sharing common spaces may compromise your privacy. And, this is the number 1 reason physicians do not want to house hack. But, there are some ways around this. For example, consider a separate entrance basement apartment, or a small multifamily property instead of renting rooms. We have had tenants stay in our basement apartment for 3 months and hardly ever seen them. Or, consider renting out rooms to your residency friends.
Tenant Turnover: Dealing with tenant turnover can be time-consuming and costly. Finding new tenants, screening applicants, and coordinating move-ins and move-outs require effort and attention. Frequent turnover can disrupt your routine and impact your rental income. To minimize this challenge, consider implementing effective tenant screening processes and offering attractive lease terms to encourage longer-term tenancies.
Property Management Responsibilities: House hacking requires active property management. And, this can be demanding, especially if you have a busy medical practice. It is important to have a good team that you can call on to handle maintenance issues promptly so you do not have to.
Lifestyle Limitations: Living in close proximity to tenants or managing multiple rental units within your primary residence may limit your lifestyle choices. For example, you may have to forgo certain activities or make compromises to maintain a positive tenant-landlord relationship. Assess whether you’re comfortable with these lifestyle adjustments before committing to house hacking.
Market Dependency: House hacking’s profitability is influenced by market conditions, such as rental demand, property values, and interest rates. Economic fluctuations and local market dynamics can impact rental income potential and property appreciation. It is important to thoroughly research and analyze the local real estate market and regulations. This will allow you to assess its stability and potential risks before committing to a house hacking investment.
House hacking has allowed us to live almost for free in Colorado Springs. And, if I can do it. You can too! If you want to see the Airbnb listing of our basement apartment click here! House hacking has allowed us to add value to our home, buy more assets, and offer a safe and comfortable place for guests to stay. I have not once regretted it. If you want to know more about house hacking, my friend Craig wrote a book that you can purchase here!
Look, I have a goal to reach as many physicians as possible to teach them how investing in real estate can give you the freedom to practice medicine. and live life how you want. If you got something out of this article can you share it with a friend? Thanks!