The term ‘House Hacking’ may not be common for most people. The first time I heard this word, I thought about renovation. I was completely wrong. In fact, I wished I had known about House Hacking before I bought our first condo.
House Hacking is a strategy where you buy a house, condo, duplex, or any other kind of property with the plan of renting out a portion of it while you are living in the other portion. Multi-Unit properties such as Duplex, Triplex, or Fourplex are common to be used as House Hacking. The owner can occupy one unit and rent out the others. Now, you may question, how does this work? Is it worth doing house hack while you are not even finished paying off debts?
Believe it or not, the answer is Yes. Many people focus so much on being on a tight budget in order to pay off debt. There is nothing wrong doing this, but it just takes a long time to pay off those debts. Within those budgets, housing cost such as Rent is one of the major expenses every month. By doing house hack, you can save a majority (if not all) of housing costs.
So, let’s take a look at the numbers – keep in mind, depending on where you are and how the housing market in your area, house hacking may not be your best solution to pay off debt quicker. Since I am in California, let’s just use a property that I used to own as an example:
Back in Summer 2017, I bought a duplex in Sacramento area for $300,000. The lender asked me to put 25% down in order to get a better interest rate. The mortgage payment was about $1,550 per month (including Property Tax and Insurance). There were 2 identical units at the duplex. Each one can be rented out at $1,250 per month – bringing a total of $2,500 a month. You can probably see that we are at a profit already.
Now, lets not go further in that yet, and let’s go back to house hacking. Rents in California are not cheap. If I were to house hack and live at one of the unit, my housing cost would be about $700 a month, which is ridiculously cheap in California. This is for 2 bedroom 1 bath with attached garage. Here is how I came to $700 a month:
Monthly Mortgage: $1550
Utilities (water, sewer, garbage) $250 – this is landlord/owner responsibility.
Landscaping $150 for both units.
Total Costs $1950 minus Rent income $1250 = $700 per month.
If you rent similar housing, you would pay $1250 a month. By househacking, you are saving $550 a month. And this is not the only benefit.
- Your mortgage interest (included in your monthly payment) is pretty much covered by the Rent income.
- When you file taxes, you still get to deduct your mortgage interest (although technically you didn’t pay for it!
- Your initial down payment goes to your equity in the home. When you sell the home, you will get the down payment back to you – unless the housing market tanked.
What do you think? Imagine having extra cashflow by reducing your housing expenses, you will be able to pay off your debt faster. Plus, when you sell the duplex, you will receive your down payment back and capital gain (assuming the property value goes up). Do some research in your area and see if this is a possibility. Leave a comment or questions below.