Making Money in Real Estate | House Hacking
House hacking is a strategy that real estate investors use to build wealth in real estate. It involves purchasing a multi-unit property and living in one of the units while renting out the others. This not only allows the investor to live in their own property for little to no cost, but it also generates rental income that can be used to pay off the mortgage and build equity in the property.
One of the biggest benefits of house hacking is that it allows investors to get into the real estate market with less money down. Traditional real estate investing often requires a large down payment, but with house hacking, the investor can live in the property and use the rental income to cover the mortgage. This means that the investor can invest in a property with a smaller down payment and still have a positive cash flow.
Another benefit of house hacking is that it allows investors to start building their real estate portfolio from a young age. By investing in a multi-unit property and renting out the other units, investors can start generating rental income right away. This income can then be used to invest in other properties, creating a snowball effect that helps the investor to build wealth in real estate over time.
House hacking can also be a great way to learn about the real estate market. Living in your own property gives you a firsthand look at how property management works, and how to handle tenants. This can give you a great head start when you decide to invest in other properties, or even in a larger scale.
One of the most popular forms of house hacking is duplex or triplex and renting out the other units. This allows the investor to live in one unit and rent out the others. However, you could also consider to buy a single family home and rent out rooms, this is known as room hacking.
It's worth noting that house hacking is not for everyone and it requires some level of commitment, like becoming a landlord, and being responsible for the property, tenants and the expenses that come along with it. And also, it's important to consult with a real estate attorney and/or tax professional before making a decision to invest in real estate.
Here's an example of how someone might create wealth by house hacking for 2 years:
The investor purchases a duplex for $300,000. They make a down payment of $60,000 and finance the remaining $240,000 with a 30-year mortgage at an interest rate of 3%.
The investor lives in one unit of the duplex and rents out the other unit for $1,500/month. They use the rental income to cover their mortgage payment, property taxes, and insurance, which comes out to $1,300/month. This leaves them with a positive cash flow of $200/month.
Over the 2 years that the investor lives in the duplex, they make a series of renovations to the property, including updating the kitchen and bathrooms, adding a deck, and finishing the basement. These renovations cost $30,000.
After 2 years, the investor is ready to sell the duplex. Due to the renovations they made, the property has appreciated in value and is now worth $360,000. They sell the property for that amount and pay off the remaining mortgage balance of $228,902.
After paying off the mortgage, the investor is left with a profit of $31,098. Additionally, they can take advantage of the capital gains tax exclusion and exclude $250,000 of capital gains from the sale of their primary residence.
It's worth noting that this is just an example and the outcome could be different in real life scenario. The market conditions, the location of the property, the renovation costs, and the timing of the sale can all affect the outcome of the investment. Additionally, this example doesn't take into account other costs such as property management, legal and tax advice, etc.
In conclusion, House hacking is a great strategy for real estate investors looking to build wealth in real estate. It allows investors to get into the market with less money down, generates rental income that can be used to pay off the mortgage and build equity in the property, and can help investors to start building their real estate portfolio from a young age. However, it requires some level of commitment, like becoming a landlord, and being responsible for the property, tenants, and the expenses that come along with it. And also, it's important to consult with a real estate attorney and/or tax professional before making a decision to invest in real estate.