House hacking - part 1
Have you ever considered an owner-occupied multi-family property? My clients Steve and Cheryl did, and it worked out well for them.
It seems that everyone is “hacking” something--house hacking has been around for decades, it is buying a one to four unit multi-family property, living in one of the units and renting the others.
Steve and Cheryl bought a fourplex ten years ago for 500 thousand dollars. It was a fixer-upper in need of upgrading and cosmetic improvements. Today the property is valued at double what they paid, and now the rent income had doubled as well from what it was when they started.
You may not see such a massive return as Steve and Cheryl, but with a bit of work in finding the right property at the right price, and securing the right loan, you may be able to come close.
What is house hacking?
House hacking is the purchase of a duplex, triplex, or fourplex with the intentions of living in one unit as your primary residence while renting the others. Having four units spreads your risk a bit by giving you three rental incomes so if you lose one it does not hurt as bad in the short run.
One strategy depends on having one or more vacancies--move into the unit in the worst shape and fix it up. When the improvements are completed, rent the unit for market rent and move into the next worst unit. Another strategy if your cash flow allows is keeping the worse unit vacant while you focus on fixing it up and live in another. You could then rent the updated unit for a higher rent while you fix up another unit. Eventually using this strategy, you will have all the units updated and could move out completely selling the property or refinancing and purchasing another.
The benefits of house hacking?
If you like the idea of being a real estate investor house hacking is an excellent way to get started. The goal would be to purchase a property where the rent income pays your loan and expenses and possibly allows you to live in a unit close to free.
There will come a time where you may consider selling your house-hacked property so you may want to speak with a tax professional. If you have a fourplex, you could consider three-quarters of the property as an investment property and one-quarter as your residence. These are treated differently in the tax code, and each has their benefits provided you follow the rules to maximize your profits.
Keep in mind to fully realize the benefits you should stick with two to four units as a property with five or more units is considered a commercial property. The rules change when it comes to financing. A single-family house up to a fourplex with four units are classified as a residential property and therefore allows you to secure more favorable residential financing.
In part two we will look at the financial-side of house hacking, how to find a property, as well as your new job as a landlord.
Burt M. Polson, CCIM, is an active commercial real estate broker. Reach him at 707-254-8000, or firstname.lastname@example.org. Sign up for his email newsletter at BurtPolson.com.