We are going to cover the different advantages and disadvantages, the pros and cons of house hacking.
I will do that in context of the type of house hack, the type of property, because depending on which approach you choose, the advantages and disadvantages are going to be a little more or less pronounced.
Con number one is that it takes quite a bit of time, work, and effort in order to set up a good house hack. It’s like with most things in life, anything that is worth having usually takes quite a bit of work to get it. A house hack is no different.
It’s one thing to say, “I’m going to house hack” and quite another thing to pull it off, because there are quite a few steps that you have to complete successfully.
First of all, you have to find a suitable property and get it under contract, which is sometimes not that easy in a competitive market. Then after you’ve closed it, you have to do some repairs and upgrades depending on your strategy, market and advertise it, show it to prospective tenants, do interviews and background checks. And once you have moved the tenant in, you have ongoing property management, which means rent collection and maintenance.
It takes quite a bit of effort, and don’t under estimate this, but once you are through that process and you’ve set up a good tenant, it’s usually smooth sailing.
Con number two is going to be compromises you’re going to have to make in order to facilitate a house hack. Most perfect investment properties will not look exactly the same as your ideal dream home. So it depends a little bit on what type of house hack you’re going to choose and what type of property you’re going to choose, to how far you will have to take these compromises.
We’re going to talk about the different types of house hacks later, but just understand that most likely you will have to make compromises of some sort, especially if you’re planning on moving out in the future and then turning your first house hack into a 100% investment property.
Con number three, you are going to have neighbors. This may sound very obvious, but you’re going to share real estate with other people. It’s important that you are comfortable with it.
In the best case scenario, you’re going to see your neighbor once in a while in the driveway, but if you’re going to take it to the next level and you have a roommate, you have to be comfortable with seeing that person several times a day.
On that note, it’s important that you also discuss this with your significant other, and that you’re both comfortable with whatever strategy you’re going to choose.
Con number four is business risks. House hacking is no different from any other business venture. With business rewards, you’ll always have a certain set of business risks that are associated with those rewards. When it comes to house hacking, you want to make sure you have a property that is in good repair. That is safe. You have a good lease in place and you carry the proper insurance.
One of the main principles of real estate investing is that generally, if you have a nice property in good condition and in a good area, the business risks are generally lower, but you’re paying a higher price for those lower risks.
Those were the cons to consider.
Next, I’d like to talk about the advantages of house hacking. The first thing I’m going to throw out here is being in control. Maybe you have lived in a small multi-family before, and you are familiar with the living situation. The main difference is, now you are in control. Now you own the property. You are the landlord. You decide who parks where, and you can decide who uses the yard or doesn’t use the yard. And you can decide in which color you want to paint the exterior or the interior.
So you are in control of your destiny. You are in control of that property.
Advantage number three is long-term wealth building. This is the most important advantage of house hacking, yet it gets so little attention because everybody’s so focused on cashflow. Long-term wealth building does not show up on your bank account right away. It shows up on your mortgage statement when you realize that your principal balance has been paid down. And thus, now your net worth has increased. It shows up on your appraisal when you realize that just for owning the property, your net worth has increased because the value of the property has gone up over time. Or because you have done some remodeling and you forced the value up of the property. It shows up on your tax return because you have been able to take those deductions. So cashflow is important, but long-term wealth building outweighs cash flow usually by quite a bit.
And if you talk to seasoned investors, they will always tell you that the magic is happening with long-term wealth building and not with cash flow. Advantage number four is learning how to invest in real estate. The day you start receiving passive income can have a profound impact on your life. Most people have a major aha moment when they read Rich Dad, Poor Dad by Robert Kiyosaki, and learn about passive income.
So what do you learn from house hacking? First of all, you learn how to evaluate and how to buy real estate. Secondly, you learn how to operate, improve, and maintain real estate. Then you learn all the necessary property management and landlording skills. So in essence, it is a crash course into real estate investing, but with a very low barrier of entry.
This was a high level overview about the most important advantages and disadvantages you should be considering before you decide to embark on a journey on a house hack.
Now we’re going over the different types of house hacks and then you can decide which one is the best for you.
The first type of house hack that I should mention is the classic duplex house hack. That’s the most popular one, and Milwaukee is a great playground for this, because we have such a great inventory of all different kinds of duplexes. You have the old gorgeous looking, 1920s duplexes. You have the very efficient 1960s, which I call shoe boxes. You have upper and lowers. You have side-by-side. So there’s really a great selection of duplexes in Milwaukee you can choose from.
The reason why a duplex house hack is so popular is because it gives you maximum of privacy with a dedicated unit that you can occupy, usually a very good lifestyle. You can choose a variety of neighborhoods.
On the other hand, you only have 50% of your property producing cashflow. So that makes it a little bit difficult to completely eliminate your monthly housing expenses. You typically end up chipping in a little bit to make your monthly mortgage payment.
The second type of house hack is going to be with the three family or with the four family. If your goal is to eliminate all of your monthly housing expenses, then three or four families might be worth a consideration. If you’re willing to limit your own occupied space to let’s say 25 or 33% of a property, you obviously have a larger portion of the property dedicating to producing income for you. You have more tenants that are going to help out with that.
Now, this is not going to provide the same lifestyle as you would have in a duplex. Typically these types of properties also don’t do as well in the department of long-term wealth generation, because they don’t tend to appreciate as much.
The third type of house hack would be with the single family home. Yes, you can house hack a single family home. Now, before you dismiss this idea completely, these are typically single families that are on the larger side with four or five bedrooms. Often, they have a layout where the living quarters are somewhat separated in the house, so it makes it easier to rent out rooms, either on a long term or on a short term basis like Airbnb.
The advantage of single-family house hacks is that they work really well for live in flips, so you can improve the property while you’re living there. They generally tend to do better with appreciation over time.
Strategy number four is a luxury house hack. These are not easy to find and you have to get a little bit creative, but there’s lots of luxury properties that have some sort of an income potential. Maybe you have a guest house that can be rented out either short-term or long-term. Maybe you have a barn on the property that can be rented out for storage for boats or for cars. Or maybe you have a business that’s also located on the property that provides additional means of income. So, luxury house hacks are usually high end properties that are on a larger parcel and have additional means of income. They’re not easy to find, but they have great financial upside over the long term.
Finally, strategy number five is the extreme house hack. What is an extreme house hack? That is when you buy a property and you rent out every last little bit of living space that you possibly can for income. And then you go and park a trailer or a camper in the backyard or in the driveway and that’s where you live. I have to admit, I’ve never seen that done here in Milwaukee or in Wisconsin. But I have seen it in California, where property values are so high, that this is the only way to actually pull off a house hack. It goes back to the old saying, if there is a will, there is a way. And if you really want to make it happen, you can always do an extreme house hack.
So, there are a lot of different ways on how you can house hack. Each strategy comes with its own advantages and disadvantages.