Thinking of using housing hacking to get into real estate? I’m sure you’ve heard all the pros, but have you considered the cons?
For those new to the terminology, “house hacking” refers to the strategy of buying a small multifamily property, living in one unit and renting out the rest to offset living costs. The property is typically a duplex, triplex, or maybe a fourplex.
The concept is fairly easy to execute, as these types of dwellings still qualify for the best traditional home financing, while actually doubling as investment properties. Done well, the tenants you place will reduce your mortgage and ownership costs each month, or even cover the costs entirely, allowing you to live for cheap or free while building equity.
It all sounds great, right? Sure does. However, house hacking isn’t perfect. Here are five specific issues those who execute this strategy will wrestle with.
The Cons of House Hacking
- It Doesn’t Scale
As a way to get started in real estate or acquire your first starter home, house hacking is fine. It’s just not going to scale from an investment perspective. Some lenders also prefer loaning on non-owner-occupied properties. Keep that in mind.
If you do house hack, then move on quickly and make some true investments.
- It’s Dead Weight
Some very wealthy and successful real estate investors still rent their own homes. It sounds crazy, but owning your own home isn’t always all it is made out to be. This is especially true if you are a bit of a minimalist, are just starting out, want to avoid bills, are working toward financial freedom, or love being mobile and traveling.
If this sounds like you, then owning your own unit can really be dead weight. You are responsible for carrying it around, and it can hold you back from everything else. You may be better served by investing in a small multifamily property for the income and renting somewhere else.
- The Numbers Often Don’t Work
Being profitable and making investments that actually work in real estate is all about numbers. If you can find a duplex for the same price as a single family home and rent the extra unit for as much as a house, all while living for free or even making a profit, that’s great.
Of course, most sellers—especially in the investment community—understand this, too. So they have begun pricing these small one- to four-unit properties accordingly. Often you won’t be able to rent the units for as much, and you’ll pay more for the property.
- It’s Too Emotional
Warren Buffett says investing is best when it is most businesslike. It’s hard enough to really be objective in real estate as it is. The difficulty is compounded by throwing yourself into the mix with your tenants and living in your investment property.
There is too much mental fog and temptation to spend too much on it, hold it too long, and make poor decisions throughout. Make those money mistakes on your own home if you’d like, knowing that you are splurging for self-indulgence. But don’t take your eyes off the prize when house hacking—that prize being profit.
- It’s High Risk
Living next to your tenants and being personally involved is inherently high-risk. Sometimes you have to start out there though. It is good to learn firsthand on the front lines.
Yet, savvy investors usually go to extreme lengths and often invest quite a bit in protecting their privacy and identity, insulating themselves from their tenants. They definitely don’t want anyone knowing where they live or their personal cell phone number.
At best, you are going to be too lenient or tough as a neighboring landlord. You’ll often have to deal with knocks on your door to complain or fix things at inconvenient times. What’s worse, it is too easy for upset or malicious tenants to make up false claims, take advantage of you, or even sue you.
In general, I am all about finding legal and efficient ways to get ahead. House hacking is fine if that’s what it takes to get your foot in the door of real estate. To get a taste of investing, do it if you need to. But once you develop a passion for real estate, move on.
Alternatively, if you have the money for a down payment, you might take that money and truly invest or even partner up with someone on a real investment first instead.
Just be sure to consider the cons, as well as the pros. Weigh other options to determine which path is the most direct route to accomplishing your ultimate goals.
Considering house hacking? Have you looked into other options? Which type of investment will you ultimately choose and why?
Let me know in the comment section below!