House hacking drawbacks - taxes and other issues

[Garrett Pettit]

Does anyone have any advice for dealing with back-taxes and the risks/drawbacks of house-hacking a primary residence as an investment property as well? So many people say house hacking is the best way to start, but I want to hear real experiences from those who have done it: lessons learned, especially with regards to taxes, homesteading, and other tradeoffs that may have to be made.

[Brandon Rush]

Hey Garrett,

I have done two house hacks and I personally do feel it is one of the best ways to start. Here are a few reasons why:

1) You Save On Living Expenses: Instead of renting, if you lived in a 2-4 unit property, you now have other income covering your mortgage. You are now either paying less than you would if you were paying rent or paying nothing at all. This lowers your living expenses, minimizing that burden that much of our population deals with.

2) Landlording on Training Wheels: Living at the property allows you to become a property investor with your risk being a little lower. By living at the property, you will learn many aspects of property investing such as property management, tenant management, vendor management and much more. You will learn what you like and do not like about investing, allowing you to get more specific with future investments. 

3) You Have A Property: This one is simple, by house hacking, you will have a property. The other guy/gal who says "Oh I would never house hack and live with tenants" and rents for 10 years will not nothing to show for other than the apartment they are helping the next landlord pay down. 

I am not trying to say that it is essential that EVERYONE house hack. But when I hear statistics about how many Americans have less than $1000 in their bank accounts, I do not understand how these same people can go out and buy a single family home and not house hack. 

A couple of tradeoffs you will have to deal with:

1) Living With Tenants: To me, I personally don't care. But for those who are big on privacy, this is something you will need to get over. Tenant's can be a pain in the but sometimes, especially if they know you are the owner. But, it's really not the end of the world. You fix a lot of this by setting boundaries with your tenants, or doing what I did and hiring a property manager.

2) It's Not Your "Dream Home": Most likely if you are considering house hacking, you are not in a position to acquire your dream home yet, so suck it up!

I am sure there are other tradeoffs, but I still believe house hacking is such a powerful way to get started. Imagine if you house hacked a house every year for 10 years.... You could simply house hack your way to financial freedom. 

Good luck on your journey and let me know if you have any other questions.

Also check out my podcast appearance where I talk a bit more about house hacking, BP Rookie Episode 221.

[Drew Sygit]

Why would you be worried about property tax issues? You'll get a head start with house-hacking versus buying an investment property.

[Garrett Pettit]

Quote from @Brandon Rush:

Hey Garrett,

I have done two house hacks and I personally do feel it is one of the best ways to start. Here are a few reasons why:

1) You Save On Living Expenses: Instead of renting, if you lived in a 2-4 unit property, you now have other income covering your mortgage. You are now either paying less than you would if you were paying rent or paying nothing at all. This lowers your living expenses, minimizing that burden that much of our population deals with.

2) Landlording on Training Wheels: Living at the property allows you to become a property investor with your risk being a little lower. By living at the property, you will learn many aspects of property investing such as property management, tenant management, vendor management and much more. You will learn what you like and do not like about investing, allowing you to get more specific with future investments. 

3) You Have A Property: This one is simple, by house hacking, you will have a property. The other guy/gal who says "Oh I would never house hack and live with tenants" and rents for 10 years will not nothing to show for other than the apartment they are helping the next landlord pay down. 

I am not trying to say that it is essential that EVERYONE house hack. But when I hear statistics about how many Americans have less than $1000 in their bank accounts, I do not understand how these same people can go out and buy a single family home and not house hack. 

A couple of tradeoffs you will have to deal with:

1) Living With Tenants: To me, I personally don't care. But for those who are big on privacy, this is something you will need to get over. Tenant's can be a pain in the but sometimes, especially if they know you are the owner. But, it's really not the end of the world. You fix a lot of this by setting boundaries with your tenants, or doing what I did and hiring a property manager.

2) It's Not Your "Dream Home": Most likely if you are considering house hacking, you are not in a position to acquire your dream home yet, so suck it up!

I am sure there are other tradeoffs, but I still believe house hacking is such a powerful way to get started. Imagine if you house hacked a house every year for 10 years.... You could simply house hack your way to financial freedom. 

Good luck on your journey and let me know if you have any other questions.

Also check out my podcast appearance where I talk a bit more about house hacking, BP Rookie Episode 221.

Thanks for the advice, Brandon. I will listen to that podcast episode of yours! Do you have any advice with dealing with homesteading back-taxes or lack thereof as a house-hacker?

[Garrett Pettit]

Quote from @Drew Sygit:

Why would you be worried about property tax issues? You'll get a head start with house-hacking versus buying an investment property.

 Very true, buy my concern is in the execution: I've heard stories of Florida residents such as myself renting our portions of their primary residence house-hack only t get hit with whopping back-taxes and fines for handling homesteading taxes wrong. So the proper handling of taxes in a house hack is a concern I'm looking to learn more about. I'm speaking with tax advisors, but I wanted to hear the BP community's experience as well.

[Troy P.]

Please show me one example where a real estate investment is a bad idea because of taxes.  Yes, you will need to have a great tax advisor and CPA that has your best interests in mind, but that is with all RE transactions, not just house hacking.

[Basit Siddiqi]

Each county / state's definition of what is eligible for homestead exclusion will be different.

Read what the requirements are and apply for it if it applies to you.
If you fully move out, do not continue to apply for homestead exemption.

[Dwayne Byrd]

You would have to read what the definitions are on homesteading. I got started that way and since I lived there, there was no problem with it, and I don't know who would be out checking to see who lives at your house ect.. You can only have 1 homestead here in Florida.