House Hacking: Risks and Rewards

With the average housing costs in the U.S. on the rise - house hacking gives a pretty attractive opportunity - to offset living expenses - and potentially even profit from it from cash flow

However - like any investment, house hacking comes with its own set of risks and rewards. 

Today we'll talk about the risk of waiting to purchase a home,  the low-risk to house hacking, and how it allows investors to grow their rental portfolio - at a much higher rate.

So to start this off - we have housing costs.

Housing costs in the U.S. have soared in recent years - and have risen throughout history.

This ultimately makes homeownership - simply just seem unattainable to the average person looking to buy.

With that, a stat I came across recently - states the average monthly housing cost in the US - has reached $1,900 per month.

This is a 6% increase from the previous year - where the average housing costs were just under $1800 per month

You can't control your rent, but you CAN control - what you want your mortgage payment to look like,  when you're starting to look for homes.

So very similar to what we are seeing in today's market - where there are years or periods of time - when the average annual rent increase, outpaces the average annual home appreciation rate.

While rents are up 6% year over year, Right now the national average home appreciation year-over-year - is sitting right around 0%,  believe it or not

So from this perspective - you could make the case that there are times, like.. right now, when it is actually more risky to rent, and wait to purchase a home - than it is to just make the jump and buy that home

In short summary - there is a risk to renting when you consider the opportunity cost

And one one of the key advantages to house hacking - is the ability to leverage some of those low down payment options, when purchasing a property as a primary residence

Unlike traditional investment financing, where a 20% down payment minimum is pretty normal to see  (thank you to the 2008 housing crisis) - house hackers can purchase with low down payment loans - such as an FHA loan at 3.5% down, or conventional financing at 5% down. 

To put this into perspective - This means that on a $200,000 property, the down payment could be as low as $7,000 with an FHA loan, or $10,000 with conventional financing.

That same $200,000 property with investment financing, would require $40,000 with 20% down

So with such a low initial investment, house hacking allows a little bit of margin for trial and error. 

The smaller down payment not only makes homeownership more accessible, but also from the investor standpoint - provides much lower risk with less of your own money strapped to that property.

Which brings me to one of the best parts about house hacking - is that it's repeatable.

before we continue on here, an important thing to note when house hacking,  is that in order to avoid mortgage fraud (that was not a fun sentence to say),  you have to live in that property for 12 months minimum, before a new owner-occupied loan can be issued in your name

So now that we've gotten that out of the way - having that low down payment on each property, even further lowers your risk from an investment standpoint, when repeating this process.

By house hacking, you can make your money not only work harder  - but lower your risk when you purchase multiple properties. 

For example - with that $200,000 property we mentioned earlier, the $40,000 down payment you would put down when purchasing with investment financing - a house hacker could purchase 4 $200,000 properties with that same $40,000, spread over 4 years with 5% down each

The distribution of that $40,000 is much lower, when it's spread across multiple properties - which in turn lowers the overall risk.

If that one property you purchased with investment financing goes to 0 - you've lost 100% of your investment.

If one of the 4 properties you house hacked goes to 0 - you only lost 25% and still have 3 others.

So to sum all of this up

If you want to house hack, or even if you just want to buy that first property - but are maybe on the fence if you'd even want to house hack - buying right now, even where current prices are, look a heck of a lot better on paper than renting does.

If you want to purchase investment properties, but don't have a ton of money to put down - house hacking is the best way to do that. 

It has a lower risk to purchasing an investment property - both from the standpoint of requiring less money down - AND, when you decide to repeat the process, it spreads the risk over multiple properties - with the same money you would've spent otherwise, on one investment property just by not living in it for a year first.