House Hacking: My Top 5 Rules You Need to Know

Today I'm going to share my top five rules, that every person thinking about house hacking should know

These are legal rules you need to know, and also some rules we've implemented into each house hack from experience thus far.

So Rule #1: Residency Requirement

One of the most important rules of house hacking, is that if you purchase your house hacks with a loan (which is almost always the case), you must live in those properties, for at least 12 months, before you can get a new owner-occupied, or primary residence loan, in your name. 

So if you are house hacking every year, this is extremely important.

But the good news, you don't have to worry too much (hopefully), because your lender will see your loans and the dates they were issued. 

Mortgages are public knowledge, which, if you're a homeowner you'll understand this, is the reason why you start to get a bunch of spam junk mail, pretty much as soon as you close on your home, from insurance companies and creditors and all that.

So, your lender has this info as well and should be able to tell you the earliest date a new loan can be issued, or when the earliest closing date can be.

Of course, hopefully your lender does their digging properly, but this is why it's important to track on your own just incase. 

Attempting to get a new loan, without following this 12 month residency requirement, could potentially result in mortgage fraud.. which is a serious felony charge. 

So keep that 12 month timer going in the back of your mind, cause you can't house hack if you're in an orange jumpsuit sittin in the clink

Which leads me to the next rule, and this is extremely obvious so I'm not going to go too deep into it, but it has happened before and is why this is an actual rule - believe it or not, you actually have to live in the property you purchase with owner-occupied financing!

This will also be a call into the feds for mortgage fraud :)

Okay, moving away from the legal stuff for a minute, the next Rule (kinda): Understanding Tax Deductions and Rental Income

This is pretty important, so I wanted to clarify this a little bit, cause I was wayyy wrong, and thought this was different before we started house hacking

At the time of recording this video, and at least how it's been since we started in 2020, 

is while you're LIVING in your house hack property, you can deduct mortgage insurance, mortgage interest, and closing costs to the full amount, for the portion of the property you live in, or occupy.

Buuuut

those deductions for renovations, maintenance, repairs, and other expenses related to the property's rental portion, only apply once you've moved out and the property becomes a full-time rental.

This is where it gets a little tricky..

If you're renting out units, or renting out bedrooms within your property while you're STILL LIVING THERE, deductions can ONLY be made for the portion of the property being rented out.

For example, if you're house hacking a duplex, and living in one side while renting out the other side, deductions for maintenance, repairs - the other stuff I mentioned, are still deductions but rather than being able to deduct the full amount - you can only deduct 50% of it because you occupy the other half of the property.

It really gets tricky if you're renting out bedrooms in say, a single family or townhome house hack, because a lot of the space and such is shared. So consult with your CPA, or a tax professional on how to approach. Just leave it the pro's, don't try and swindle something here on your own, just to save a couple bucks.

This brings me to our next Rule - Document Everything, and Keep Your Receipts!

I'm not going to lie to you, I really screwed this up year 1.

I learned this the hard way, in not keeping receipts of everything we had done to the place, when it came to filing for taxes. 

If you remember from previous videos, I mentioned we replaced floors and carpet in our first house hack, plus some other value-add features?

Well, when it came to filing for taxes, I figured just showing a bank statement of the payment, that I actually paid, from the company who did the work, would be just fine

Well, I didn't get the deductions on those because I lost the receipts.

I don't remember how it played out, but I had either not filed for an tax filing extension soon enough, or if it was something else - but I couldn't get the receipt in time for when we had to file.

Even if I had gotten the extension, what a pain the you-know-what it would've been, to track down those companies and see if they can find the receipt to send over.

Moral of the story, keep your receipts. However you want to keep or store those.

Efficiency and ease. Always the goal when it comes to house hacking. Learn from my mistakes.

But continuing on,

Keep receipts of any and all property-related expenses.

From renovations and repairs, to general maintenance and upgrades.

I talked about this a few weeks back on the video talking about how to put your credit cards to work - While credit cards, and financial tracking tools can help organize your spending, and put those into categories, receipts are the proof of what was actually done, and what that expense was for.

Don't put yourself in the same scenario I was in, by not holding those receipts.

Now our last rule here, and if you've been following along with with these videos, this should be rule #1 but Treat your House Hacks Like a Business!

It's a huge mindset shift for sure, by trying to change from "this is where I live", to that change to "this is an income source or investment".

Rather than thinking of every little thing you have to fix or repair as an "expense", consider each as an investment in your business. Which... it is.

Especially when it comes to those items that get a 100% deduction on your taxes.

Now, don't just go out and start fixing things up to get a deduction. You are still paying for that!

This is where treating these places as a business returns the favor, as we wrap this up here...

You call up your CPA or tax professional towards the end of the year, and you might be looking at let's say, $1,000 you'd have to pay in taxes on one particular property.

Your tax pro might say, "instead of paying the government $1,000 in taxes on this place, is there anything you need to do to the property, that would total around $1,000 that we could just deduct instead?"

you find something needing fixed for $1,000, whatever it is - call it a washer and dryer your tenants have been complaining about - and all of a sudden, that $1,000 you would've paid in taxes, instead went towards an improvement or repair towards your house hack.

That's the power and the difference of treating your house hacks like a business, because it is. You're running a small business!

The balance sheet stuff with deductions and income, and all that stuff is great,

but it means nothing. It means 0!!

If you don't have your mindset right, your tenants are having bad experiences, or god forbid - your house hacks don't even rent out, solely based on the fact you don't have your !!! in order.

Don't be that guy, or gal, and do it the right way. 

Threw a lot at ya here, not trying to talk anyone out of house hacking, because it is the absolute best way to build wealth and purchase investment properties, but just that small mindset shift on your house hacks are extremely important and is not a scary or unsurmountable feat to tackle when it's done right.

Follow these rules, be prepared, get it all in order, and you'll maximize the full potential or opportunity, house hacking brings to you, and your personal wealth-building goals.