House hacking is a non-traditional real estate investing strategy where the investor purchases a property and lives in one portion while renting out the other portions. The rental income generated from tenants covers the housing expenses and produces monthly positive cash flow. House hacking is a popular strategy, especially among millennial investors to build wealth through real estate. However, it is quite different from traditional buy-and-hold real estate investing. Here are some of the key differences between house hacking and traditional real estate investing:
Investment Horizon And Risk Tolerance
House hackers usually have a long-term investment horizon and higher risk tolerance, including considering the best $1000 investment,since they are living in and managing the investment property themselves. Traditional real estate investors, on the other hand, tend to have a more conservative risk profile and prefer less hands-on property management. They rely more on professional property managers to handle the day-to-day operations. House hackers are willing to accept higher risks in exchange for the opportunity to live for free and build equity. They make an emotional commitment to their investment property and neighborhood. Traditional investors take a purely financial view and seek to minimize risks however possible.
Property Selection Criteria
House hackers choose properties based on livability and rental potential as they plan to reside in the property themselves. They prefer multi-family properties or single-family homes with rental suites. Traditional investors have more detached criteria focusing primarily on metrics like rental yield, appreciation potential, and cost of ownership. They invest in a wider range of properties based solely on the numbers. House hackers have additional considerations like the number of bedrooms and bathrooms, space for shared amenities, storage, parking, etc. depending on their own needs. This dual-purpose selection approach can be more complex but also rewarding when done right.
Responsibilities And Work Involved
House hacking requires substantial work in terms of property management, tenant screening, rent collection, maintenance, and repairs. The investor must handle all landlord responsibilities which can be challenging while living in the same property. House hackers take on significantly more responsibilities with their properties compared to traditional real estate investors. However, for those wanting to get into real estate but lack experience, house hacking can be a good way to learn the ropes. The costs of mistakes are lower when you have your own money in the deal and you’re able to get started with less risk as rents from tenants help carry the burden.
Monthly Cash Flow
House hacking aims to generate monthly positive cash flow from rental income to cover ownership costs and turn the property into a money-generating asset. Traditional real estate investors also focus on cash flow but typically at a higher level to justify the investment. They look to generate substantial cash flow over and above expenses to get an adequate return on their equity. House hackers can get started even when monthly cash flow is limited since their living costs are reduced or fully covered. Any excess cash flow is a bonus and equity growth builds over the long run through price appreciation and mortgage paydown.
Tax Implications
House hackers can deduct more of their rental property expenses for tax purposes since a portion of the property is used for rental business. They can write off costs related to the structural components and fixtures in the rental portions which provides significant tax benefits. For traditional real estate investors, tax deductions apply only to direct rental property expenses. Expenses related to structural components must be depreciated over longer periods. The ability to deduct interest, taxes, and maintenance costs provides more immediate benefits for house hackers.
Leverage And Financing
House hackers typically put down lower down payments, say 5-20%, and finance the rest with a mortgage to get started. Traditional real estate investors generally finance with larger down payments of 20% or more and lower leverage. They have more equity in the deal but also more cash tied up. House hacking allows investors to build equity with tenants paying down the mortgage. House hackers gain advantages from leverage in the form of rental income to offset their own expenses and build wealth over time as tenants pay down the mortgage.
To Wrap Up
While house hacking and traditional real estate investment both aim to generate wealth through property ownership, the strategies differ substantially in terms of investment approach, responsibilities, cash flow, leverage, and tax implications. The right strategy depends on your investment goals, risk tolerance, and preferences regarding active or passive property management. House hacking can be an attractive model, especially for new investors, to gain valuable experience with less risk. Traditional real estate investing may be better for those wanting a more hands-off approach focused primarily on maximizing returns. With the right strategy and execution, both models can be extremely rewarding.
