More than half of buyers under the age of 40 are interested in the option of “house hacking” as a way to afford a home.  House hacking is purchasing a property that also provides rental income to help offset the costs of purchasing and maintaining a home.

The basic tenets are sound, according to investment expert Barbara Corcoran: “Buy the cheapest multifamily property you can in an area that has good rentals. Live in one half of it and the tenant will pay your expenses.”

Today’s Market

Housing costs are high, and people are more open to sharing space.  Instead of purchasing a single-family home, young professionals in their 20s and 30s should consider and owner-occupied rental strategy.

In simplest terms this means buying a duplex, living in one half, and renting out the other half.  However, different housing opportunities exist in different markets.  In some areas it may be more desirable to purchase a three-or-four-unit complex.  In other areas it could mean purchasing a single-family home that has an existing ADU. Freddie Mac defines an ADU as a space with a separate entrance, kitchen and bathroom but which “may share utilities and common walls with the primary dwelling unit.”  This can range from a separate structure on the same property, to a garage apartment.  (For those that remember the show “Happy Days”, Fonzi lived in the Cunningham family’s garage apartment.)

Qualifying

When purchasing rental property buyers can qualify to borrow a higher amount, since their qualifying income is supplemented by the projected rental income.  Additionally, conventional loans used to require at least 15% down for multifamily units, but Fannie Mae has changed their rules to allow a 5% down payment on two-to-four-unit properties. This opens opportunities for many more prospective buyers.

While financing for multiplexes is becoming more accessible in some instances, if they’re out of reach, another alternative for a first-time homebuyer is to ask someone they’ve rented space with in the past if they’d like to be a tenant and share a single-family home.

If the buyer had a roommate that they’ve lived with and can show payment history, that might count toward additional income to help them qualify for a mortgage.

Tradeoffs

There are always tradeoffs… As the pandemic illustrated, rental property regulations can impact ownership costs and responsibilities.  A homeowner may need to manage an eviction ban or public assistance programs because it’s subject to the rules of various entities governing the property or loan.  Homebuyers opting to use this hack would do well to take a property management class. Some municipalities mandate landlord education and there are nonprofits in others that can provide it.

We encourage you to speak with a trusted advisor to learn more about your options before moving forward with a real estate purchase.  You can easily communicate with an advisor for free by using the contact form on our website.