Understanding house hacking pros and cons can be a significant help in deciding whether or not house hacking is for you.
After purchasing and living in two house hacks myself, I’m here to help shed light on the pros and cons of house hacking.
In this article, we’ll break down the most important house hacking pros and cons so that you’re better prepared to make the decision for yourself.
What are the Pros of House Hacking?
There are many pros to house hacking. The primary pros to house hacking include low-risk passive income, having other people pay your mortgage, reducing your living expenses, building financial wealth, increasing your net worth, and gaining valuable real estate experience.
Let’s expand upon the pros of house hacking:
House Hacking Pro #1: Reduce Your Living Expenses
A study published by the Joint Center for Housing Studies of Harvard University shows that more than 20 million Americans spend 30% of their income on housing expenses. That’s a significant amount of each paycheck going towards housing expenses!
By house hacking, other people will pay you to live in/on your property. This means that the amount you need to pay out of pocket to own your home decreases. Depending on the market, it’s even possible to live for free by house hacking!
House Hacking Pro #2: Stabilize Your Living Expenses
The same study published by the Joint Center for Housing Studies showed that rent prices are increasing far faster than incomes. Therefore, if you remain in the rental market (at least for the time being), you’re likely to experience rent increases that outpace your salary increases which will force you to spend more of your income on your rent.
By living in a house hack, you can lock in your monthly “rent” payments with a fixed-rate mortgage. This means your mortgage payment will remain consistent for the term of the note (typically 15 or 30 years), and the only things that will influence your monthly costs are your homeowner’s insurance, local taxes, and utilities. These things typically don’t change very much which means you can stabilize your living expenses with a mortgage better than you can control rent prices.
House Hacking Pro #3: Increase Your Financial Net Worth
With other people paying for a portion (or all!) of your mortgage, you gain equity in your house without paying for it! Over time, this will add significant value to your financial net worth.
House Hacking Pro #4: Gain Valuable Landlord Experience
Many people love the idea of investing in real estate to build financial wealth, until it involves them being a landlord. The title “landlord” can be a daunting hurdle for some individuals to overcome, and with good reason—being a landlord can be tough work.
However, purchasing and living in a house hack will help you gain valuable landlord experience in a way that I personally found to be an easier entry into the responsibilities. By living in the home and being a landlord to other tenants, you get to see first-hand how others will treat your property, what they care about, what they don’t care about, what to do if they have trouble paying rent, etc.
I found that having close proximity to my first tenants removed a lot of the uncertainties associated with being a landlord and made it a lot simpler to gain experience. If something went wrong, it was a few seconds of walking to go take a look at it myself versus having to drive across town or request a technician to go out there and relay the news.
This experience made it much easier for me to move on to a second house hack and become a distant landlord down the road.
House Hacking Pro #5: Become Familiar with Real Estate Investing
Real estate investing can be a tricky game. There are a lot of components that you need to consider and manage as you go through the process of acquiring and managing a property.
By purchasing and living in a house hack, you will become intimately familiar with the fundamentals of real estate investing. This includes sourcing funding, analyzing deals, evaluating properties, screening tenants, positioning rental prices, monitoring cash-flow, and much more.
It’s one thing to read about all of these types of real estate investing fundamentals in a book. It’s entirely different (and a better learning experience) to understand them first hand.
What are the Cons of House Hacking?
There are some cons to house hacking. The primary cons to house hacking can include sharing your home/property with other people, lack of privacy, the instant responsibility of being a landlord, and additional work associated with owning a home.
Let’s expand upon the cons of house hacking:
House Hacking Con #1: You Must Share Your Home/Property
If you’re used to an extremely private and quiet space, purchasing a house hack might feel like it is “cramping your style” a little bit. You may be in a position where you’re sharing common space, outdoor space, or a wall/floor/ceiling with your tenants.
This can be frustrating if you don’t set yourself up for success. This simply means you need to evaluate your tolerance levels for sharing space and search for house hacks that comply with those levels.
For example, if you’re an introvert and hate sharing common space such as living areas and kitchens with other people, don’t purchase a single-family home house hack where you plan to rent out rooms. Instead, search for a house hack that has a separated unit, mother-in-law suite, or Additional Dwelling Unit (ADU).
If you don’t take your personal needs into account and find a house hack that meets them, then you may not want to move forward with the house hack.
House Hacking Con #2: You Must be a Landlord
As mentioned above, being a landlord can feel like a daunting task with a lot of responsibilities at first. This can be intimidating.
Although house hacking is an excellent way to ease into the role and gain extremely valuable real estate experience, it is a “baptism by fire” path to becoming a landlord in the sense that you instantly become a landlord by nature of the house hack setup.
If you’re not fully comfortable managing expectations with others, enforcing rules, managing home repairs, etc., this can be a con that prevents many from following through with a house hack.
House Hacking Con #3: You Have More Work
House hacking provides an excellent stream of relatively passive income. However, it doesn’t come without work. If you’re currently renting a place, there is a good chance that you don’t have to worry about much (or any) of the maintenance.
This is sure to change as soon as you become a homeowner as you will be responsible for at least facilitating needed repairs, landscaping, general maintenance, etc.
If you are currently a homeowner and looking to turn your house into a house hack or purchase a new house hack, you have an idea of what added work comes along with a house. However, you’ll have the added work of filling rooms/units, managing tenants, and keeping your financial books in order.
In the grand scheme of things, the amount of added work isn’t intense, but it is additional time that you need to contribute so that your house hack is successful.
House Hacking Con #4: House Hacking Doesn’t Scale
I believe house hacking is a great way to get into real estate for all of the pros listed above.
That being said, house hacking is not a scalable real estate investment strategy. Sure, you optimize your salary and lifestyle so that you can acquire and move to a new house hack approximately once per year, but you can only get to about 10 properties by doing that due to lending norms for primary residences (it would also take you 10+ years to acquire those 10 properties).
Because of this, you won’t be able to use house hacking as a strategy to quickly scale a real estate investment portfolio.
House Hacking Con #5: Moving
Few people find moving to be a fun, leisurely experience.
Most find it to be a time-consuming, labor-intensive process.
Because of that, moving from your current location to a new house hack can put a lot of people off. Additionally, if you plan to do multiple house hacks as a way to get started in real estate, you’re signing yourself up for more moves than you would make otherwise.
This, in and of itself, can prevent a lot of people from moving forward with a house hack. Be sure to measure your tolerance for moving, and then (and this is important) measure it against the benefits of house hacking. Is it worth the short-term inconvenience for you?
House Hacking Con #6: Risk
Purchasing a home is expensive and will likely require you to take a substantial loan.
With a home loan comes substantial risk. If the market can’t generate the rent you expected, or you have to…
House Hacking Pros and Cons Conclusion
Hopefully, these 10 House Hacking Pros and Cons have been helpful in either reinforcing what you already suspected or introducing you to new considerations as you contemplate house hacking.
House hacking is a significant undertaking, and it deserves ample research and consideration. After all, if you purchase a house hack without having solid numbers to back your decision, or you aren’t financially prepared to take on the unpredictable costs that can pop up with homeownership, a house hack can be a very bad decision.
That being said, if you have done your research and have all of your ducks in a row, I believe the pros of house hacking outweigh the cons of house hacking. In fact, you can read a short reflection post after I moved into my second house hack here: Is house hacking worth it?
At the end of the day, it all depends on your personal situation. Talk with professionals, mentors, and advisors to help determine if house hacking is a good strategic move for you in your Examined Wealth journey.