Housing is most people’s biggest expense. On average, Americans spend 37% of their take-home pay on rent or their mortgage, which doesn’t leave much room for saving after their other bills are paid.
The rising cost of housing is making it harder for the average American to build wealth. But luckily there’s a way to get your housing costs down so you can invest more of your salary.
It’s called house hacking, and it involves renting out a portion of your home to cover some or all of your monthly mortgage payment. To help you get started, here’s an overview of what house hacking is and how to pull it off.
What is House Hacking?
House hacking is a popular way to reduce or even eliminate your mortgage payment. By renting out parts of your home to tenants, you’ll be able to generate enough revenue to offset or completely cover your housing costs.
You’ll also be able to earn rental income without the costly mortgage rates that come with investment properties. Many banks require investors to put 20% or more down on the real estate they buy. Lenders also charge 0.5% to 0.75% higher interest rates for investment properties than primary residences.
But by living in the home you’re renting out, you’ll be able to put down as little as 3% and qualify for the lower interest rate associated with primary residences. That’s why some investors live in their rentals for a year or two before moving on and buying another property.
It’s usually easiest to house hack by purchasing a multi-family property with several rental units rather than a single-family home. Houses that have multiple apartments typically earn more rental income. You’ll also have more privacy if you go the multi-family route because you won’t be sharing a house with your tenants.
But if you already own a single-family home or condo, that doesn’t mean you have to move to house hack. You can rent out your spare bedrooms or basement to offset your housing costs and build equity. It might be a little awkward to live with tenants, but it’s worth it to save a big chunk of change on housing.
If you don’t have any extra space in your home, you can even generate extra income by putting up a tent or yurt on your property and renting it on Airbnb. Believe it or not, travelers may be willing to pay to go camping in your backyard, especially if you live in a scenic area.
How Can House Hacking Help You Build Wealth?
House hacking can help you build wealth by increasing your home equity and freeing up some of the money you’re currently spending on housing. This will enable you to invest a bigger portion of your income and have a more comfortable retirement.
Even if you only rent out a spare bedroom and earn a couple of hundred dollars from house hacking, that money will really add up over time thanks to compound interest.
Say you’re able to invest an extra $500 per month over the course of your 30-year mortgage because you rent out your basement. If the money you invest earns 8% interest, you could have an extra $679,699 in retirement.
You can even continue to rent out your home after it’s paid off to give you an extra passive income stream in retirement.
Some financial experts believe that homeownership isn’t a good investment. They argue that residential real estate doesn’t appreciate enough to cover all the maintenance and insurance costs that come with owning a home. In the end, they think you’d earn more by renting and investing the money would’ve spent on home maintenance in the stock market instead.
But with house hacking, you don’t have to choose between owning a home and investing. Renting out your spare bedroom can help offset the costs of homeownership like mortgage payments and property taxes so you can fully fund your retirement account. You’ll even qualify for a lower interest rate and down payment because the home you’re renting out to tenants is also your primary residence.
If you decide to move, you can keep the home as part of your investment portfolio. You can even continue to rent it out after it’s paid off and earn passive income for life.
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