Pros and Cons of Multi-Family House Hacking
What is multi-family house hacking? Think of it as a financial “hack” that may help you live free or nearly free in your property. Sounds ideal, doesn’t it? It can be a smart solution aimed at saving you money and generating a stronger return on your real estate investment. What could possibly go wrong!
Usually, when you ask, “What could possibly go wrong?”, something inevitably goes sideways! House hacking is not without its downsides. As a savvy investor, make sure you are fully aware of the pros and cons before entering into a multi-family house hacking situation. Your potential tenants, your family, and your portfolio will thank you!
First, what is house hacking? Say you purchase a multi-family building. You live in one unit and rent the others out. This allows you to pay some or even all of your living expenses via the rental income these units generate. And there are a lot of checks in the PLUS column:
- Income generation. In many cases, you can earn income over and above your monthly expenses. This allows you the flexibility and freedom to save, pay down your mortgage, or reinvest funds into building projects, upgrades, and/or other properties.
- Favorable lending terms. You may qualify for an advantageous FHA loan. These funding vehicles are backed by the Federal Housing Administration, which significantly reduces the risk for lenders. In turn, they extend more favorable terms, including a smaller down payment, less stringent credit requirements, and lower interest rates.
- Tax deductions. Many of the repairs and upgrades you complete on your multi-family housing property can be deducted. This can help take the sting out of tax time!
- Landlord training wheels. If this is your first rental property, you will gain the experience necessary to advertise units, screen tenants, handle resident concerns, adhere to a maintenance schedule, keep accurate books and records, negotiate contracts – and brush up on your middle-of-the-night crisis plumbing skills.
Living on the premises can help you stave off small issues (e.g. repairs) before the grow into major headaches.
- Investment experience. Again, if this is your first investment property, you can learn the ins and outs while living on in the building. When you venture out to secure funding for future investment projects, lenders will look favorably upon this experience. Your chances of nabbing bigger loans and better rates are much greater.
But let’s return to the big question: what could go wrong? In the MINUS column:
- Constant access. When you live on the property, many tenants view you as having 24/7 accessibility. Now, you should always respond promptly and proactively to concerns, night or day – but constant knocks on the door when you’re sitting down for dinner or relaxing after a long day can get old when boundaries are blurred.
You could have a minor repair scheduled for the next day, for example: a tenant may see you “lounging” around and wonder why you are not working at nine o’clock at night!
- Tenant disagreements. Having to mediate a dispute between people who live next to you or having to pursue eviction or other action with a “neighbor” is awkward to say the least. Careful tenant selection is key to avoiding this touchy issue.
- Construction zone. If you need to complete renovations or extensive repairs on the property, you are living in the midst of a construction zone.
Do the pros outweigh the cons? Approach multi-family house hacking with a clear set of expectations – and a clear sense of reality!