House Hacking- really as beneficial as many say?

[Will Dennis]

Hey guys!

Got a question about house hacking. So pretty much everyone says that house hacking is the ideal first investment, but being someone who often questions conventional wisdom, I have a few questions about this. I feel my question would best be illustrated as an example.

Let's say in our example that Joe rents his current single family home that only he lives in for $1,000/mo. Let's say he purchases his first investment property- a duplex. Let's say each side also rents out for $1,000 a month, and the mortgage is $1,000.

Is there any benefit to Joe actually moving into the property and choosing to house hack? As I see it, Joe has two options, which I will outline below.

Option A allows Joe to pay $1,000/mo. in rent, stay in his current home, and collect $1,000/mo. from each of his duplex renters, totaling $2,000. In this scenario, Joe would have $2,000/mo. in income from his renters, and $1,000 going out for his own rent, leaving him with $1,000 to put towards the mortgage each month. He breaks even.

In Option B, Joe can "house hack" by moving out of his currently rented home and into his newly purchased duplex, receive $1,000 from one renter compared to the two in Option A, which he uses to pay his mortgage. Again, he breaks even.

If Joe breaks even in both scenarios, if he prefers to pay to rent in his current home for whatever reason, is there really any benefit to house hacking from a financial standpoint? Further, if many new investors live in their duplex for a year or so and move out anyway so they can rent both units out, why not just skip the middle step and go with renting both units out as their initial investment strategy?

I guess what I don't understand is how "house hacking" where you live in the property is really of any great benefit when compared to just renting out both units- especially considering the breakeven outcome of both scenarios listed above.

Thank you all in advance for reading and for any answers you might me able to provide!

Will

[Christopher Giannino]

@Will Dennis

I think there's a couple of things to note about the advantages of house hacking your 1st investment...

1. Qualifying. You need to be able to qualify for the loan. If you go the FHA route (which many house hackers do), I believe FHA will count 75% of potential rents towards your purchasing power so in theory it could be easier to qualify for the loan because you can afford more on paper. If you don't use an FHA loan, some lenders will only count that 75% of potential rents if you have 2 years of land lording experience.

2.  Low Downpayment. Like I said above, many investors start house hacking because they can utilize FHA loans. FHA loans allow for a smaller down payment, usually as low as  3.5%.  If buying a MFH as strictly an investment, many lenders have different overlays and therefore will require a lot more down.  I talked to a lender a couple of months ago and they required a minimum of 25% down on  MFH investment properties. 

3. Rate. FHA and owner occupant loan rates tend to be better than rates on strictly investment properties. Also if you're a First Time Home Buyer, you might be eligible for special grants.

4.  Management.  You're living on site and therefore will hopefully be able to manage more effectively.  You'll see things day to day and might be able to correct things before they become huge issues.

5. Tax Incentives.  There's more tax incentives given for owning properties then renting so you could potentially be missing out on tax breaks.