For many Canadians, owning real estate requires creativity – and House Hacking is a creative solution. Through House Hacking, you could reduce or eliminate your monthly housing costs entirely. In this article, we digest what House Hacking is and its advantages and drawbacks. If done right, you could be on the road to living in your home for free.

What is House Hacking?

The goal of House Hacking is to cut your living expenses while you build home equity. The premise is to purchase a larger home than you need so you can rent out the remaining space and act as a landlord. Your tenants’ rent should cover the full or a substantial amount of your mortgage payments. All the while, it’s you who builds equity in the property.

What goes into house hacking?

House Hacking starts as soon as you look for a property – you must find a home you can live in and rent out. Some House Hackers opt to purchase a duplex or triplex or a home with a basement apartment. But you can simplify it further. For example, you can rent out an extra room in your house to start your House Hacking journey. The tenant’s rent in that other room, basement or unit goes toward your mortgage payment. Thus, you’re effectively building equity in your home for free!

When buying a home, you’re not only looking for your primary residence but an investment property. Therefore, you want to consider your neighbourhood and how you can renovate the property. University towns are great areas to look at, as they consist of student renters who are often ideal tenants. You’ll also want renovations that aren’t specific to your taste and appeal to the general population.

What rental income can I plan for?

Of course, for house hacking to work, you need to plan how much you can earn in rental income. That is very dependent on where you House Hack. Vacancy rates are tightening after they fell during the pandemic’s peak, so conditions are becoming more favourable for landlords. In many Canadian markets, you can expect at least $1000 of rental income, and in peak metropolitan areas like Toronto or Ontario, you may be able to get $2000 monthly. To determine how much you can earn, but sure to do research localized to the region you are looking to buy in.

You have to put your investment before your comfort

House Hacking is time-consuming and full of upfront costs

Purchasing a home is hard. It’s even harder when you’re trying to buy a larger home so you can House Hack. There will be costs that you will have to pay upfront, including a down payment, lawyer fees and realtor commissions. Additionally, you’ll likely need to renovate the property to make it desirable to tenants. Renovations will further take time, and it can be a stressful process for some. If you don’t have the time or capital for these upfront costs, then House Hacking may not be suitable for you.

House Hacking means being a landlord is your new part- or full-time job

The idea of your mortgage payments being paid by a tenant seems amazing. However, you want to remember that you’re a landlord, which will take up a sizeable part of your week. Despite what some believe, being a landlord is a job and requires attending to particular duties. You must prepare to find tenants, draft leases, and manage ongoing tenant issues and maintenance requests.

Because you’re living with your tenant, a rigorous tenant selection process is more important than ever. You’re not just looking for someone to pay your mortgage; you’re looking for someone to cohabitate with.

Property management is much easier when you live there

On the flip side, property management can be challenging when you’re far away. Often landlords may live in a city but have investments across the province. If a toilet’s clogged at 2 AM, a landlord often can’t just get out of bed and drive over. Calling a plumber or other professional to remedy the situation may also be expensive or challenging. This issue doesn’t exist when you House Hack because you live with your tenant. If there’s an issue at 2 AM, it’s a matter of going downstairs or to the other unit.

Tax considerations have both pros and cons

There are both tax benefits and disadvantages to House Hacking. In terms of benefits, House Hacking lets you deduct the costs of being a property owner, such as property taxes, house maintenance, utilities, and interest payments.

In terms of disadvantages, the Canadian tax system will not allow you to claim the whole property for your principal residence exemption—only for the areas of the home you live in. This is easily calculated if you’re in a duplex, triplex, or renting a basement apartment. But more complex situations such as a tenant that shares a kitchen and bathroom can create confusion about your tax bill. In this case, it is best to talk to a tax professional to see how much you can deduct and how much you can owe.

Final thoughts

House Hacking is a way to buy property while minimizing your financial expenditures. However, it’s not as simple as getting a “Get a House for Free Card.” It will take time and money, and whether you have enough of both to reap the benefits of House Hacking is dependent on your situation.

The post How a House Hacking Strategy in 2022 can reduce your Housing Costs to Zero first appeared on RankMyAgent - Trusted resource about Buying, Selling and Renting.

In this article, we digest what house hacking is and its advantages and drawbacks. If done right, you could be on the road to living in your home for free.

What is house hacking?

The goal of house hacking is to cut your living expenses while you build home equity. The premise is to purchase a larger home than what you need so you can rent out the remaining space and act as a landlord. Your tenants’ rent should cover the full or a substantial amount of your mortgage payments. All the while, it’s you who builds equity in the property.

What goes into house hacking?

Some house hackers opt to purchase a duplex or triplex or a home with a basement apartment. But you can simplify it further. For example, you can rent out an extra room in your house to start your house hacking journey. But keep in mind during the home purchase process that you’ll be house hacking so you can plan.

When buying a home, you’re not only looking for your primary residence but an investment property. Therefore, you want to consider things like your neighbourhood and how you can renovate the property. Areas with post-secondary institutions can potentially reward you with student renters who are often ideal tenants. You’ll also want renovations that aren’t specific to your taste and appeal to the general population.

Unlike BRRRR, house hacking doesn’t require that you find a gem of an undervalued property. Generally, your goal isn’t to be profitable but to reduce your monthly expenses. But, it’s still important not to overpay for a home and to find the best deal available.

Build equity in your property with fewer costs

Whenever you make a mortgage payment, part of the payment goes towards the principal of the loan. By renting out part of your home, you can make this payment with less of your own money, in that you’re using someone else’s money—the rent from your tenant. Thus, you’re effectively building equity in your home for free!

Begin your real estate investment journey

While capital is also an issue, individuals commonly fear real estate investing because of their lack of knowledge. To be a real estate investor and landlord, you need to understand the role’s financial, legal, general contracting, and other aspects.

However, house hacking ignites your learning because you begin to act as a landlord and real estate investor on a small scale. If you continue to invest in real estate, you’ll already know how to find and manage tenants and attend to many legal and financial situations.

Property management is much easier when you live there

Property management can be challenging when you’re far away. Often landlords may live in a city but have investments across the province. If a toilet’s clogged at 2 AM, a landlord often can’t just get out of bed and drive over. Calling a plumber or other professional to remedy the situation may also be expensive or challenging. This issue doesn’t exist when you house hack because you live with your tenant. If there’s an issue at 2 AM, it’s a matter of going downstairs or to the other unit.

Your quality of life may be reduced

If this is your first home, you want to make the house really feel your own. But when you house hack, this may not always be possible. For example, House hacking may mean you have a tenant in the bedroom beside you or that you can’t use your basement because it’s currently a rental apartment.

There are tons of upfront costs and work

Purchasing a home is hard. It’s even harder when you’re trying to buy a larger home so you can house hack. There will be many upfront costs for a down payment, lawyer fees, realtor commissions, and more. Additionally, you’ll likely need to renovate the property to make it desirable to tenants. Renovations will further take time, and it can be a stressful process for some. If you don’t have the necessary time or capital to manage it, house hacking may not be for you.

Being a landlord is a part- or full-time job

The idea of having your mortgage payments primarily covered by a tenant seems nice. However, you want to remember that you’re a landlord now. Despite what some believe, being a landlord is a job and requires attending to particular duties. You need to prepare for finding tenants, drafting leases, and managing ongoing tenant issues and maintenance requests.

Because you’re living with your tenant, the renter selection process is more critical than usual. Remember, this person isn’t only a monthly cheque but someone you’re living with or living beside.

Tax considerations have both pros and cons

There are both tax benefits and disadvantages to house hacking. On the pros side, house hacking lets you deduct the costs of being a landlord, such as property taxes, house maintenance, utilities, and interest payments.

However, the Canadian tax systems won’t allow you to claim the whole property for your principal residence exemption—only for the areas of the home you live in. This is easily calculated if you’re in a duplex, triplex, or renting a basement apartment. But situations such as a tenant that shares a kitchen and bathroom with you make it more complex. It’s best to speak to an accountant or tax professional to understand where your tax liabilities lie.

Final thoughts

House hacking is a great way to build equity in your home while reducing your monthly costs. However, there are many advantages and disadvantages to it, and it’ll depend on your circumstance whether it’s a right fit for you.

The post How House Hacking Can Reduce Your Housing Costs to Zero first appeared on RankMyAgent - Trusted resource about Buying, Selling and Renting.