by Marco Di Gabriele
You want to buy your first home but you don’t know if you can afford it. Paying rent is one thing, but committing to a mortgage payment every month can be much scarier.
“House hacking” has become very popular amongst first time homebuyers who want to buy a house while offsetting some of the costs of their monthly mortgage payment.
What is “house hacking”?
The concept is simple, buy a house that you can live in and rent out part of it to make your monthly payment more affordable.
Essentially there are two ways that people typically “house hack”.
The first strategy consists of purchasing a house with multiple bedrooms & renting out a few of the bedrooms to roommates who will help to cover your mortgage payment.
The second strategy, for those who don’t want roommates, is to purchase a multi-unit property and live in one unit while renting out the other unit or units.
I know multiple people who are currently “house hacking” and it works out really well.
How does it work?
As an example, I want to break down some numbers to show you how this can work for you.
Lets say you purchase a renovated 3 bedroom single family house in South Philadelphia for $275,000.
You put down a 3% downpayment, roughly $9,000.
You monthly payment with taxes & insurance would roughly equate to $1,650 per month
You can rent out 2 of the bedrooms for $600 each, which comes out to $1200 per month.
Now, every month you are putting that $1200 towards the mortgage & monthly payment and you’re left paying $450 a month to live in a brand new home.
The best part, is instead of paying $450 to a landlord, you are paying yourself every month in equity.
What are the advantages?
The main advantage of "house hacking" is that with limited funds, you can become a homeowner and still pay less than you would renting somewhere in the city.
When you rent, the money that you spend on your rental payment each month is completely lost. It goes into your landlords pocket and he/she uses it to pay the mortgage on the house that you are living in. As a homeowner, now your monthly payment builds equity in an asset that you own.
When you own a home, you also have the ability to take advantage of appreciation. If you purchase a property in an are that is appreciating, it is likely that in the future you will be able to sell your home for a higher price than the price that you purchased it for.
Additionally, owning a house has a number of tax benefits associated with it. Homeowners can deduct both mortgage interest and property tax payments as well as certain other expenses from their federal income tax. Homeowners may also exclude, up to a limit, capital gains that they realize from the sale of their home.
All in all, "house hacking" is an great strategy for first time homebuyers who don't mind living with a few roomies to help carry their monthly costs.
