House hacking: Making your home pay for itself

ATLANTA - In the past three years, median home prices are up more than 25% while mortgage rates have more than doubled. In the meantime, first-time buyers are struggling to find an affordable house in a seller’s market. 

The American Dream of homeownership seems to be slipping away, but FOX 5 real estate expert John Adams says there's a strategic entry point perfect for beginners: house hacking.

House hacking is a real estate term used to describe generating passive income from renting out a piece of your property while living there yourself.

House hacking isn't a gimmick; it's a well-established strategy that leverages your living situation to fuel your investment. Here's the key: FHA loans, backed by the federal government, offer incredibly attractive 30-year fixed-rate mortgages with a down payment as low as 3.5%. This opens the door to acquiring a four-unit quadplex, a property with the potential for significant value appreciation, even if it requires some initial cosmetic work.

The magic lies in the diversification of income streams. By renting out the three additional units, your tenants effectively contribute towards your mortgage, property taxes, and insurance. But the true brilliance unfolds when you occupy one of the units yourself. The rent you would traditionally pay disappears, essentially allowing you to live for free while building equity in a property with long-term growth potential.

Most mom-and-pop landlords have found that they can retire comfortably on as few as eight or 10 rental units. Just buy one house a year for 10 years, and you’re done! Sounds simple, huh?

Doug Shand ties down his kayak on his vehicle outside the quadplex he has lived in for 3 years. (Photo by Ron Bull/Toronto Star via Getty Images)

Adams says the benefits extend far beyond free rent. House hacking allows you to build sweat equity. Those weekends spent painting, fixing minor plumbing issues, or landscaping translate into a more valuable property. You're not just fixing things; you're acquiring valuable skills that become assets as your portfolio expands.

Another advantage Adams points to is tax benefits. Never forget that taxes are the greatest expense most people will face in their lifetime. And the tax benefits for real estate investors are nothing short of remarkable. In effect, the government is paying you to offer clean, decent, affordable housing, because the government can’t do it themselves.

Tax advantages add another layer of benefit. The IRS offers a wide range of deductions for rental property owners, including mortgage interest, property taxes, repairs, and even depreciation. Consulting a CPA is crucial, but these deductions can significantly reduce your taxable income, further accelerating your financial progress.

Without question, house hacking isn't without its responsibilities. From tenant screening to occasional repairs, there's a management aspect to consider. However, the rewards far outweigh the challenges. You gain invaluable experience in property management, develop a sharp understanding of the real estate market, and build a solid financial foundation for your future.

Adams's advice to renters is this: The journey to owning a home begins with a single, strategic step. That step is education. You can and should learn about real estate.  

Through careful planning, some sweat equity, and the power of house hacking, you can unlock the incredible potential of real estate and become the master of your financial future. Don't wait – seize the opportunity and start house hacking your way to success.

Atlanta native John Adams has been a real estate broker and investor in residential real estate for the past four decades.