What if we told you there are property owners with mortgages who live in their properties at zero net cost?
These owners have been able to use the home they live in to reduce their housing costs to zero. In some cases, they have also been able to create a positive cash flow for themselves.
How is this possible?
The secret is a real-estate strategy called house hacking.
What Is House Hacking?
When you rent out a portion of your residential property to generate income that can be used to pay off your monthly expenses and mortgage repayments, it is known as house hacking.
Buying a duplex/triplex to rent one or two floors while living on one could be a way to start house hacking. You could also rent out your garage or any spare rooms in your house.
A popular arrangement is to design your property so that the building has different entrances on each floor, giving privacy to both you and your tenants while you share the house.
People may use a house hacking strategy to gain additional financial independence or live in expensive areas they otherwise could not afford.
In areas where rents are as high as mortgage payments, it might even be possible to completely offset your monthly repayments and other expenses, and create a positive cash flow for yourself.
What Are The Advantages Of House Hacking?
- You will lower your monthly housing costs by covering expenses using revenue generated by renting out portions of your house.
- You have a chance to completely write off expenses such as insurance, car payments or maintenance fees.
- You can divide your utility bills among the number of tenants you have, reducing the cost for you.
- You can potentially get into the real-estate market sooner and also learn how to be a landlord.
- You can pay off your mortgage faster using the rental income and invest the equity in a second property.
What Are The Disadvantages Of House Hacking?
- You will not get any additional tax deductions, as they are not available for owner-occupied houses.
- You might have to pay capital gains tax on the value of the portion of the house you have rented out when you sell it.
- You will compromise your privacy to a certain extent when you share a house with other people.
- You will have to take on some extra work as the landlord, such as general maintenance and repairs for the tenants.
- The rental yields will differ according to the location of the house. In some areas, it might not be enough to cover your expenses.
Is House Hacking Legal In Australia?
Yes, you are allowed to rent out portions of your house.
Is House Hacking A Profitable Investment?
House hacking is profitable if you can offset enough of your homeowner expenses using the rental income from your property. This will depend on your unique circumstances.
Tax implications will have a big impact on whether your house hacking is profitable. You’ll need to show any rental income in your tax returns but you can claim tax deductions on your mortgage interest and on expenses such as council rates, utility bills and maintenance fees for the percentage of the house you’ve rented out.
On the downside, you will have to pay capital gains tax when you sell the property, in addition to other selling costs. The Australian Tax Office will assess your situation to decide how much CGT you will have to pay when you sell.
CGT can be enough to negate all of your rental income. So if you plan to sell your house in the future, make sure to call your accountant to estimate your CGT before you begin house hacking. Rental yields are much lower than mortgage repayments in many areas. There is a fairly high chance you will not be able to cover all your expenses using the rental yield alone.
Calculate your monthly rental yield and compare it with your estimated housing expenses to see whether house hacking is a profitable investment for you.
Getting the help of a financial adviser before making any decisions related to housing is important to ensure the profitability of the move. Get the help of Home Loan Experts. Call us at 1300 889 743 or fill out this free enquiry form.