House hacking in 2024. A unique opportunity.

As interest rates have risen over the past couple of years, the headlines have overwhelmingly focused on the impact they have had on monthly payments. While prices did pull back temporarily, they have generally remained steady as higher interest rates have been offset by record immigration and a historic lack of inventory.

House hacking is one of the safest and most effective ways of building long term wealth because it allows homeowners to outsource their debt while also giving them the flexibility to pick and choose when to maximize rent vs lifestyle.

House Hacking Examples

1. A single family house with a basement apartment. This is the most common form of house hacking. Basement apartments are cost effective to build and generate strong rents, while leaving the homeowner to enjoy near maximum use of their space.

2. A single family house with a laneway house or garden suite. Similiar to basement apartments, laneway houses allow the homeowner to enjoy maximum use of the main property. While constructing a laneway house is more costly than a basement apartment, the return on investment and immediate cashflow is still strong. The added benefit of a laneway house is that it is a fully detached dwelling and provides maximum privacy for the homeowner.

3. A multi unit house. These type of properties offer the maximum financial benefit for a homeowner. A fourplex home with a laneway house can create a "live for free" scenario where the tenants cover all of the monthly expenses for homeowner. The homeowner has the flexibility to choose which unit to live in depending on the amount of income they wish to generate. For example, they could live in the laneway house and rent out the main house if their focus is on lifestyle. Conversly, they could live in the basement and rent out the rest of the property if their priority was to maximize revenue.

Who should be house hacking now?

Those who own a condo or house and are looking to upsize. The rise in interest rates over the past couple of years provided a pause in what had been an extended period of explosive growth in home prices. In addition to this, the rise in construction costs combined with slower price growth has pushed flippers and speculators out of the market. This has created a unique opportunity for end users to purchase excellent properties at common sense prices. 

Parents who want to responsibly buy a home for their kids. A 2021 study conducted by CIBC found that gifting for downpayments exceeded $10 Billion in 2021. The average gift amount in Toronto was $130,000 for first time buyers and $200,000 for move up buyers. While these gifts cetainly help buyers close on properties, they are often still left with large mortgages and high monthly payments. House hacking is a way to help your kids upsize into their future home, while also leaving them house rich. By outsourcing part, or all of their monthly costs, it will help them build long term wealth while leaving them with the flexibility of expanding their own living space as they feel more comfortable doing so. Remember there is a different between what you can afford and what you should afford.

People who are looking to buy a property with family or friends. (Co-buyer) As real estate prices have skyrocketed across the GTA in recent years, it has made the dream of homeownership seem impossible for many. Co-buying is a solution that will without question see a massive increase in popularity in the years ahead. Purchasing a multi-unit house with a friend or family member presents a myriad of advantages for individuals seeking both financial stability and collaborative living arrangements. Firstly, the cost-sharing aspect allows buyers to pool resources, making homeownership in the city's competitive real estate market more accessible. Shared responsibilities for mortgage payments, property taxes, and maintenance costs lighten the financial burden on each co-buyer. Additionally, the potential for rental income from the multiple units provides a steady stream of revenue, contributing to mortgage repayment and overall investment returns.

Mistakes to Avoid

Timing the market to maximize your current property. Generally speaking, while the value of your current property might not be at its peak price, if you are moving up to a more expensive property, the discount you will receive on the purchase of the new property will outweigh any perceived loss on your current one.

Don’t be afraid of a larger mortgage. If you have tenants helping you pay it, you are actually outsourcing your debt, and this is one of the fundamentals of building wealth. While upsizing and taking on a larger mortgage (especially at the current rates) may be intimidating, let the numbers and common sense guide you. Depending on the property you buy, and how much of it you rent, you may pay less every month than what you do currently, and with the right property, you could pay nothing at all.

Being closed minded about co-buying. At the end of the day, real estate is almost always as much about investing as it is about finding a place to call home. The saying that "fortune favours the bold" wasn't created by accident. The most successful people in the world all have business partners. In fact, almost everyone in world has business partner in the form of spouse. So why is it that when it comes to buying a property, it's either all ours or nothing? Co-buying allows people to potentially enter the market sooner (at lower prices) as well to offset their monthly costs. With the ability to build laneway houses up to 1700 square feet, multiple owners can still create a detached and private living environment where both owners enjoy maximum benefit from the property.

So why is now the time to house hack?

Simply put, the numbers just make sense… regardless of the interest rates.

There are excellent properties selling at attractive prices every single week. As a buyer in this market, you can find a multi unit property where you can live in one of the units and rent out the others. Additionally, you can find an attractive single family home with the ability to build a laneway house for a fraction of buying two separate houses.

These scenarios allow buyers to reduce and sometimes even eliminate their monthly living expenses. In addition, outsourcing debt is one of the most powerful tools to building long term wealth.

In our current market, a condo that is purchased as an investment, would not have it's monthly costs covered by the tenant. Conversely, you can absolutely find a multiplex house that is cash flow neutral or even positive. Moreover, while a condominium can either function as the owner's residence or be rented out, it cannot simultaneously fulfill both roles. In contrast, a multiplex house offers the added advantage of serving as both a home for its owner and an investment vehicle. This is where the opportunity lies.

As a final thought, house hacking doesn't need to be looked at as a permanant living arrangement. It allows homeowners to be flexibile and to adapt their living arrangements to suit their situation and lifestyle.  It also provides ongoing financial security and can contribute substantially to your long term wealth.