House hacking is a strategy used by real estate investors to purchase a small multifamily property, such as a duplex or a triplex, and live in one unit while renting out the others. One of the major benefits of house hacking is the potential for a great return on investment.
Appreciation
One way to achieve a high return on investment with house hacking is through leveraged appreciation. By putting down a small down payment and financing the rest of the purchase with a mortgage, you can take advantage of the property’s appreciation without having to pay the full cost upfront. This allows you to earn a return on the appreciation of the entire property, rather than just your down payment.
Cash Flow
Another important part of the return on investment with house hacking is cash flow. By renting out the other units, you can generate passive income that can offset the cost of homeownership and potentially even provide a profit. This cash flow can provide a steady stream of income that can be used to pay down the mortgage, invest in other opportunities, or cover living expenses.
Taxes
Real estate also offers a number of tax advantages that can further boost your return on investment. For example, the qualified business income deduction (QBID) allows real estate investors to deduct up to 20% of their rental income from their taxes. Additionally, real estate can be depreciated, which means that you can claim a deduction for the wear and tear of the property over time. This can help to lower your taxable income and increase your overall return on investment.
Loan Paydown
Finally, real estate can be a great investment through loan paydown. As you (or your tenants) make mortgage payments, you are paying down the principal balance of the loan, which means that you are building equity in the property. When you eventually sell the property, this equity can be a significant portion of your return on investment.
In summary, house hacking can be an amazing investment due to its potential for leveraged appreciation, cash flow, tax advantages, and loan paydown. By carefully considering these factors, you can make informed decisions about whether house hacking is a good fit for your investment goals.