How House Hacking Helps You To Buy a House as a Beginner - Kotak Bank
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04 JANUARY, 2023

Property prices have skyrocketed over the last few years in prime areas across India. That does not pose a serious problem for high-earning executives, top sales associates, corporate leaders, and other high-rank professionals. However, average Indians trying to buy a house on a Home Loan find EMI payments challenging. So, those who dream of owning an expensive property in a posh locality prefer to generate income from it (through renting a portion) to pay the high amount of home loan EMIs. This approach is termed, House Hacking. Besides opening the doors to owning a home in expensive areas, it allows more flexibility and creativity for creating financial wealth for the owner. Let’s learn more about this strategy.

How Does House Hacking Work?

House hacking is an age-old strategy for real estate investment that has gained huge popularity in the recent past. It involves buying a property and renting out a part of it to earn money from it. Many use the house hacking strategy to make money from the property they purchase with a Home Loan and use the rent amount to pay their loan EMIs.

A perfect example would be purchasing a single-family home with a housing loan, remodelling the backyard or basement to make a small apartment unit or renting out an extra room to earn money. The rental income earned by the homeowner from the property's rented portion goes towards paying off the loan EMIs and building home equity. In a way, the homeowner gets an extra income source to pay their Home Loan EMIs, and the loan does not disturb their regular financial budget.

Key Features of House Hacking

Here are a few key features of the house hacking strategy:

  • House hacking is a lucrative investment strategy in real estate, aiming to partially or completely offset the owner's Home Loan EMI
  • Small multi-family houses, single-family homes, two-unit duplexes, and three-unit triplex structures are the best options for this strategy.
  • Under this plan, financing the residence with a Home Loan generally becomes less expensive than buying a house in India with savings.

Read Also: How To Invest In Property In India To Make Good Money?

Benefits of House Hacking

Let’s look at a few house hacking benefits worth considering:

  • The strategy lets owners minimise the capital amount tied to their rental property. Many people without enough money use this strategy to invest in real estate and build equity. Once they repay the loan with the rental income, they can save money and buy another property to build their real estate portfolio.
  • Financing the home purchase does not require a huge down payment. Homebuyers can purchase the property on a Home Loan with a small down payment and pay the remaining amount in EMIs using the rental income on the same property.
  • Using rental money to pay off the mortgage reduces personal housing expenses and helps build home equity faster.
  • Tax deductions on the cost of repairs and renovation on the property's rental portion reduce the homeowner's taxable income.
  • House hacking is an excellent way to familiarise a property owner with being a landlord and becoming a successful property investor and manager. Since the tenant lives next door or down the hall, they can immediately address any issues. Many aspiring real estate investors get a chance to learn by doing so and lay a solid foundation for becoming full-time investors.

How Does House Hacking Help Save Money?

House hacking involves renting out parts of a house to generate income that owners use to offset their mortgage costs and other expenses related to owning a property. If done correctly, it allows people to purchase a house, live in expensive areas of the city, or generate income through homeownership. Those who need help to afford a high-priced property use this creative method to buy and manage their finances efficiently.

By adopting this strategy, they can improve their home-buying budget significantly and get some money to save, invest, or pay down their loan EMIs faster. The strategy can help save money in the following ways:

  • Generates revenue from rented-out portions of the property and lowers the monthly costs required for maintenance.
  • Reduces taxable income by acquiring extra mortgage interest deductions and tax write-offs.
  • Adds to the family income and improves their standard of living.
  • Eventually turns a buyer into a homeowner without paying heftier EMIs.
  • Improves the Home Loan borrower’s repayment capacity and ensures timely payment without default.

Another significant benefit of house hacking is that the buyers do not need to make a huge down payment while purchasing the property. It allows investors to save capital for other purposes or purchase more properties.

Seven Steps to Start House Hacking

House hacking for beginners functions much like purchasing another home. However, it emphasises researching the property and evaluating its rental potential. Follow these seven steps to start hacking for the next property purchase:

  1. Save some money for the down payment, improve the credit score, and fulfil the lender’s eligibility and documentation requirements to get the best Home Loan offer.
  2. Get pre-approved for a Home Loan, create an estimate of the loan costs, and qualify for it.
  3. Consult with a good real estate agent, let them know your house hacking goals and let them find a suitable property.
  4. Determine the locality where you want to purchase the property, research its local zoning laws, and find if the RWAs allow renting properties. Moreover, understand the state and local tenant laws in place to avoid any complications in the future.
  5. Finding the right property is the most significant piece of the puzzle. While analysing a property, consider its maintenance costs, rental potential, insurance, operating expenses and property taxes.
  6. After finalising a property, apply for a loan, sign the paperwork, make the down payment, and get possession.
  7. Move into the property and find suitable tenants after conducting their background checks, credit checks, employment verifications, and other required details.

Now that you completely understand the meaning of house hacking and its pros and cons, your final decision to hack is your personal. While the strategy generates income and covers the Home Loan EMI and valuation of house entirely, it requires the homeowners to live and share amenities with housemates.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.