As much as has been written on this blog about investment properties and house hacking, there seems to still be a lot of confusion in regards to which asset class best fits in people’s lives. I see this question discussed on the forums quite a lot.
With this in mind, I am going to try to identify some of the key perspectives and elements on both, in hopes of helping you make the most intelligent decision.
Why Asset Class?
Note that as I compare purchasing rentals to purchasing a house hack, I am not referencing techniques, but rather asset classes. Let me explain.
A lot of the confusion and hesitation around house hacking comes from the perceived loss of certain home characteristics that many people are hesitant to accept. The loss of privacy is quite real when it comes to house hacking, and so there’s a compromise on location, construction quality, age, and amenity package. This makes it hard for lots of you to justify giving up so much in life just so you can save a few bucks.
Are You Moving Into A Rental?
The dynamic I described above stems from the fact that people are mistaken about asset classes. The generally accepted norm for a house hack, for example, is to buy a duplex and move into one side while renting out the other side. In this example, you can also substitute either a triplex or a four-plex in place of a duplex.
The thing is — whether we are talking about a duplex, triplex, or four-plex — all of these belong to an asset class I’d refer to as rental. In other words, you, a reasonable human being who works hard and expects your home to be nice, are not intended to move into this asset class and call it home. Not unless you are twelve, and ride your bike to work.
And you know this! This is why you keep wondering whether you should pursue a house hack or simply buy a rental.
You Should Do a House Hack
Presuming you realize that you should be house hacking in a completely different asset class, I say do a house hack. Understand, there is a way to do this without having to make all of the compromises you may be concerned about. However, there are truly too many benefits to what I call a luxury house hack not to do one.
I’ve written about luxury house hacking quite a bit over the past year (since I am doing it), most recently in this article. I don’t want to rehash the details of my house hack here. However, let us ponder all of the strategic advantages a luxury house hack represents.
1. They’re Easier to Manage than Rentals
A luxury house hack is infinitely easier to manage than a rental. First of all, since we are talking about a vacation or corporate rental, the quality of tenant is lightyears ahead of what you would expect in a rental. Secondly, these are short-term rentals, which means you’ll never have to sign a lease. This means that you will never be faced with needing to evict someone living next door.
Finally, if you utilize websites such as Airbnb, HomeAway, and VRBO, they will handle all of the financial transacting for you. This not only simplifies life by turning rental income into mailbox money, but it creates separation between you and the tenant. Not a small thing, especially if you are new!
2. More Money than Traditional Rentals
In one of the previous articles I wrote about a concept called velocity of money. Due to higher velocity, you will almost certainly make much more top-line revenue in a luxury house hack than you could in a so-so rental.
3. Competitive Advantage
And, having made more top-line revenue, we have to acknowledge that a lot of your costs will be built in. You won’t have a second set of utility bills, property taxes, and landscaping. This provides for significant competitive advantage, and results in lower operating costs than your competition.
4. Better Lifestyle For You
In order to attract class-A tenants, you have to be in a class-A location. Your options, therefore, are as follows:
• Buy a luxury house hack in a class-A location, and kill two birds with one stone.
What I am driving at is that the reason class-A guests will be attracted to your rental is the same reason you’d want to be there.
With a luxury house hack, you’ll gain a rental that makes more money than a traditional rental — but is easier to manage. Hence my recommendation. However, there are additional benefits!
Not only will luxury house hack provide for more income which is easier to manage, but it will necessarily put you into a class-A location for less money than you’d spend on class-C primary residence.
5. Added Tax Breaks on Your Home
This is the last bullet point. Typically, folks struggle with deductions as they relate to a primary residence. This is even more of an issue post Trump’s tax reform.
In a house hack situation, you will have many options to combat taxes.
I would be very hesitate to recommend you do a traditional house hack. In my opinion, it simply requires you to compress your quality of life to such a great extent. It’s not sustainable. If the choice is between a traditional house hack and buying a dedicated rental, buy a rental.
However, a luxury house hack changes everything. For one thing, you keep your privacy. You will never have to sign a lease, which means you’ll never have to evict. You will make more money than a dedicated rental — and easier. And, by definition, you’ll live in a great location.
If the choice is between a luxury house hack and a dedicated rental, definitely do a luxury house hack!