You’ve probably heard here on BiggerPockets that house hacking is one of the best ways to jumpstart your real estate investment journey, and that is certainly true! I would argue that it is also one of the best ways to hedge against a recession.
Recession fears and predictions are a healthy portion of our daily news cycle in the latter half of 2022. The Fed has explicitly stated that they will curb inflation at all costs.
As investors, we have felt the initial impact of these actions through mortgage rate hikes and losses in the stock market. But on the consumer level, this hasn’t translated to people’s wallets and monthly budgets on a wide scale just yet.
Soon, there will be less money circulating in the marketplace, leading to budget cuts and layoffs. When this happens, everyday people look for ways to make supplemental income and cut their expenses, which is a great place for house hacking to enter the picture.
Less Than The Rest
From a pure real estate point of view, when purchasing a new primary house in a market downturn, house hacking will allow you to have a better financial picture month-to-month than anyone else paying market rates. High mortgage rates, like the ones currently sitting at 7% at the time of this article, hurt. But they hurt less when someone else is helping you pay the mortgage.
Real estate investing is all about making the next best move available to you. I’ve seen buyers have more negotiating power in the last month than in my entire real estate career. Experts like David Greene have mentioned multiple times in the last few months that this is the most fun he’s had investing in real estate in years because of the opportunity to get deals he’s excited about.
While many buyers will sit on the sidelines and “wait for the market to get better,” house hackers have the opportunity to get in and have help from roommates or short-term rental guests to pay an intimidating mortgage. You have the opportunity to pay less than the rest to build your real estate portfolio, build equity, and let real estate start having its compound effect via appreciation, debt paydown, and rental appreciation over time.
Options and Opportunities
Another perk of house hacking is its flexibility and options for the homeowner. The highest and best use from an income standpoint would be to utilize a short-term rental strategy. If a harsh recession comes to fruition, the short-term rental market could be one of the first to be affected, resulting in less occupancy and lower nightly rates. A house hack has the opportunity to pivot to a long-term rental or a rent-by-the-room strategy to counteract the effects of a recession and still provide consistent monthly income from the property.
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As alluded to in the previous section, although interest rates will keep many home buyers and would-be investors on the sidelines, house hacking affords the opportunity to get into a property despite a higher mortgage payment. House hackers will have the chance to afford payments now and then refinance down the road to an optimal rate and increase cash flow.
House hacking also presents options for multiple exit strategies. If you are interested in house hacking, you probably don’t want your first house hack to be the last property you buy. House hacking presents multiple options for next steps. You can move out and transition it into a true rental property, sell and redeploy the equity you’ve built, or just simply stop house hacking the property and make it your own.
Affordability
When budget cuts and layoffs start happening, people living off of single incomes or couples barely making rent won’t be able to afford the posh apartment in the hip neighborhood within walking distance of a coffee shop. They will have to look for roommates and cut down on their living expenses.
House hackers are uniquely positioned to fill up their rooms during a downturn. People who usually wouldn’t consider sharing a living space are forced to consider it. With most house hacks offering a bedroom or a basement unit, you offer a cheaper alternative while they weather the economic storm, and they provide a stable income for you during the same trying economic times. Not only is it cheaper for an owner to purchase and finance a house hack property, but it also presents renters with more affordable options as well. House hacking presents win-win situations during a recession.
Final Thoughts
Every investment has a certain degree of risk. House hacking is one of the least risky ways to acquire more real estate. That’s why it’s talked about so often and is the crowd favorite to get into the investing game. Incorporating the same idea of less risk to get into a property, this strategy also presents less risk during uncertain economic conditions. Looking to get into real estate investing or continue growing your portfolio during the looming recession? Strongly consider giving house hacking a try.
Put Your House to Work
Discover why so many successful investors use the house hacking strategy—and learn from a frugality expert who has “hacked” his way toward financial freedom. Serial house hacker Craig Curelop lays out the in-depth details to make your first (or next) house hack a huge success.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.