House Hacking
“House hacking” is purchasing either a multi-family property or renting out a portion of your own property to rent to a tenant. The phrase primarily refers to purchasing multi-family properties typically ranging in size from 2-4 units. For instance say your purchase a duplex and move into one of the two units. You would then rent out the other unit and cover a large portion of your mortgage (sometimes all!). Once you are ready to move on you keep the property and rent out both sides. Below are some additional reasons why to purchase multi-family properties.
Lower Unit Costs
Multi-family units in Fredericksburg, VA typically have lower unit costs than single family homes. The roof, walls as well plumbing (and maybe other systems) are shared effectively lowering the cost. Because they are shared you will have a lower cost per unit meaning you get more for your money! A lower cost per unit equates to more favorable cash flow numbers and return on investment. Depending upon the bank you may even get comparable or lower rates than what would you get on a single family unit. The insurance may be less for multi-family units as well!
FHA Loans
If you house hack you may qualify for an FHA loan. These loans typically carry very low down payment requirements and low interest rates. One downside of FHA is Mortgage Insurance Premium (MIP). This can be balanced out by purchasing a property that needs work and rehabbing it and then refinancing it. If you purchase a property in Fredericksburg, VA the rate of appreciation typically exceeds inflation so you may be able to refinance in a few years to eliminate any mortgage insurance.
Added Income
As for your passive income stream, the more units per property, the overall negative financial impact of vacancies is lessened as well. Typically there are two types of multi-family properties: 2-4 units or units with 5 or more. Many lenders treat units with 5 or more properties as commercial properties and may have stricter lending standards. The major benefit of multi-family properties is the additional amount of people paying your mortgage and expenses, while building the equity in the property you own.
Tax Breaks
A major reason many start investing in Fredericksburg, VA multi-family properties are the tax incentives. Expenses for maintenance and other costs incurred may be deductible and/or depreciable. Deprecation of the building can be a substantial tax break as well. The amount is deducted from the income reducing your overall tax liability. The tax code is complicated surrounding real estate and multi-family properties so consult a tax professional for any questions regarding your tax liability.