House Hacking vs. Traditional Real Estate Investing: Pros and Cons

house hacking Jan 29, 2025
House Hacking vs. Traditional Real Estate Investing

House hacking is one of the most popular strategies for first-time real estate investors, particularly for those looking to offset their living expenses or build wealth quickly. However, as with any investment strategy, house hacking has its advantages and drawbacks when compared to traditional rental property investing. Whether you’re just getting started or looking to scale your portfolio, understanding the key differences between house hacking and more traditional real estate investing is essential for making the right choice for your financial goals.

In this post, we’ll compare house hacking with traditional real estate investing, outlining the pros and cons of each approach.


What is House Hacking?

At its core, house hacking involves buying a property, living in part of it, and renting out the other part(s) to generate income. Common forms of house hacking include purchasing a duplex, triplex, or fourplex, or renting out individual rooms in a single-family home. Essentially, house hacking allows you to live in the property while your tenants help cover the cost of your mortgage, property taxes, utilities, and other expenses.

What is Traditional Real Estate Investing?

Traditional real estate investing typically involves purchasing a rental property (single-family home, multi-family building, commercial property, etc.) and renting it out to tenants. With this strategy, the investor typically doesn’t live on the property and generates rental income solely for the purpose of profit. The investor is fully responsible for the property’s upkeep and management, but also enjoys the financial benefits of owning a rental property.

Now let’s break down the pros and cons of both strategies.


1. Initial Investment: House Hacking vs. Traditional Investing

House Hacking:

  • Lower Down Payment: One of the main advantages of house hacking is the ability to use government-backed loans (FHA, VA, etc.) that require low down payments—sometimes as little as 3.5%. This makes house hacking an affordable option for new investors who might not have large amounts of capital to invest.

  • Lower Entry Barrier: With house hacking, you’re living in the property, so there’s no need to cover the full cost of the mortgage or property taxes on your own. Rental income from tenants covers a significant portion of your expenses, reducing the financial pressure.

Traditional Real Estate Investing:

  • Higher Down Payments: Traditional investment properties often require 20% or more as a down payment, which can be a significant barrier to entry. Since you don’t live in the property, you’re subject to more stringent lender requirements, and higher down payments are often necessary to offset the risk.

  • Harder to Qualify for Loans: For investors without a primary residence or a long track record in real estate, qualifying for loans may be more difficult, especially when purchasing multiple properties.

Pro for House Hacking: Lower down payment and easier financing.
Pro for Traditional Investing: Potentially higher leverage and larger-scale properties for those with more capital.


2. Risk Exposure: House Hacking vs. Traditional Investing

House Hacking:

  • Shared Living Space: Since you’re living on the property with your tenants, there’s a level of personal exposure to any issues that arise. Tenants may have direct access to shared spaces (kitchen, bathroom, etc.), which could lead to conflicts, maintenance problems, or privacy concerns.

  • Tenant Turnover Impact: In house hacking, tenant turnover can directly impact your quality of life, as you might need to adjust your living arrangements while finding new tenants. While you do have rental income from tenants, the potential stress of sharing your space can be a downside.

Traditional Real Estate Investing:

  • No Personal Exposure: Traditional investors don’t live on the property, so they have fewer personal risks and are less affected by tenant disputes or issues in the property.

  • Tenant Risk: However, traditional investors face risks like vacancies, tenant non-payment, and damage to the property. Since they don’t live there, they may have a harder time quickly addressing problems that come up.

Pro for House Hacking: Direct control over tenant selection and maintenance, along with the opportunity to quickly address issues.
Pro for Traditional Investing: Less personal exposure to tenant conflicts and property issues, with fewer lifestyle disruptions.


3. Cash Flow and Profit Potential: House Hacking vs. Traditional Investing

House Hacking:

  • Substantial Cost Reduction: The biggest financial benefit of house hacking is the ability to reduce or eliminate your living expenses. By renting out part of the property (whether it’s a basement, attic, or an entire unit), your tenants help cover the mortgage, utilities, and other costs. In many cases, your rental income may even generate positive cash flow, allowing you to save or invest further.

  • Slower Wealth Building: While house hacking helps offset your housing costs and can allow you to save money, the total cash flow from the property may be lower than with a larger investment property. You’re only renting out part of the space, so the overall rental income potential may be limited compared to owning an entire multi-unit building.

Traditional Real Estate Investing:

  • Higher Cash Flow Potential: Traditional rental properties often generate more cash flow, especially if you own a multi-family property or several single-family homes. With more units or larger properties, you have a greater chance of generating significant income from rent.

  • More Exposure to Expenses: Traditional real estate investors may have higher property management costs, maintenance, taxes, and insurance. Additionally, vacancies can significantly impact cash flow, and the investor is solely responsible for all costs.

Pro for House Hacking: Reduces or eliminates your own housing costs while building equity.
Pro for Traditional Investing: Potential for higher monthly cash flow with larger properties.


4. Tax Benefits: House Hacking vs. Traditional Investing

House Hacking:

  • Tax Deductions: As a house hacker, you can deduct a portion of your mortgage interest, property taxes, insurance, and maintenance costs, but only for the part of the property that is rented out. For example, if you rent out one half of your duplex, you can deduct 50% of your expenses, such as utilities or repairs.

  • Depreciation: Like traditional real estate investors, house hackers can also take advantage of property depreciation, allowing them to deduct a portion of the property's value each year, further reducing taxable income.

Traditional Real Estate Investing:

  • Full Deductions: Traditional real estate investors can deduct expenses for the entire property, including mortgage interest, taxes, repairs, and property management fees. In addition, they can benefit from depreciation, potentially offsetting rental income and reducing taxable income.

  • More Comprehensive Tax Planning: Traditional investors can implement more tax-efficient strategies like 1031 exchanges, cost segregation studies, and depreciation to maximize their returns.

Pro for House Hacking: Eligible for tax deductions related to the rental portion of the property.
Pro for Traditional Investing: Full tax benefits and deductions for the entire property.


5. Management and Time Commitment: House Hacking vs. Traditional Investing

House Hacking:

  • More Involved: Since you live on the property, house hacking requires more time and effort to manage, especially if you’re dealing with tenant issues. You’ll be directly involved in day-to-day property management, which can be time-consuming but also gives you more control.

  • Learning Opportunity: If you’re new to real estate investing, house hacking can be a great way to learn the ropes while minimizing financial risk. You’ll be hands-on and gain experience with tenant screening, maintenance, and property management.

Traditional Real Estate Investing:

  • Passive Income (with Property Management): Traditional investors who hire property managers enjoy more passive income since they don’t have to deal with the day-to-day operations of the property. However, this comes at a cost (typically 8-12% of the monthly rent).

  • More Time-Consuming (Without Management): Without a property manager, traditional investors must handle maintenance, tenant communication, and rent collection themselves, which can become time-consuming, especially if they own multiple properties.

Pro for House Hacking: Direct involvement offers better control and learning experience.
Pro for Traditional Investing: More passive income if you hire property management.


Conclusion: Which Strategy is Right for You?

Both house hacking and traditional real estate investing offer unique advantages and challenges. House hacking is a great choice for new investors who want to offset their living expenses while gaining experience in real estate. It’s ideal for those who are looking for lower upfront costs and want to live on the property.

On the other hand, traditional real estate investing offers higher cash flow potential, more tax benefits, and fewer personal exposures to tenant issues. If you’re comfortable with a higher upfront investment and want to scale more rapidly, traditional investing might be the better fit.

Ultimately, the best strategy depends on your financial goals, risk tolerance, and how involved you want to be in managing your properties. Whether you choose house hacking or traditional real estate investing, both paths can lead to financial freedom and wealth-building through real estate. Visit the Contact page and schedule a time to meet with Joel Jones, the CEO of Landlord Strategy, today!

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