Sounds a little sketchy doesn't it? This is something that makes complete financial sense. The issues arise when it doesn't make "family" sense given your circumstances.
What is House Hacking?
The simple definition of house hacking is buying a multi unit property such as a fourplex (a 4 unit apartment building), living in one of the units and renting out the other units. Oftentimes, the other units will pay your entire mortgage and you live basically rent free all while putting a 3.5% down payment.
Why Does it Make Financial Sense?
Traditionally, to qualify for a typical investment property loan, you will probably have to put at least 20% down payment towards your purchase. If you are buying a $400,000 fourplex that means you'd have to come up with $80,000 cash to put towards your down payment. And the interest rates for investment properties are typically a bit higher than your primary residence. If your primary residence interest rate is 4%, then an investment property loan will probably be 4.75-5%.
Here is where things get exciting. When you follow this house hacking strategy and purchase a multi-unit property such as a fourplex for your next primary residence, and plan to live in one of the units, you get the benefits of primary residence loan interest rates as well as minimum down payment requirements. So let's say you find a fourplex that you would feel comfortable living in and renting out the other three units. You can purchase this fourplex using a minimum down payment of 3 1/2% for FHA loans and 5% conventional loans. So if you are purchasing a $400,000 fourplex, instead of having to come up with an $80,000 down payment, all you need to do is come up with a $14,000 down payment. AND the interest rate you will get will be much lower than the interest rate issued for investment properties because you are living in the property as your primary residence (banks view it as less risky if you plan to live in the property).
Once You Purchased It, Then What?
Once you have purchased your fourplex and have lived in the property more than one year, lending guidelines allow for you to move out. So basically sacrificing to live in a fourplex for at least one year allows you to purchase a the investment property with minimum down payment, a lower interest rate, and live virtually rent-free for that year. You can then move on and either repeat the strategy or buy your single-family home and have an income producing property for as long as you would like.
Why Don't More People Do It?
Simply because it is a sacrifice. Typically, families are looking to purchase a single family residence to live in long-term. It is not convenient to live in an apartment for an extended period of time and there is the hassle of managing the other tenants in the building as well. While this investment strategy is not for everyone, those do it, will experience the financial benefits.
Personally, I'm following a different strategy - purchasing a fixer-upper with great potential, living in it for a few years while fixing it and then selling and repeating the process. That doesn't mean that I don't believe in the house hacking strategy. On the contrary, it makes MORE sense than the fixer upper strategy. I actually tried to convince my wife to House Hack but due to our growing family circumstances she decided it would be better to buy and live in a fixer-upper. This aligned with our family goals a little bit better and was a lot easier on the comfort zone of my wife. More on the fixer upper strategy later.
Interested in learning more about this strategy, let me know!