House-Hacking vs. Turnkey Rentals — Which is Better?
When it comes to beginner-friendly real estate investing strategies, you have a few popular choices. There’s house-hacking, BRRRR, and our bread-and-butter — turnkey rentals. In this article I will compare these two strategies to determine once and for all which is better House-Hacking vs. Turnkey Rentals?
We have written several articles comparing BRRRR to turnkey rentals (here’s the most recent one). Surprise surprise … a company called MartelTurnkey came down on the side of turnkey rentals. But we stand by that judgment even more thoroughly in this time of higher interest rates and inflated costs of materials and labor.
But what about house hacking? How does this popular beginner-friendly real estate strategy compare to turnkey rentals?
What Is “House-Hacking?”
“House-hacking” essentially means living in part of a property and renting out the other part of it.
This might be as simple as buying a 3bed/2bath house, living in the master bedroom, and renting out the other two bedrooms to “roommates.” It also might include buying a duplex, triplex, fourplex, or house with an ADU (accessory dwelling unit — a back-house, garage apartment, or granny flat). You live in one unit, your tenants live in the other unit(s).
What’s the “hack?” The fact that your tenants basically pay your mortgage with their rent (or at least part of it) while all the while you’re building equity and growing your net worth as the property owner.
Pros of House-Hacking over Turnkey Rentals
Lower Down Payment
As an owner-occupied property, this kind of deal qualifies for conforming homeownership loans — Fannie Mae, Freddie Mac, even FHA and VA loans (the latter for military personnel or their family members).
These loans allow you to put 10% down or less. For FHA loans, it’s as little as 3.5% down. VA loans — 0% down. That’s a low barrier of entry. Compare that with a conventional investment property loan — you usually have to put 20% down at minimum.
Easy to Self-Manage
Because you live on the property, it’s easy to meet and screen tenants, respond to maintenance requests, collect rent, serve notices, and otherwise manage the property yourself. I.e. no property management expense.
The Homestead Tax Exemption
If you live in your property for at least two out of the last five years and sell it for a profit, up to $500,000 of that profit can be exempted from capital gains taxes under the Federal Homestead Exemption. That’s a lot of money you can potentially shield from taxation.
Cons of House-Hacking over Turnkey Rentals
Private Mortgage Insurance
Yes, you don’t have to save as much money to buy an owner-occupied home … but if you put less than 20% down, you are on the hook for an extra expense called private mortgage insurance (PMI).
This payment doesn’t contribute to the equity paydown of the loan. It’s basically money down the toilet, same as mortgage interest or rent. If you put 20% down on a turnkey rental, you don’t owe PMI.
Limited to Your City
Of course, if you’re going to live in your rental property, you’re limited to the city you live in (or want to live in). By contrast, turnkey rentals open your deal pool to the entire country — including booming markets with excellent property prices and rent-to-value ratios.
Fewer Tax Advantages
While the homestead exemption can be a big windfall when you sell a personal residence, turnkey landlords get a ton of tax advantages. You can read all about those tax advantages here.
No homestead exemption, but you can even defer those capital gains taxes with a 1031 exchange. Not quite as good as an exemption, but fantastic for building wealth long-term.
Self-managing may save you some money, but even if you live on the property, self-management is work. If you want a hands-off, passive investment that produces cash flow like clockwork and contributes to a life of financial freedom … turnkey rentals are the way to go.
Above all, MartelTurnkey makes turnkey rental investing easy and rewarding. We work hard to break down all the obstacles and hurdles that stop people from investing … and to pave the way for a smooth ride to prosperity. Contact us today to find out how we can do the same for you!