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In a market where flipping has started feeling like playing financial roulette, owner-occupying your first investment, otherwise known as house hacking, offers new investors a safer, smarter path to profit from their first real estate investment.
There was a time when flipping homes seemed like one of the fastest ways to build real estate wealth. Buy low, renovate fast and sell high — that was a formula that worked for millions of one- to four-unit investors.
Due to thinning margins, supply chain problems, too few contractors, plus higher interest rates, house flipping has now become challenging even for the most experienced flipper. Couple that with tariffs, inflation and a stagnant or deflating market, and this is an environment where you can easily end up with massive losses rather than profit.
What’s the hot new alternative? House hacking
House hacking is the strategy of living in your investment property and either renting out part of your existing home or creating additional units you can rent out to generate rental income. This approach reduces (and can even eliminate) your personal housing costs, build equity, while also simultaneously lowering your risk.
House hacking is one of the best alternatives for becoming a real estate investor and not getting crushed by what could easily happen if you were doing a flip.
House hacking your primary residence
“House hacking” combines the advantages of single-family homeownership with the income and wealth-building potential of owning a rental property.
Here are a few common house hacking strategies for single-family properties:
Garage conversions
Transform your detached or attached garage into a studio or one-bedroom rental.
Basement apartments
Finish out a lower level with its own entrance, bathroom and kitchenette. My in-laws had a huge unfinished basement that only had a laundry. They added a separate outside entrance, built a full kitchen, created a living area for viewing TV and a single bath for that area. They also added a second master suite for guests, including a steam shower that was accessible from the main house down the stairs.
ADU builds
If you’re in a market with high rents and lenient ADU laws, (Portland, Austin or parts of Southern California), building or converting even a modest ADU can add $1,200 to $2,500 per month to your income stream while also significantly increasing your resale value.
In addition, many cities now allow homeowners to build a small backyard cottage or over-garage apartment with minimal red tape.
Internal reconfiguration
Do you have a split-level house or home with a fourth or fifth bedroom with a private bath away from most of the house? If so, you can section off part of your home to create a rental with a private bath and separate entry, which is great for traveling nurses, students or Airbnb guests.
Practical steps to get started
Assess your property
Identify spaces within your home that can be rented out, such as spare bedrooms, basements or garages.
Understand financing options
Explore loans suitable for owner-occupied properties, like FHA or VA loans.
Check local regulations
Research zoning laws, rental regulations and tax implications in your area. Many areas have strict rules about short-term Airbnb-style rentals. This may vary given that you are living in the property, but it’s important to verify.
Prepare the space
Make sure that the rental area meets safety standards, is up to code if you make any improvements and is clean and appealing to potential tenants.
Market your rental
Use platforms like Airbnb or local rental listings to find tenants.
Owner occupying a 2- to 4-unit property
If you house hack your primary residence, chances are it will mean that you’re living in a nicer property than if you purchase a two- to four-unit building, where you may end up living in an apartment.
In other words, you’re not getting the dream home you see on HGTV, but you are trading those high mortgage payments for rental income that starts you on the path to building true real estate wealth.
Benefits of owning a 2- to 4-unit property where you reside include
- Built-in cash flow from Day 1.
- Simplicity in management (you’re already on-site)
- Favorable financing options as an owner-occupant.
- Better yet, lenders typically allow you to count a portion of the rental income from the other units toward your qualifying income. That means you can afford a larger purchase than you could with a single-family loan alone.
- When you’re purchasing as an owner-occupant, you may qualify for low- or no-down-payment loans (FHA: 3.5 percent; VA: 0 percent), an opportunity that doesn’t exist for investor-only loans, which typically require 15 percent to 25 percent down.
- Best of all, you may even be eligible for down payment assistance. According to DownPaymentResource.com, the average DPA benefit in 2024 was $18,000, money that in many cases can cover most, if not all, of your down payment and closing costs.
Add even more value by building additional units over time
Want to increase income without buying another property? Consider these value-boosting strategies:
- Convert a duplex to a triplex by finishing a basement.
- Add an ADU to the backyard of your two- to four-unit property.
- Upgrade the existing units to command higher rent.
- Split a large unit into two smaller apartments, if zoning allows.
With the national housing shortage and demand for rentals still sky-high, especially in starter markets, these upgrades can yield serious ROI.
10 powerful reasons your first real estate investment should be a property you live in
1. Significantly better financing terms
Owner-occupants qualify for much lower interest rates and better loan terms than traditional investors. FHA and VA loans allow low or even zero-down payments, something that investor loans almost never offer.
2. Buy with less cash upfront
Instead of coughing up 15 percent to 25 percent down on an investment property, you can get started with as little as 3.5 percent down on a duplex, triplex or fourplex if you live in one unit. It’s the easiest path for first-time homeowners to break into real estate investing.
3. Reduce your housing costs
Tenant rent can cover a large chunk (and sometimes all) of your mortgage, taxes and insurance. This drastically lowers your cost of living while you’re simultaneously building wealth through equity and appreciation.
4. Boost your buying power
Lenders often count projected rental income toward your qualifying income, especially on two- to four-unit properties. That means you may qualify for more property that is more expensive than your W-2 income alone would normally allow.
5. Gain built-in property management
When you live onsite, you can handle minor issues immediately, avoid property management fees and stay on top of maintenance. This saves money, time and headaches.
6. Set the standard for tenant behavior
Tenants tend to behave better when their landlord lives on the premises. Properties stay cleaner, lease violations drop and disputes get resolved quickly. Your presence creates built-in accountability.
7. Learn by doing (and earning)
Becoming a landlord will provide you with a real-world masterclass in real estate investing, especially if you’re managing a two- to four-unit building. You’ll learn how to screen tenants, manage maintenance and handle finances, all with less risk than traditional investing.
8. Double-dip on tax benefits
You may be able to deduct mortgage interest and property taxes as an owner-occupant while also claiming depreciation, repair costs and other deductions on the rental portion of your property. (Always check with your CPA for your unique tax situation.)
9. You have multiple exit strategies
Unlike pure rentals, owner-occupied two- to four-units offer flexible resale options. You can rent out all the units, refinance and move into your next investment property, do a straight sale of the property, or a 1031 Tax Deferred Exchange.
10. Build wealth faster
With lower expenses, higher cash flow, forced savings through amortization and real-time experience, living in your first real estate investment lets you scale faster. Whether you’re after financial freedom or long-term rental income, this strategy gets you there more quickly.
The best real estate investment may the one you can live in
In a market that is challenging even to the most experienced house flippers, living in your first real estate investment can provide the foundation for building lasting wealth through real estate investing. Best of all, you don’t need a lot of money to get started, just a mortgage, a plan and the willingness to live in a property where your name is on the mailbox.
Bernice Ross, president and CEO of BrokerageUP and RealEstateCoach.com, the founder of Profit.RealEstate and is a national speaker, author and trainer with over 1,500 published articles.
