As the median home price in many of America's major cities spiral beyond the reach of everyday working people, they are resorting to more creative means to enter the real estate market.
One of those methods is a type of "house hacking," where multiple people pool their money to buy a single-family home, potentially residing there while renting another portion of it out. Although it can increase buying power, potential pitfalls must be addressed.
The benefit of a successful house hacking arrangement is clear. Theoretically, it allows buyers otherwise excluded from the housing market to combine their resources and become property owners.
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However, the devil is always in the details. If you're considering house hacking with a team, you and your partners must iron out every detail before signing an offer to purchase a property. First, ensure your intentions and goals are sufficiently aligned to be house hacking partners.
You might assume you and your partners would live together in the house you hacked. However, what if one of your partners intends to build a real estate portfolio by owning portions of multiple properties and renting out the section of the property you assumed they would live in? What if they wanted to maximize their investment return by listing their "hacked" spaces on short-term rental sites? Are you OK with that?
Renting out their share of a hacked property would be within a property owner's rights even without advance notice. Short-term rentals might also be legal if they comply with state or local laws. Without advance conversations and an operating agreement outlining the parameters of your arrangement, you'd be powerless to stop them.
This is why everyone's intentions must be crystal clear and aligned for the long term. House hacking isn't like moving in with a roommate where you can tolerate each other for a year before moving on if things go south. It's the opposite. House hacking requires a 30-year commitment from you and all your partners.
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The chances are high that you or one of your house hackers might get a dream job in another state and need to move before paying off the mortgage. Selling a fractional portion of a property may not be easy. So, it is advisable for your operating agreement to include a contingency plan such as a buyout payment from the departing house hacker.
Without such a clause, the departing hacker would still be responsible for their share of the mortgage. However, you're all jointly and severally liable under the mortgage, which means if one hacker defaults, everyone defaults. You could end up stuck with the mortgage and have to pay it off minus one partner. Worse yet, the partner who didn't pay would still be entitled to their equity share.
This underscores the need for clarity about your endgame with the house you hack. Are you all planning to live there permanently? Would you all sell the house at the end of the mortgage term? Another important consideration is that mortgage lenders don't offer special "house hacking" loans for individual portions financed by each partner.
All of you will go through the same credit approval and underwriting process. If one partner has a lower credit score or a high income-to-debt ratio, you could all end up paying higher interest rates, potentially costing you tens of thousands of dollars each over the lifetime of the mortgage. So, choose your hacking partners extremely carefully.
The point here is not to deter you from house hacking or make it seem impossible. It is to ensure everyone enters the arrangement fully understanding the potential implications of a 30-year-long business partnership. If that’s the case, your chances of a successful house hack greatly improve. If not, you could easily be in a financial nightmare with no easy solution.
Disclaimer: The author is a former licensed real estate agent. Some opinions and information expressed in this article are based on that experience and not drawn from publicly available information or previously reported data. This article is not meant to endorse or recommend house hacking, and readers are cautioned not to accept it.
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