The first time home buyer faces several challenges, especially in today’s real estate market. Affordability is a significant concern as housing prices have reached record highs, and mortgage rates have increased.

Moreover, inventory remains limited, especially for starter homes. Even lower-priced condos are challenging to find, as investors and downsizers offer stronger, often cash-heavy bids.

According to the National Association of Realtors, only 26% of last year’s home buyers were first-timers—the lowest share on record and down from 34% a year prior.

If you’re a first time home buye struggling to afford home ownership, there are some workarounds you can consider to purchase your first home.

House Hacking

House hacking is a real estate investment strategy in which participants use their homes to generate income to offset their expenditures. For example, renting out a basement apartment or an accessory dwelling unit (ADU), such as a detached garage that’s been outfitted with a bathroom and small kitchen, counts as house hacking. Splitting housing costs with a roommate or converting a part of your home into an Airbnb also qualifies as house hacking.

House hacking isn’t a new concept, but it has grown in popularity as new digital platforms have entered the market, making it easier than ever for homeowners to generate income from their property. In some cases, house hacking may help you qualify for a larger mortgage if you purchase a home with immediate income potential, such as a legal duplex or a property with a secondary suite that has a kitchen and full bathroom. House hacking could also help you pay your mortgage once you move in. I am particularly fond of helping my buyer clients get going with house hacking through purchasing a duplex. You get all of the financing advantages of a traditional owner occupied loan as long as you live in one of the units and there are not more than 4 units. What’s more, buying something like a duplex does not cost twice as much as a single family home. In many cases, your entire mortgage could be covered by renting the second unit, at the very least, a large portion of your mortgage will be covered – improving your monthly cash flow, when compared to financing a single family home.

There are several ways you can use your home to earn some extra cash, such as offering paid parking in your driveway on a site like Spacer or SpotHero, renting out your swimming pool for a few hours on Swimply, making your home available for photoshoots or events on Giggster or Peerspace, turning your backyard into a pay-by-the-hour dog park on Sniffspot, or listing your garage space on an app like Neighbor Storage.

Before you decide to house hack, make sure you understand the laws and HOA rules in your area. You can find a home with income potential in a neighborhood with less restrictive zoning and regulations by working with a real estate agent.

Team Up With Friends or Family

If you’re not comfortable welcoming strangers to your home, consider co-purchasing with a friend or family member. This unconventional housing arrangement is growing in popularity as friends and family members cope with higher living costs by pooling resources.

According to the National Association of Realtors’ 2022 Profile of Home Buyers and Sellers, the share of first time home buyers living with people other than children or a romantic partner is currently at an all-time high. Meanwhile, research from Pew found that multi-generational living has accelerated, with a quarter of U.S. adults aged 25 to 34 now living in a multi-generational home.

You can customize your arrangement to fit your circumstances. For example, you could purchase a home and then rent a portion of it to a loved one. Alternatively, you might consider co-buying a home with friends or family members so that you can step onto the property ladder and start building equity together. Co-ownership could work out especially well for you long-term if it helps you buy a home that’s bigger, has more investment potential, or is located in a high-demand area that appreciates at a faster rate. Plus, you get to share the cost of maintenance, repairs, and upgrades with your co-owner, which can be a significant financial relief.

Co-ownership is a particularly viable option for those who want to invest in real estate but do not have the necessary funds to purchase a property outright. With co-ownership, you can pool your resources with another party, making it possible to buy a property that you could not afford individually. This approach can also make it easier for first time home buyers to get onto the property ladder.

In addition, co-ownership offers some flexibility in terms of financing. Instead of taking out a traditional mortgage, you can work with your co-owner to come up with a financing plan that works for both parties. This can include splitting the mortgage payments or finding alternative forms of financing that may not be available to individual buyers.

However, co-ownership is not without its risks. Like any business partnership, co-ownership comes with its own set of challenges. One of the biggest risks is that your co-owner may not hold up their end of the bargain, either financially or in terms of responsibilities related to the property. It is important to choose your co-owner carefully and to have a solid agreement in place to ensure that both parties are on the same page regarding the ownership, management, and maintenance of the property.

Another potential risk of co-ownership is the possibility of disagreements or conflicts arising between co-owners. This can be particularly problematic if the co-owners have different ideas about how to manage the property or how to handle any issues that may arise. Having a clear plan in place for dealing with conflicts can help mitigate this risk.
In addition, co-ownership may limit your ability to sell the property. If one co-owner wants to sell their share, they will need to find a buyer who is willing to purchase the property with another owner. This can be challenging and may result in a lower sale price than if the property were owned outright.

Finally, co-ownership can be complex from a legal and financial standpoint. It is important to work with a lawyer and an accountant to ensure that all legal and financial aspects of co-ownership are properly documented and accounted for.

Despite these risks, co-ownership can be a great option for those looking to invest in real estate or to purchase a home. With careful planning and a solid agreement in place, co-ownership can help you achieve your real estate goals while also sharing the financial burden and risks with another party.

The above references an opinion and is for informational purposes only. It is not intended to be financial, legal, or tax advice. Consult the appropriate professionals for advice regarding your individual needs.

Sources:

1. Housing Wire – https://www.housingwire.com/articles/housing-affordability-ends-2022-at-record-low/
2. Realtor.com – https://www.realtor.com/news/trends/death-of-the-starter-home-where-have-all-the-small-houses-gone/
3. National Association of Realtors – https://www.nar.realtor/research-and-statistics/research-reports/highlights-from-the-profile-of-home-buyers-and-sellers
4. ValuePenguin – https://www.valuepenguin.com/mortgages/claiming-rental-income-for-mortgage
5. Pew – https://www.pewresearch.org/fact-tank/2022/07/20/young-adults-in-u-s-are-much-more-likely-than-50-years-ago-to-be-living-in-a-multigenerational-household/
6. YouGov – https://today.yougov.com/topics/economy/articles-reports/2022/05/25/american-homebuyers-finanancial-help-parents
7. Bankrate – https://www.bankrate.com/mortgages/first-time-homebuyer-grants/#types
8. Investopedia –  https://www.investopedia.com/terms/f/fhaloan.asp
9. National Association of Realtors – https://www.nar.realtor/sites/default/files/documents/2022-snapshot-of-race-and-home-buying-in-the-us-04-26-2022.pdf