What Is House Hacking And Is It Something You Should Be Doing?

House hacking is a modern lifestyle choice that borrowers use to gain income from their home.

House hacking provides extra income and a window into what becoming a landlord entails, so you can decide if you want to grow your real estate investments in the future

House hacking means finding ways to generate income from your home. Traditionally, house hacking meant buying a multifamily property, living in one unit and renting out the others so that the tenants pay the owner’s mortgage, and the owner builds equity while maintaining the property.

Savvy investors have always known that buying a multifamily property – or engaging in some of the other house hacks discussed below – is an easy way to learn about property management and the work it takes to be a landlord, all while having their housing expenses compensated by their tenants.

House hacking is a way to reduce living expenses temporarily, or it can be considered the beginning of a career as a real estate investor. Either way, with the high cost of housing, it’s a method for using an asset you already have to pay for your lifestyle, put money into savings or buy even more real estate investment property, all while building home equity.

You’re limited only by your creativity, the zoning laws or homeowners association (HOA) rules that the property is bound by, and your ability to find someone who needs the type of housing you’re able to offer.

To develop a house hacking strategy, think about your skills and your lifestyle. Are you extremely handy around the house and don’t care where you live? A live-in house flip might be right for you. Do you live on a property with a large barn or garage? Think about renting that out.

It’s ultimately up to you, your cash flow needs and what you’d be comfortable with in your living space.

Let’s say you buy a duplex for $400,000 and you were able to put 20% down on a 6.5% 30-year fixed mortgage.

Your monthly mortgage payment is $2,022.62 (the principal and interest payment on a $320,000 mortgage).

Now let’s assume you live on one side or floor of the house, and you find a tenant who pays $2,500 monthly rent. That pays 100% of the mortgage, with a monthly excess of $477 that can be used to cover homeowners insurance, taxes and repairs.

Assuming a standard 30-year amortization schedule, after 5 years, you’ll have $299,555.13 left on your loan. Also, assuming your home is appreciating, you’ll have gained considerable equity at this point. Remember, home equity is the difference between what you owe on your home and its value, so payments and appreciation both increase equity.

Using this example, we’ll say the home appreciates by 4% per year over the same 5-year period, your duplex would be worth $486,661.16. If you offered it for sale, you could make about $187,106.03 from the sale of the property, as demonstrated here:

• Total owed on mortgage after 5 years: $299,555.13
• Value of duplex after 5 years: $486,661.16
• $486,661.16 - $299,555.13 = $187,106.03

That amount of money can set you well down the path to financial independence. Keep in mind, however, that none of the above calculations include taxes (including capital gains), insurance or home repair costs.

Let’s take a look at some of the most common ways a house hacker earns their rental income.

Buy A Multifamily Home

Most areas offer single-family homes since attached housing has become less popular. However, many savvy real estate investors prefer starting their portfolio with a multifamily home. These types of homes can give you the opportunity to live on-site while not having to share a bathroom with your tenant.

Choosing to go this route allows you to maintain your own space and privacy while still gaining rental income from your home. The downside is that you’ll likely need to commit to maintaining a long-term rental with all that extra space.

Offer Rooms For Short-Term Rentals

If you don’t own a multifamily home and you’re not sure you like the idea of committing to a long-term rental of any part of your current home, you can explore real estate investing by offering up a spare room on a short-term rental platform like Airbnb or Vrbo. Women property owners interested in renting only to other women for safety reasons might be interested in Golightly, an invitation-only site that vets its gender-exclusive membership.

For those who are currently thinking of buying a multifamily property for short-term rental purposes, there is financing available for Airbnb rentals. Make sure to look up short-term rental laws in the state and locality where the property is located, and if the home is part of a homeowners association, make sure you’re thoroughly familiar with their rules before buying. Many HOAs flatly prohibit both short- and long-term rentals.

Find Housemates

Sharing a home with a housemate is an easy way to hack a house. Not only will you receive a monthly rent payment, you’ll also be able to split your utilities and maintenance costs.

There’s undoubtedly a cost in terms of privacy and personal space lost when renting out your home while you’re living in it. However, the financial pluses of sharing household expenses in addition to rent may outweigh any privacy considerations. Your house may be configured in such a way that both you and your tenant have plenty of private space. Remember: As the owner, you’ll want to consider a roommate contract to enforce household rules.

The key to finding a good housemate is lifestyle compatibility. You should carefully vet anyone you’re thinking of renting to, particularly if you’ll be sharing common spaces and responsibilities around the house.

Build An Accessory Dwelling Unit On Your Property

You can also hack your house by building an accessory dwelling unit (ADU). These separate living units will sometimes come with certain homes, presenting you with an opportunity to rent them out.

Homeowners with a detached garage or a basement with a separate entrance might want to consider converting those spaces into a rental unit for short- or long-term rentals, or moving into the unit themselves and renting out the main house.

This might be particularly appealing for parents whose children need a larger home than they do. The parents might build or refurbish an existing accessory dwelling and move into it while their child and their family move into the main home. Parents who are retired can travel frequently without having to worry about who will take care of their home, and the child can offer the ADU as a short-term rental while the parents are away.

Provide Rental Space On Your Property

If you have a bit of acreage, you can convert that space into rental income. For example, you can rent garage or barn space to folks who need a place to store their vintage cars or boats for the winter.

You could allow someone to park their RV or mobile home on your property, or you could move into an RV on your property and rent out your home. Make sure to check your local zoning regulations or HOA rules to see if there are restrictions on renting out use of your property.

Do A Live-In Flip

House flippers hack houses quite often. They’ll buy older homes that need repairs but have a lot of upside, based on comparables in the area. Consider this example: Houses in a particular neighborhood routinely sell for $250,000, but there’s a house that has fallen into disrepair – you can buy it for $180,000 and fix it up for $20,000. (You should know that these numbers were chosen for simplicity, and not because the average home in disrepair can be repaired for $20,000. You should plan on it costing far more.)

Say it’s going to take 6 months to complete your repairs. You can live in the house (assuming it’s at least livable) while you make the repairs. You’ll be paying the mortgage during that time anyway. Then, in 6 months, if all goes as planned, you’ll walk away with a $50,000 profit – and you’ll have saved 6 months of rent. On to the next house!

It’s no more difficult to buy a multifamily home than it is to buy a single-family house. As long as you live in the home, it’s your primary residence and the mortgage is priced accordingly. Residential mortgages are considered less risky than investment property or non-owner-occupied loans, so if you own your current home and have lived there for more than a year, you can rent it out and move into your new multifamily home with any of the types of mortgages listed below.

Primary Mortgage Options

Multifamily homes with up to four units can be purchased with either an Federal Housing Administration (FHA) loan or – if you're a veteran – a Department of Veterans Affairs (VA) loan. FHA loans offer low-interest rates with a 3.5% down payment option, even for multifamily homes. The VA also offers qualified service members and their spouses the opportunity to buy homes with up to four units with no money down and very favorable loan terms. For both loans, the applicant must plan to live on site.

Private lenders are eager to do business with new real estate investors, and generally evaluate a conventional mortgage application for a multifamily home by looking at the applicant’s credit score and debt-to-income ratio (DTI). The income generated through rentals is considered as part of the application, but buyers will have to show that they’ll be able to afford mortgage payments using a realistic vacancy rate.

Rehabilitation Loans

In addition to standard FHA and VA loans, borrowers can apply for loans to renovate and repair the property. The VA Renovation loan program allows service members to borrow both the primary and renovation loans with no money down, and wrap them into one monthly payment.

FHA 203(k) loans can be a great option, but they are subject to strict requirements as to when work must be completed and the types of work covered.

If you don’t currently own a house, there are ways to hack your rental expenses. Look for employment opportunities that include no- or low-cost housing. For example, you might look for positions as a building manager or an on-site superintendent. These jobs generally require only part-time work.

You may be able to find long- and shorter-term house-sitting gigs by registering on reputable house-sitting websites. Some may require pet- or plant-sitting, and light household maintenance as well.

House hackers must report any rental real estate income using the IRS Schedule E tax form. House hackers may also have to pay a self-employment tax if the services they provide their tenants – like meals, tours or concierge services for vacationing guests – go beyond basic property maintenance.

Homeowners, you may already have an asset that you can use to extend your household budget. You might consider hacking your house to reduce or eliminate your housing expenses – and to find out if being a landlord is right for you.

Ready to start your house hacking journey? Get approved for a mortgage today.