What is house hacking and is it something you should be doing?

Whether you want to buy a home but can’t afford one or want to make a little extra cash from one, house hacking could be the answer. It’s when you rent out a part of your home, such as a basement apartment, a spare bedroom, or even just garage space.

By renting out part of your home, you can monetize some of its value that may otherwise go underused. Read on to learn how to start investing in real estate via house hacking.

What is house hacking in real estate?

House hacking generally refers to buying a multifamily property, living in one unit, and renting out the other(s). This can help you build equity while using the rental income to help cover your monthly housing costs. It’s a great way to invest in real estate if you don’t know where to start.

Why house hack?

House hacking comes with many benefits:

• Lower housing costs: The rental income can offset some or all of your housing costs, making your home more affordable.
• Increased cash flow: House hacking creates predictable monthly cash flow that can improve your overall finances.
• First step into real estate investing: It’s often much easier to house hack your primary residence than to buy an entirely separate investment property.
• Wealth-building tool: The monthly rental income from house hacking can help you build equity in your home over time.
• Tax advantages: You may be able to deduct home repairs, maintenance, and depreciation for the part of your home that’s rented as well as a share of property taxes, mortgage interest, and other expenses.

Popular house hacking strategies

Here are some popular ways to house hack:

Buy a multifamily home

A multifamily home is a property with two or more living units. You could buy a multifamily home, live in one unit, and rent the other(s) out. This is the most straightforward way to house hack.

Find housemates

Instead of buying a multifamily home, you could also buy a single-family home and rent out bedrooms. This can be especially effective in college towns where finding roommates is normal.

Offer rooms for short-term rentals

List spare rooms in your home on short-term rental (STR) platforms like Airbnb and VRBO. Just make sure STRs are permitted by your local zoning and any homeowner or condo association rules. Also, be prepared for more frequent turnover and cleaning between tenants.

Build an accessory dwelling unit on your property

An accessory dwelling unit (ADU) is a separate, smaller living unit on your property with its own entrance, bathroom, kitchen, and living space. You could add one to your home or buy one that already has one, then rent it out to short-term or long-term tenants.

Provide rental space on your property

If you have a lot of acreage, convert a portion of it to rental space for RVs, self-storage, or other types of tenants. This can be a great way to put your land to use.

Do a live-in flip

House flipping is when you buy a distressed property, fix it up, and sell it for a profit. However, you can also live in the property while you renovate it (if it’s livable). This is called a live-in flip and is another form of house hacking.

Financing options for house hacking

Because the property you’re buying when house hacking serves as your primary residence, you can usually qualify for a conventional or government-backed loan. Here are some options:

• Conventional loan: Conventional loans are mortgages issued by private lenders like banks and credit unions. They make up the majority of mortgages.
• FHA loan: An FHA loan is a mortgage backed by the Federal Housing Administration (FHA). As a result, it tends to have more lenient credit score, down payment, and debt-to-income (DTI) requirements. Note that Rocket Mortgage does not offer FHA loans.
• VA loan: A VA loan is a mortgage backed by the U.S. Department of Veterans Affairs (VA). It requires no down payment but is only available to U.S. service members, veterans, and their families.
• Renovation loan: A renovation loan is a mortgage for financing a home’s repair costs. It’s often bundled with financing for buying the property, too. Some examples include the VA renovation loan and the FHA 203(k) loan.

How to start house hacking

To start house hacking, follow these steps:

1. Assess your personal finances: If you’re buying a home to house hack, make sure you have a high enough credit score and down payment for a mortgage.  
2. Decide on a house-hacking strategy: Choose one of the house-hacking strategies listed above that suits your situation and goals.
3. Get preapproved for financing: A mortgage preapproval will give you a better idea of your home buying budget and help your purchase offers stand out.
4. Shop for homes in your area: Search online and work with an agent to find homes for sale. Pay attention to floor plans to ensure the layout will work for house hacking.
5. Close on your property: Once you and the seller agree on a purchase agreement, sign under the dotted line to seal the deal.
6. Find tenants: Market the part of your home you intend to rent to potential tenants. Once found, tenants should sign a robust lease agreement before moving in.

FAQ about house hacking

Here are answers to some frequently asked questions regarding house hacking:

Can you house hack with an FHA loan?

Yes, you can house hack with an FHA loan. FHA loans can finance primary residences with up to four living units, so as long as you live in one, you can rent out the others.

Are there alternative ways to house hack for those who don’t own a home?

Yes, if you don’t own your home, you can hack your rental expenses by finding employment opportunities that offer no- or low-cost housing, such as a building manager or on-site superintendent. Alternatively, you can find a roommate to help pay some of the rent.

Do I have to pay income taxes on my house hacking?

Yes, you’ll need to pay income taxes on the money you make from house hacking. Consult a tax professional to learn more.

Can rental income help you qualify for a mortgage?

Yes, the potential rental income from a property can be considered income for the purpose of qualifying for a mortgage. Ask your lender for more details.

The bottom line: Your house could be working for you

Ultimately, house hacking is a smart way to lower your housing costs, build wealth, and get your foot in the door of real estate investing.

Whether you choose to buy a multifamily property, take on roommates, build an ADU, or list a spare room on Airbnb, there’s a house hacking approach to fit nearly any situation and budget.

Read to get started? Apply for a loan with Rocket Mortgage today to find out which loan you qualify for and take the first step toward making your home work for you.

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