What Is House Hacking And Is It Something You Should Be Doing?
Victoria Araj8-minute read
February 16, 2023
House hacking is a modern lifestyle choice that borrows heavily from old-school ways and has been reimagined with the help of modern home-sharing platforms.
Your grandparents may have owned a two-family house in a city before being able to cobble together the money to move to the brand-new suburbs that were created in the mid-20th century. Or, on the flip side, you may have owned your own single-family house your whole life but are now looking for house hacking ideas to create passive income streams and fund a flexible retirement.
Either way, your adventures in house hacking will provide extra income, and a taste of the landlord lifestyle.
What Is House Hacking?
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 landlording, all while having their housing expenses paid by their tenants.
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Why House Hack?
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 afford their lifestyle, put money into savings or buy even more real estate investment property, all while building home equity.
Develop A House Hacking Strategy
You’re limited only by your creativity, the zoning laws or 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.
Think about your skills and your lifestyle. Are you extremely handy around the house and don’t much 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 all up to you, your cash flow needs and what you’d be comfortable with in your living space.
Why House Hacking Makes Financial Sense, By the Numbers
Let’s say you buy a duplex for $400,000. Let’s assume you were also able to put 20% down on a 3.5% 30-year fixed mortgage.
Your monthly mortgage payment would be $1,436.94 (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 $2,000 monthly rent. That pays 100% of the mortgage, with a monthly excess of $563 that can be used to cover homeowners insurance, taxes and repairs.
After 5 years, you would have built home equity worth $32,969.37, and you’d owe $287,030.63 on your mortgage ($320,000 - $32,969.37 = $287,030.63).
Moreover, if the home appreciates at the U.S. average of 3.8% over the same 5-year period, your duplex would be worth $481,999.69. If you offered it for sale in a seller’s market, you would likely clear $194,969.06 from the sale of the property, as demonstrated here:
- Total owed on mortgage after 5 years: $287,030.63
- Value of duplex after 5 years: $481,999.69
- $481,999.69 - $287,030.63 = $194,969.06
That amount of money can set you well down the path to financial independence.
Our Top House Hacking Ideas
Let’s take a look at some of the most common ways a house hacker earns their rental income.
Buy A Multifamily Home
Before suburbs, there were city neighborhoods where residents lived in a variety of different multifamily settings. Young people moving into a city might rent part of a house from its retired owner, who lived next door or upstairs. Parents bought duplexes or triplexes so their children could remain close by after marriage.
Later, families became accustomed to growing up in or buying single-family homes, and attached housing became less popular. However, today’s savvy new real estate investor is starting their portfolio with a multifamily home.
Offer Rooms In Your Home Available 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 dip your toes in the water of 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.
Get Some Housemates
Sharing a home with a housemate is an easy way to hack a house. Not only will you receive a monthly rent payment, which may well exceed your monthly mortgage cost, but 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. But 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 have the upper hand in terms of enforcing 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). Also called granny flats, teenager suites or in-law apartments, 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 geared toward short- or long-term rentals, or moving into the unit themselves and renting out the main house.
This might be a particularly appealing option 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 are in need of repairs but have a lot of upside, based on comparables in the area. Consider this example: Let’s suppose 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 $180,00 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 basically 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!
Buying A House To Hack
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 is 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 FHA loan or – if you're a veteran – a VA loan. The FHA offers low-interest loans with a 3.5% down payment option, even for multifamily homes. The VA also offers our nation’s service members 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 the premises.
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 to be generated through rentals will be 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.
In addition to FHA and VA loans to purchase multifamily units, borrowers through either program can borrow money to renovate and repair the property. The VA 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 are subject to strict requirements as to when work must be completed and the types of work covered.
Are There Alternative Ways To House Hack For Those Who Don’t Own A Home?
The housing market at this moment is a challenge for everyone. Inventory is at an all-time low, while demand is at an all-time high. Long-time rental property owners are choosing to sell because of the white-hot market in some places, so even renters are finding it increasingly difficult to find places to live. When supply is low and demand is high, prices skyrocket.
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 build superintendent. These jobs generally require only part-time work that can be performed around your work schedule or other responsibilities.
If you consider yourself a digital nomad, 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.
Do I Have To Pay Income Taxes On My House Hacking Income?
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.
The Bottom Line: Your House Is An Expensive Investment – And It Could Be Working For You
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 landlording is for you.
Next, explore other ways to get started in real estate investing.
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