House Hacking – The Ultimate Guide about House Hacking
House hacking is an easy way to accelerate your savings rate quickly. If you are like most people, your housing costs represent a large portion of your expenses. In fact, most Americans spend between 30 to 50% of their budget on housing costs!
House hacking offers a way to slash your housing costs simply by becoming a savvy homeowner that maximizes the utility of your property. You can even use house hacking to wade into the waters of real estate investing if this is of interest. You have the opportunity to build your portfolio and your knowledge base through house hacking.
If you are ready to start house hacking, then dive into our complete guide below. We break down exactly what house hacking is and how you can start using this FI strategy.
What is house hacking?
The idea of house hacking is very simple. The goal is to reduce or eliminate your housing costs. It is all about being creative with your housing choices. Although you might not live in the most conventional situation, house hacking can provide a cost slashing opportunity.
Most folks start house hacking by simply renting out any space that you aren’t using to cover the mortgage. Although the type of space you rent out varies, the goal of covering your housing costs remains the same.
Here are the six main ways to hack your housing, each with their pros and cons:
Room Rental House Hacking
Room rental house hacking is a very straightforward way to house hack. Essentially, you just rent out a room – or rooms – in your house to offset the cost of the mortgage and maintenance.
You can rent out the extra rooms in your house to long term tenants or short term vacationers through Airbnb to cover your housing costs. The choice will boil down to the viability of these options in your location and your comfort level with permanent tenants.
In this situation, you would likely share common areas with your renters. You might need to get used to the idea of sharing the kitchen and living room with others. This strategy comes with all of the ups and downs of living with roommates. If you screen your tenants carefully, the decision to live with roommates is usually a good choice.
Some house hackers, like Maria from Canada, choose to rent out their extra rooms to friends and family. You could choose to live with your coworkers, like Dan from North Carolina. Or even find a roommate on Craiglist, like Logan from Los Angeles.
If you already have a single-family home, then this is an easy way to get started.
Income Suite House Hacking
If your current housing situation doesn’t have any extra rooms, then you could convert or modify the space you have. Consider adding a mother-in-law suite or finishing a basement to create extra livable space to rent out.
Modifying existing space gives you more control over your house hack. You could create a space to maximize privacy for yourself and your renters or leave it more open. You’ll need to think about this in terms of your personal preferences.
Beyond house hacking, another benefit of converting existing space is that it can add value to your home. An example is when you take that unfinished basement, and make it livable space, that is directly increased the livable square footage which increases your home’s value. If you are able and willing to do the work yourself, then you can earn a lot of sweat equity in the process. For example, Amanda and her boyfriend from Seattle were able to transform a cramped basement into a modern income suite house hacking opportunity. When they decided to rent out this unit on Airbnb, they were able to quickly recoup the upfront costs of the renovation.
Although you don’t have to to the work yourself, an income suite house hacking strategy can give you the privacy you desire. Plus, you will likely be able to fetch more in rent for an income suite because the renter will also have more privacy which many people are willing to pay extra for.
ADU House Hacking
An accessory dwelling unit, or ADU, refers to another building on your property. You can rent out this separate building with the goal of covering the cost of your total mortgage. Even if you are only able to offset some of your mortgage costs, it is still a financial win!
The benefit of an accessory dwelling unit is that you will not feel as if you have roommates. Although someone might be on your property, you will not be forced to share anything with them!
If this strategy sounds interesting, then you can seek out properties that are already designed for this. But if you already have a property, then consider converting a pool house or adding an apartment above your garage. In some cases, your property might not have an extra building. But it could have the space for an additional building. If you want to build an ADU, then have to get approval from the zoning department in your city or county. After that clearance, you will need to spend money to build. This can be time consuming and expensive. But if the numbers work out, it could be a good opportunity.
Make sure to consider all of the costs of building an entire structure from scratch before moving forward. If you are looking for some inspiration, then check out Cami’s successful ADU house hack in North Carolina.
Small Multifamily House Hacking
In this scenario, you would buy a small multi-unit home and rent out the extra units. Essentially, the other units on the property could offset your entire mortgage.
Many families pursue this form of house hacking because of the privacy offered. You’ll have a complete unit for yourself. It might feel like living in an apartment, but your housing cost could potentially be eliminated!
Can you house hack a duplex?
For this type of house hack, you can only buy a building with up to 4 units to ensure owner-occupancy financing benefits. So yes, you can buy a duplex to house hack. For example, you could buy a duplex and rent out one side. It is a great way to maximize privacy while enjoying the benefits of a house hack.
David Pere is one example of someone who successfully house hacked a duplex. Check out his story to explore the possibilities!
Bonus Tip: Combine this style of house hacking with a room rental house hack. An example is you buy a duplex that has two bedrooms and one bathroom on each side. You rent out the other side like you normally would. Then for your side, you live in one room and rent out the other room to a friend.
Slow Flip or Live-in Flip
If you don’t want to be a landlord but want to house hack, you still have options. The slow flip option means that you will buy a fixer-upper and live in it while you flip it. Typically, you’ll live in the house for at least 1 year while you fix it up. After you’ve made the house an inviting home, you can sell it for a profit and move on to your next house.
Although you may have to live in a construction zone for an extended period of time, the profits of a flip can be well worth it. If you want to take this strategy to the next level, then consider doing all of the work yourself. You’ll be able to dramatically improve your potential profitability if you are able to keep the renovation costs relatively low.
Bonus Tip: If you live in the home for at least 12 months and then sell you don’t have to pay any capital gains tax if the growth in appreciation is less than $250,000 for a single individual or $500,000 for a couple. Whereas most home flippers sell a home they renovate in less than 12 months and most of the time in less than 6 months, and they pay regular income tax on their profit.
Work Provided Housing
Work provided housing is the lowest maintenance house hack option. You get all of the benefits of house hacking without the effort involved in maintaining a property or managing tenants. Essentially, you find a way for your employer to pay for your housing.
Although this might sound like a rare benefit, you might be surprised to learn that many employers offer free or subsidized housing to their employees. Find out if your employer offers this amazing option!
If you are interested in finding out more about these opportunities, then Jenni from Family Size Finance’s story about work provided housing.
Why Should You Consider House Hacking?
After taking a look at the different ways you can house hack, you might be wondering if the reward is worth the effort. If you choose to house hack, the decision will almost definitely benefit your financial future.
In fact, house hacking can completely transform your financial trajectory.
Supercharge Your Savings
With soaring housing costs around the country, it is not uncommon to pay thousands of dollars each month in order to live in your home. According to The Bureau of Labor Statistics, Americans spend 32.8% of their income on housing each year. Although housing costs vary around the county, the costs can add up quickly in any budget.
Take a second to imagine the impact of eliminating or significantly reducing your housing costs. You could use those newfound savings to build your nest egg at a fast pace, pay off student loans, buy that new car you have always wanted, or take that dream trip.
Although house hacking might be an unconventional approach to housing, you might find that the savings are well worth the effort!
Learn to be a Landlord
Not everyone wants to be a landlord and real estate investor, and that is ok. But if you want to learn about real estate investing, Real estate investing it could lead you down a successful path to FI.
However, the idea of being a landlord can seem overwhelming to new real estate investors. After all, the responsibility of managing tenants and maintaining a property can be a lot to consider. That is completely understandable! But instead of allowing your fear of being a landlord to prevent you from investing in real estate, you can use house hacking to ease into your real estate journey slowly.
With a house hack, you will be an onsite landlord as you learn how to successfully manage tenants. Since you’ll be onsite, you’ll learn about the ins and outs of managing tenants. Plus, learn more about what distinguishes a good tenant from a bad tenant which could help you successfully screen tenants that meet your requirements in the future.
Overall, house hacking can be a great first step into the seemingly murky waters of being an effective landlord. You can figure things out one step at a time with a single property that you are able to take a very hands-on approach to. With time, you’ll find that you are more comfortable with managing tenants and potentially expand your real estate portfolio.
Owner-Occupants Get Better Financing
Since you will be living in the property, you will have access to owner-occupant financing. The financing terms offered to owner-occupants are typically more favorable than non-occupant terms. A few of the perks include lower down payment options and attractive interest rates.
It is important to note that in order to secure owner-occupant financing, the property cannot have more than 4 units.
One of the biggest perks of owner-occupant financing is the ability to put down a smaller down payment. Depending on the loan you choose to pursue, you may only need to but 3.5% down. If you bought a $150,000 property to house hack, then you may only need to come up with a $5,250 down payment. Whereas if you compared to buying the same $150,000 property as a pure rental property you would have to put 20% down, that is $30,000.
As you can see, owner-occupant financing lowers the barrier to buying a property. With the lower down payment option, you may be able to start investing in real estate more quickly. The house hack can help you start your income-producing portfolio without the need for a burdensome down payment.
Learn the Ropes of Real Estate
If you decide to house hack, then you will be forced to learn the basics of real estate. Not only will you need to navigate the home buying process, but also become a landlord to successfully house hack.
This offers the opportunity to get comfortable with real estate without putting too much capital on the line. You can take these skills and apply them to future real estate investments.
Plus, you’ll learn more about your preferred real estate strategy. For example, you might find that you don’t like managing tenants. With that information, you can factor the cost of hiring a property manager into the numbers of future deals.
Type of Rentals You Can Do for Your Style of House Hacking
Finding the space to rent out is only the first piece of the puzzle. You also have several ways to rent out your extra space. Choose the option that best suits your lifestyle.
You can offer your extra space to short term renters through platforms like Airbnb, Homeaway or VRBO. Typically, these tenants pay by the night and you won’t have a longstanding relationship with them.
Short term rentals can give you more control over how frequently you have tenants. For example, if you want to reserve your guest bedroom for friends or family occasionally then you can choose to not rent out space for those dates.
The constant turnover can come with extra work but you might be able to minimize this burden by hiring out tasks like cleaning in between tenants.
With the higher turnover, you may be able to charge short-term tenants more than you would a long-term tenant. Do some research on the short-term rental prices in your area. You might be surprised how much you can bring in with this opportunity.
A mid-term rental would be anywhere from one month to one year. Many people need mid-term housing options. A few include international students, traveling nurses, students on a fellowship, or corporate housing for traveling businessmen.
The turnover for this type of arrangement would be less frequent, so there would likely be less work on your end. However, there would be a tenant in your space more often so there is a trade-off.
In addition, a lot of folks that look for housing for a couple of months want it to be furnished. So you’ll need to factor the cost of furnishing that space into your budget.
A long term rental is for tenants that plan to stay for a year or more. The key for successful long term rentals is to successfully screen your tenants before entering a lease agreement.
Most importantly, make sure that your potential tenants can afford the rental. You can do this by verifying their income. You may also want to run a credit check and a background check to find out more about a potential tenant’s track record. You won’t want a tenant that has repeatedly shirked their responsibility to pay rent on time.
Also, if they will be sharing your space, then make sure that you can get along with their personality. Otherwise, it can make for a difficult situation down the road.
As you evaluate long-term tenants, make sure to take all factors into account. If you are uncomfortable with the tenant in the beginning, it is not likely that things will get better throughout the lease term.
The Numbers of House Hacking
House hacking can be a quick way to change your financial situation for the better. However, not every deal is a good one. You’ll need to carefully run the numbers of a deal before pulling the trigger.
Here are the numbers you’ll need to evaluate to ensure you are getting a good deal:
The 1% Rule
The 1% rule is a great rule of thumb for real estate deals of all kinds, including house hacks. In order to abide by the 1% rule, a property should be able to bring in a gross monthly rent equal to 1% of the total investment on the property. You can also stretch this to the 2% rule in some cases.
So, if you buy a home for $100,000, then it should be able to bring in $1,000 per month in rent according to the 1% rule. This rule can help you weed out the less profitable properties in your search.
Of course, not all markets are able to support the 1% rule. For example, In Los Angeles, California, the median sale price is $760,200. But the median rent price is $3,500. With that, you would have difficulty satisfying the 1% rule in that market. If you live in a high cost of living area, then you might have to lower your expectations regarding the 1% rule. However, house hacking could still help you reduce your monthly housing costs. Even if you aren’t able to completely eliminate your housing costs, it can still be a good opportunity to save money that you would otherwise be forced to spend on very high rent prices.
A final number to look at is your cash flow. Essentially, you subtract any expenses from your gross rental income. Of course, positive cash flow is a great sign. After all, it is a great feeling to get paid to live in your own home. However, even if you are only able to cut your housing costs in half, that is still a big win for your budget. Take a minute to decide what type of cash flow you want to achieve with your house hack before getting started.
Here’s how my cashflow looked on my second house hack:
Gross Rental Income: $1,200/month
Home Owners Association: $175/month
Mortgage, including taxes and insurance: $700/month
I bought the 4/4 condo for $92,000 and spent $2,000 for a few minor repairs upfront. Overall, my monthly cash flow was $145/month for the first year. After I moved out, the monthly cash flow bumped up to $437 because I was able to rent out the fourth bedroom.
Affordable Financing Options
One thing great advantage of house hacking is that you can take advantage of owner-occupant financing opportunities. Many lenders offer home buyer loans that are aimed to make buying a home more affordable. Most of these programs offer lower down payment requirements which can help you start your house hacking journey quickly.
Here are a few options to consider:
FHA loans are offered by the Federal Housing Administration. As of 2019, you’ll only need to put down 3.5% to secure this home loan. Plus, the lending requirements are less strict that most conventional lenders.
VA loans are backed by the Veterans Administration to help veterans get into their own homes. Generally, it is an easy loan to qualify for and you will not have to put any money down.
If you live in a rural area, then USDA loans backed by the US Department of Agriculture are a great option. They require no money down which can be a game-changer.
Even conventional loans can be a good option for owner-occupants. Depending on the lender and your creditworthiness, you may only need to put down 3-5%.
How to House Hack and Live for Free
If you are ready to start house hacking, then take action! Here is what you’ll need to do.
Find the Property
The first thing you need to do is to find the right space.
If you are already a homeowner, then you might have an extra room available. Think outside the box. Instead of thinking about what might not work, think about what would. For example, could you convert the basement into a functional living space? Or would building an ADU be a better option for your situation? Don’t be afraid to think about unconventional approaches to house hacking!
If you aren’t a homeowner, then you’ll need to find a property before you can start house hacking. One advantage is that you can start your home search with tenants in mind. Find a space that would work for you and your future tenants.
Run the Numbers
Once you find a property you are interested in, run the numbers of the deal. Make sure that you are comfortable with the projected cash flow and cap rate before moving forward. Not every deal is a winner, so don’t be afraid to move on to another property if something doesn’t feel right.
Secure the Financing
After you are satisfied with the financial viability of a deal, then look for financing opportunities. As an owner-occupant, you should not have too much trouble securing a mortgage. If you are having difficulty, then you may need to work on your credit score.
Learn more about boosting your credit score today!
Close on the Property
If everything goes according to plan, you’ll close on your house hacking property smoothly. It will be a great introduction to the world of real estate to prepare you for potential deals in the future. Once you have the keys, make any repairs to the property and spruce it up for new tenants.
Find the Right Tenants
As you start to fill your property with tenants, it is important to screen them appropriately. Although your methods will vary based on the length of your rental, make sure you are comfortable with the people moving onto your property.
After all, you may be in relatively close quarters. You don’t want to have a tenant that is rude and incapable of paying their rent on time.
Maintain the Property
As time goes on, repairs will inevitably pop up. It is important to stay on top of the minor repairs as they come up to avoid any building problems. Also, keeping an emergency fund for unexpected expenses on hand can smooth over any cash flow hiccups that you might encounter.
Watch Your Savings Grow
If you’ve found a good property to house hack, then your housing costs should drop dramatically. With that, you’ll be able to redirect that income towards other financial goals such as saving or investing for your future.
What you need to know about house hacking
Take a look at our final tips that can help you tackle this amazing wealth-building strategy!
How many times can you house hack?
The best part about house hacking is that there is no limit to the number of times you can take advantage of this strategy. You can even build a real estate portfolio through a series of house hacking opportunities.
How to house hack while in college
College living is perfectly suited for house hacking. Most college students live with roommates, so you can easily pursue the roommate rental house hack.
Although it may be difficult to secure financing for a house hack as a college student, it is not impossible. Get creative with your financing options to pursue house hacking while in college.
Can you pursue house hacking with a family?
Yes, you can absolutely pursue house hacking with a family in tow. However, you’ll need to consider the additional factors of house hacking with a family onsite.
In most cases, you’ll want more privacy. Plus, you’ll likely need more space to accommodate your family. Although there are more things to consider, it is still very possible.
The Bottom Line
House hacking is a great way to get started with real estate investing. Whether you try this tactic at 20 years old or later in life, it can accelerate your path to FI. Don’t wait to take action on this powerful financial strategy!