House hacking is a way to transform your financial future. Since the average American spends around 30% of their income on housing costs each year, it is possible to save a significant portion of your income with the decision to house hack.
Although the promise of reduced or eliminated housing costs sounds like a dream come true, you might want to learn more about this strategy. Today we will dive into the definition of house hacking and learn how this strategy can dramatically impact your financial future.
What is house hacking?
House hacking is the decision to rent out a portion of your property in order to offset the costs of your mortgage and property maintenance. Although there are several ways to house hack here are the six most common options:
- Room rental house hacking. This is the most traditional form of housing hacking. If you have extra rooms in your house, then you could try this today.
- Income suite house hacking. An income suite house hack provides a more separated experience. You won’t have as many common areas to share with your tenants, but you’ll still have their rental income.
- ADU house hacking. An ADU, or accessory dwelling unit, allows you to rent out a separate building on your property. With this, you’ll have even less interaction with your tenants.
- Small multifamily house hacking. A small multifamily house hacking opportunity could be a building with up to 4 units. You can rent out the spare units to offset your mortgage.
- Live-in flip. If you want to house hack without being a landlord, you can flip a property for profit.
- Work provided housing. If your employer provides housing, you can take advantage of the benefits of reduced housing costs without owning a property.
There are different ways to approach house hacking. But the common theme is that you can use the extra space on your property or in your home to produce an income. The goal is to completely offset your mortgage and maintenance costs.
House hacking experts weigh in
Let’s take a look at what these personal finance experts have to say about this unique housing strategy.
A powerful opportunity
Dave Mason, co-author of The Cash Machine: A Tale of Passon, Persistence, and Financial Independence, has this to say:
“House hacking is when you purchase a primary residence and rent portions out to others in order to cover your costs. When done well, house hacking can allow you to reduce your living expenses to zero, build equity, and often even realize a small monthly income on top of that.
What makes it so powerful is that US law allows you to have up to four units covered by one primary residence mortgage, so one house with four apartments can all be purchased under a very affordable, low downpayment, primary residence mortgage.”
An income stream
Nathan Claire, the founder of Buying Jax Homes, shares his definition of house hacking:
“The act of creating an income stream from their own place that you reside may seem confusing, complex, or even impossible. For most people, their personal residence is a liability (not an asset) as it costs you money to live there instead of bringing in money each month. Even if the home is free and clear, you are still most likely paying for insurance and you will ALWAYS have to pay yearly taxes.
For many investors, this just doesn’t sit right with them, prompting them to utilize different strategies on how to turn their home into an income-producing property. This can be done several ways, but it all begins with rent. A homeowner may rent out a room, rent out one half of a duplex and live in the other, or even rent the house out on the weekends via short term rental sites like Airbnb or VRBO. Whatever the strategy, it’s all about turning that costly home you use for leisure and peace of mind into a cash cow that can help or even completely pay for your mortgage, insurance, and taxes. Allowing you to live in the property and all while collecting payments to offset the expenses mentioned above.
House hacking can be a great way to cut costs on living expenses in exchange for the sacrifice of some privacy/quiet sense of enjoyment. It may not be feasible for all investors but a great many are utilizing this strategy with success all over the world today”
Low down payment opportunity to invest in real estate
Josh Eberly, from Glanzair Properties, says:
“House hacking for us is the process of buying a property that you can rent out part of to cover some if not all of your mortgage. This is extremely attractive as there are special lending programs for first time home buyers that do not require a large downpayment.”
The perfect way to start investing in real estate
Leonard Ang, from iProperty Management, shares his take on house hacking:
“House hacking is the beginner’s stage of real estate investing. It is where you own a home, multi-family rental properties, or any building with multiple rooms and rent them all out, except for one room you use for yourself. This is considered hacking because the income you gain from renting out your “units” is used to pay for your basic necessities while making a profit. This is legal however some municipalities may fine you if certain standards are not met.”
How to learn more about house hacking
House hacking offers the opportunity to take your personal finances to the next level. The strategy is fairly straightforward but it is important to understand the basics before diving in.
As you learn more, please take advantage of all the resources that FI by REI has to offer. You can check out case studies for inspiration, listen to our House Hacking Podcast, or read the Ultimate Guide to house hacking.
The more you learn about house hacking, you’ll realize that there are so many different ways to pursue this strategy. Take your time to find a strategy that will work best for your life. You might be surprised which opportunities jump out at you when you start thinking through your housing solution in a more creative light.
Is house hacking worth it?
Each year, the average American spends around 30% of their annual budget on housing expenses. Whether you own your own home or rent a space, the costs of putting a roof over your head can be very high. This is especially true in high cost of living areas. You might find yourself spending almost half of your income to live in a safe place in certain situations.
Imagine if you were able to completely eliminate your housing cost. Think of what you could do with those savings! You could invest the savings in your pursuit of financial independence, pay for a lavish vacation, or spend the funds on your favorite hobby. Without a housing cost, your budget will suddenly have more wiggle room to work towards your goals.
Overall, house hacking can be a great opportunity. Although you may have to consider alternative living situations, the rewards can definitely outweigh the costs. Of course, you’ll need to decide for yourself whether or not house hacking is a path you want to pursue. But make sure to consider the amazing benefits before passing up this life-changing opportunity!
In 2018 FI by REI was created with the purpose of helping individuals that want a better life. We share articles on personal finance, house hacking & real estate investing, and more.