Table of Contents
What Is House Hacking?
Is House Hacking Legal?
House Hacking Strategies
House Hacking Pros and Cons
Is House Hacking Worth It?
House Hacking Bottom Line
What Is House Hacking?
House hacking is a real estate investing technique that involves using your home to generate income, typically by renting out part of it. There are numerous house hacking strategies, but most involve renting out separate rooms in your home or units in a building you own. Then, you can use the rent to pay your mortgage, allowing you to reduce or even eliminate your personal housing expenses.
House hacking is an excellent strategy for beginners who want to learn the basics of owning a rental property but aren’t quite ready to purchase a separate house. It allows you to be close by to respond to issues if anything happens and keep an eye on your tenants to be sure they’re not breaking the rules outlined in the lease. It’s also a smart strategy for those who want help paying their mortgage and have some extra space they’re not currently utilizing.
Is House Hacking Legal?
Yes, house hacking is legal, but you still need to respect local laws and regulations while house hacking. For example, if you try an Airbnb house hack, you need to follow local laws, which might mean collecting taxes or implementing a minimum stay.
House Hacking Strategies
- Multi-Family Home House Hack
- Rent by the Room
- Create a Separate Suite
- Put Your Home on Airbnb
- Mobile Home or RV House Hack
- FHA House Hack Strategy
1. Multi-Family Home House Hack
The traditional house hacking strategy involves purchasing a 2-4 family building, occupying one of the units, and then renting out the rest. This is the strategy preferred by most house hackers because it offers more privacy than some other methods. You will still have all your tenants under one roof, but each has a separate living space. Duplexes and triplexes are perfect for house hacking, although you can do it with almost any multifamily building.
2. Rent by the Room
Another way to house hack is to purchase a single-family home and rent out separate rooms or a portion of the house. Perhaps you have a spare bedroom that isn’t being used. You may decide to rent it out and use some of the rental income to pay the mortgage. Or perhaps you’re willing to rent out an entire floor and share standard amenities like the kitchen and living room and charge even more in rent. Doing so means you may have to share your home with your tenants. But this is a good strategy if you’re comfortable with the arrangement or know some people looking for a place to stay.
3. Create a Separate Suite
If you want to create more separation between yourself and your tenants, you could also construct a separate suite and rent it out. For instance, you could build a guest house above the garage or in the basement. You could also create a separate casita in the backyard or convert a pool house into a separate apartment. The more amenities and features you include (such as a private entrance, kitchen, bathroom, etc.), the more you can charge in rent. But it may also cost you an upfront investment if you don’t already have this kind of structure in your home.
4. Put Your Home on Airbnb
Airbnb is another valuable resource for house hacking, especially if you live somewhere with a strong tourist season. Maybe you don’t want a permanent tenant, but you don’t mind temporarily renting out a spare room. Or maybe you often travel and want to make some money while you’re away. Airbnb is a great way to find tenants looking for short-term rentals, plus you can often charge higher rates than what you’d get for renting it out yearly.
5. Mobile Home or RV House Hack
If you don’t have much space in your home but have a large plot of land that isn’t being fully utilized, you may consider doing a mobile home or RV house hack. That means purchasing an RV or a manufactured home and parking it on your property. Then you can either rent it out to tenants, or you could live in it yourself and rent out your home.
Mobile home/RV hacks are better in rural areas, as you need a decent-sized plot of land, and many suburban neighborhoods have laws against mobile home construction or RV parking. So be sure to check the local zoning laws before you try this particular strategy.
6. FHA House Hack Strategy
FHA house hacking refers to using a traditional house hacking strategy with an FHA loan. FHA loans have much lower credit and income requirements than traditional mortgages. You can also be approved with as little as 3.5% down. But FHA loans are only available for primary residences, not investment properties.
The beauty of a house hack is that it’s a primary residence and an investment property, so you can use an FHA loan. The FHA house hack is a smart strategy for those who don’t have the credit and income to afford a conventional mortgage but want to begin earning passive income that can help them pay back the mortgage.
House Hacking Pros and Cons
House Hacking Pros
- Pay Down Your Mortgage Faster
- Less Maintenance
- Fewer Expenses
- Keep an Eye on Your Tenants
1. Pay Down Your Mortgage Faster
The primary benefit of house hacking is using the additional rental income to pay off the mortgage. Depending on how much space you rent and what you charge, you may be able to cover your entire monthly mortgage payment with the rental income. Or you can continue making regular payments and pay off the loan half the time (just keep an eye out for any prepayment penalties).
2. Less Maintenance
Maintaining one property is much less expensive and time-consuming than managing a portfolio of separate investment properties. You only have one roof, yard, HVAC system, set of pipes, and so on, which you would have to maintain anyway because you live there. Plus, if a pipe bursts in the middle of the night, it’s easier to address if you’re right there than if you have to drive across town.
3. Fewer Expenses
House hacking usually carries fewer expenses than buying separate investment properties. You only have to pay one tax bill, one insurance bill, and one bill for each of the utilities, which is more straightforward for accounting purposes. Plus, you can often save money on a property manager since you’ll easily be able to collect rent and maintain the property yourself.
4. Keep an Eye on Your Tenants
Another benefit is that it allows you to closely monitor your investment. If you’re an absentee landlord, you’ll have to trust that your tenants are on their best behavior or do periodic checkups to ensure they are following the rules in the lease. But with a house hack, you can easily spot prohibited conduct such as smoking, loud parties, extended house guests, unapproved pets, etc.
House Hacking Cons
- Lack of Privacy
- May Impact the Resale Value
- Tenants Will Expect Your to Respond Quickly
1. Lack of Privacy
While house hacks have their benefits, there are several reasons why you may not want to house hack. The most obvious is privacy concerns. Depending on your strategy, you may have to open your home to strangers. That means you’ll have to develop a thorough vetting process and be able to mitigate potential disputes, especially if you have multiple tenants living under one roof. Even with a classic house hack, your tenants will live right beside you, which can get uncomfortable for some. So, you should seriously consider whether you’re comfortable mixing your business and personal life in that way.
2. May Impact the Resale Value
A house hack could also potentially impact the resale value of your home. For starters, it will likely lead to more wear and tear. More people are coming in and out daily, which may impact the property’s condition. Plus, if you have a single-family home being shared with tenants, it may be difficult to find a buyer who is open to that type of scenario, even with the extra income, so you may be forced to ask your tenants to leave before you can sell the property.
3. Tenants Will Expect You to Respond Quickly
If your tenants know you live on the premises, they will likely expect you to respond to requests and issues much faster than if you lived in an entirely different area. So, if you’re going to do a house hack, it’s wise to establish boundaries and expectations early on so you aren’t bombarded with constant requests and complaints.
Is House Hacking Worth It?
House hacking is a great strategy to help you pay your mortgage or earn extra passive income without all the stresses of managing a separate property. But you have to be prepared for the responsibilities and sacrifices that come with it. If you’re uncomfortable having strangers – or even people you know personally -share your home or live under the same roof, this isn’t your strategy.
The standard house hack appeals to many because it offers the same benefits but more privacy. However, no matter what, you’ll still live in the same building, which presents challenges. So, while house hacking can be a lucrative technique for those willing to share their home or building, you should carefully weigh the pros and cons before jumping in.
House Hacking Bottom Line
House hacking is great for new investors and those with under-utilized space in their homes. If you are looking for help paying the mortgage or want to save for the down payment on more traditional investment property, you should consider house hacking.
But, if you’re uncomfortable with tenants under your own roof or don’t want to deal with the added hassles of being easily accessible, this may not work for you. Ultimately, you should define your investing goals and decide what you’re comfortable with if you’re debating whether or not this technique makes sense.