House hacking started as a way for people living in high-cost areas to buy and maintain a home.
Now it’s one of the most popular ways people start their real estate investing journey.
If you’re interested in house hacking, rest assured. There are many different tactics you can use to save money or make money by owning just a single piece of real estate.
Let’s get into it!
What is house hacking?
House hacking is a term used to describe the act of buying one property and then utilizing it in some way to generate an income. This can be done by renting out rooms or even renting out entire units within the multi-family property.
It’s a great way to build wealth while also reducing your expenses since you can live in a part of the property for free or for a discounted amount.
Here are some pros and cons of house hacking…
Pros of House Hacking
• You can save money by living in the property you’re investing in.
• It’s a great way to get started in real estate investing with minimal capital.
• You can leverage tax benefits and currencies that come with being a landlord.
Cons of House Hacking
• Being a landlord is not always easy and may require a lot of time and effort.
• You’ll be responsible for any maintenance or repairs that need to be made.
• House hacking can be more complicated in certain areas due to local laws and regulations.
A Popular Example Of House Hacking (With Numbers)
To help you understand how this works, let’s take a quick look at a popular example with some actual numbers attached to it.
Imagine you buy a duplex for $250,000. You plan to live in one unit and rent out the other for $1,400 a month. Your mortgage payment is roughly $1,300 including insurance and taxes so you are making about $100 per month, you’re living in the duplex for free, and someone else is paying to increase your equity.
Starting to see the benefits?
This is a great way to start real estate investing or to just live more affordably.
It’ll teach you the ropes to being a landlord in an environment where you can keep a close eye on your tenants, and you can get to grips with managing a budget and taking care of maintenance, repairs, and other real estate investing responsibilities.
Important Things To Consider When House Hacking
As with all real estate investing methods, there’s some degree of risk involved.
And it’s important to be aware of common pitfalls when you’re deciding on a house hacking strategy, buying a property, and finding tenants.
Here are some things to keep in mind…
Think About Location
You want to choose a property in an area with good rental demand. If you’re renting out rooms, you’ll also want to make sure it’s close to amenities like public transportation and shops. Also, try to avoid HOAs as they typically have restrictions around having non-owner residents living in your property. And don’t forget to research all of the landlord-tenant laws in your area so you don’t run afoul of any.
Getting a Loan
The most popular loans for house hacking are FHA loans (or VA loans if you’re a veterate), and they require a lower down payment than other loan types. However, you’ll need to meet the credit and income requirements for this type of loan, as well as occupancy and rent-to-value ratios in order to qualify.
Making Repairs & Maintenance
You should set aside some time once a month or every other month (make sure to coordinate with your tenants) to check your property and make sure everything is in order. This includes routine maintenance like replacing filters, mowing the lawn, etc., as well as emergency repairs like fixing a broken water heater or a leaky roof. Part of house hacking is taking good care of the property you own. Make sure to put a little money away every month to cover any repairs that may come up.
Run The Numbers
Take the time to run the numbers before buying a property. Calculate how much money you’ll need to put down, what your monthly expenses will be (mortgage payments, insurance, taxes, etc.), and your expected rental income. Good real estate investing is just good math.
Be Picky When Looking For Tenant
Your tenants will have a huge impact on the success of your house hacking. Make sure you’re doing thorough background checks on potential tenants and look for people who are responsible, communicative, and have steady sources of income. It’s also a good idea to ask for past landlord referrals. Remember: it’s better to let the house sit empty for a little while than it is to have bad tenants.
1. Buy a MultiFamily Property
The first and one of the most popular, straightforward tactics for house hacking is to buy a multifamily property (like a duplex, triplex, etc.) and rent out all or some of the units.
This is a great way to reduce your monthly expenses, increase your income, and get your feet wet in real estate investing.
The bigger the multifamily property is (i.e. the more homes or bedrooms), the more you’ll be able to rent out and the more income you’ll be able to earn.
If, for instance, you buy a triplex for $400K (with a mortgage of $2k) and rent out two of the units for $1,500 each, you could be looking at a monthly profit of around $1,000 (not to mention getting your own space for free.
Of course, also remember that more homes means more tenants, more repairs, and more general management. If you’re just getting started, try not to bite off more than you can chew.
2. Rent Out Additional Rooms
Another option is to buy a single family home and rent out additional rooms in the house.
This can be an especially great option if you already have a mortgage and need some extra income to help with expenses. It also allows you to gain experience as a landlord without having to manage multiple units at once.
When renting out additional rooms, you’ll want to make sure the property is in decent shape. You’ll also need to factor in additional costs like utilities and other bills. And remember that it’s important to be transparent with your tenants about general house rules and expectations since you’ll be sharing space like the kitchen and living room.
Sound too uncomfortable to rent out rooms of your house to random strangers?
I’d bet that you have at least a few local friends or acquaintances who wouldn’t mind renting a room from you. This could be a great way to save money while helping out someone you already know.
3. Get Housemates
If you already own a single family or multifamily property and just need to cover some extra expenses, consider finding a couple of housemates.
You can find potential housemates through friends, family, online rental sites (like Craigslist or Zillow) or even local colleges and universities.
Just be sure to make expectations clear from the beginning and create a rental agreement to protect yourself. This can include things like rules for noise, responsibility for household chores and repairs, pet policies, etc.
And be sure to do background checks on potential housemates as well (assuming you don’t know them already) – you don’t want to end up with someone who has a history of not paying rent or being evicted from previous rentals.
This is similar to renting out rooms but different in one regard: it’s typically less formal and you might even just split the cost of the mortgage with your housemate.
4. Turn Land Into Income
If you have a large tract of land you can rent out, you may be able to use it as an additional income stream.
This could include renting it out for agricultural purposes (such as raising livestock or selling produce), operating a campground or RV park, or even hosting special events like weddings and parties.
Just remember that if you’re renting it out for any long-term purposes, it’s important to have the proper permits and licenses in place.
And if you plan to host events on the land, make sure you create a detailed contract with the renter that outlines things like what types of events can be held there and how much they must pay for each event.
The great thing about land is that the only limit to its profitability is your own creativity. So take some time to explore different ideas and see what might work best for you.
5. Live in Your Flips
One of the most profitable ways to house hack is to buy a fixer-upper or distressed property and fix it up while you’re living in it yourself.
This is a great way to both become a homeowner and a real estate investor at the same time.
The key, of course, is to find a property that could use some repairs and renovations… but that is still livable.
This not only allows you to benefit from lower mortgage payments as well as rental income (if you choose to rent out part of the house), but it can also be an incredibly rewarding experience that allows you to learn all about the real estate industry.
Plus, when it comes time to sell your home, you can likely expect a nice return on your investment due to the repairs and upgrades you’ve made.
6. AirBnB Your Home
Airbnb can also be an excellent source of income if you have extra rooms in your house or apartment that aren’t being used.
This is becoming increasingly popular among homeowners who want to make some extra money but don’t necessarily want the hassle of long-term tenants.
Just be sure to research the laws in your area surrounding Airbnb rentals, as these can vary wildly depending on where you live.
And remember that it’s important to set boundaries with your guests and make sure they understand all the house rules before they arrive.
7. Finish The Basement
If you already own a home, you may be able to house hack by finishing your basement or attic and renting out the extra space.
Depending on where you live, zoning laws might limit what type of activity can take place in the finished area – so make sure you check with your local government before doing any major renovations (and always check to make sure you have the proper permits).
Finishing a basement can not only provide extra space for tenants, but it may also increase the value of your home when it comes time to sell.
8. Invest In ADUs
Accessory Dwelling Units (ADUs) are self-contained units typically attached to a primary residence or built in the same lot.
These can come in many different forms, such as guest houses, granny flats, tiny homes, and converted garages – and they offer a great opportunity for homeowners who want to rent out space while still having plenty of privacy for themselves.
Just remember that, like with Airbnb rentals, you’ll need to make sure your local laws allow for this type of rental arrangement before taking any action.
9. Try AirBnB Arbitrage
If you don’t want the hassle of having to manage rental properties yourself, another option is to try Airbnb arbitrage.
This involves reaching out to owners of long-term rentals or real estate investors in popular tourist areas. Offer to pay their rent price every month so long as you’re allowed to list the property on AirBnB and keep the profit.
The main sell here is to tell them that you’ll manage the property completely and get it cleaned after every guest. That can be a big selling point for the owner. Long-term tenants don’t clear the property nearly as often as you would if you listed it on AirBnB for them.
This is a great way to benefit from high-return markets without having to purchase the property yourself.
House hacking can be an incredibly rewarding and profitable way to get into real estate investing — but it does require some planning and research.
Make sure you understand all the local laws pertaining to rentals, check out potential properties in person before committing, and remember that any renovations or repairs must fit within your budget.
Above all else, however, just remember to have fun with it. Investing in real estate can be a great way to make some extra money and build up your financial portfolio — and house hacking is a great place to start!