Imagine owning a home and helping someone else pay your mortgage. Among younger generations, many view homeownership as simply a pipe dream, but this sounds too good to be true. After all, housing is the biggest expense for most Americans and is more expensive than ever.
However, some resourceful buyers were able to spend less money in their own homes and even live for free. Input: “House Hacking”.
What is house hacking?
House hacking is a strategy in which homeowners rent out parts or units of a single-family home in order for homeowners to offset or eliminate housing costs. It’s a new name for the old practice, but it’s still a great way for buyers who may be priced to buy a home.
In some cases, house hacking can even turn housing into income-generating assets. This could be appealing to people trying to break into real estate investments, especially as investors’ activities drop. House hacking is different from owning traditional investment property because you don’t rent an entire house. You also live in it.
So, if you’re looking for ways to make homeownership more affordable, or want to start your investment journey, a house hack could be a good place to start.
Why is house hacking so popular?
House hacking is popular because it offers an achievable path to homeownership, not just a complete financial burden. It is seen as a way to “hack” the market by removing some of the costs. Many also use it as their first step towards real estate investment.
With housing costs increasing, its popularity has steadily grown over the past few years. In many markets, buyers now need to score six numbers to buy a starter home.
Some house hackers are profiting, but today many are trying to cut their living costs. Record-breaking home prices and mortgage rates have led to steep entrance costs and no guaranteed extra income.
House hacking strategy
House hacks usually involve renting a room or unit in the house, but there are endless options. You can rent a pool, a basement and even a parking lot. If applicable, it is limited only by creativity, zoning laws and the Homeowner’s Association (HOA).
Some common strategies are:
Single-family home: rent a spare bedroom (short-term or long-term) or lease multiple rooms to different tenants. You can also rent a completed basement or convert it to another living space. Multi-family home: Buy a double, triplex, or fourplex, live in one unit and rent another unit. Accessory Residential Units (ADUs): Lease a detached ADU or “grandma pod” such as a backyard cottage, carriage house or legal suite. Garage Conversion: Turn your garage into a completed bedroom or studio apartment. Some people even rent a garage as a parking space. Live -in Flip: Buy a house that needs an update, live during renovations, and sell profitably. The owner may benefit from the tax benefits occupied by the tax benefits.
>>Read: Can I rent a major residence?
Benefits of House Hacking
House hacking combines the benefits of homeownership with the potential for rental income. This is the fault:
Generate income: By renting out spare rooms, apartment complexes, and more, you can offset your home costs, cover your entire mortgage, or even make a profit. Easy entry into the housing market: House hacking gives you access to several low-down payment loan types. An FHA loan allows just 3.5% down on 1-4 units of property if it is a primary residence (you must live there for at least 12 months). VA loans offer 0% down to eligible veterans. Freddie Mac’s Home Passion program allows qualified buyers to buy for just 3% down. Lower Investment Bar: House hackers buy both major residences and income-producing real estate for one down payment. This involves much less cash than buying investment property alone. Investment loans for real estate accounted for by non-owners usually need to be reduced by 15-25%, while house hacking requires a reduction of just 0-3.5%. Tax benefits: Homeowners can deduct interest and property tax on mortgages in their primary residence. You are also eligible to deduct depreciation, repairs and other rental-related expenses for some of your rental home.
What to consider before a house hack
House hacking is not free money. Success requires goals, legal know-how and good boundaries. Here are some important considerations before you begin your hacking journey:
Monthly Budget: Determine the income you need to make your home you can afford and the investment worth it. The key metrics are PITI (principles, interest, taxes, insurance). Represents monthly housing costs and vary depending on home price, head price and location. Repairs and improvements: Daily maintenance costs, unexpected repairs, budget for future improvements. The rule of thumb is to budget 1-4% of the real estate purchase price each year, resulting in 5-8% of your monthly total rental income. Tenant: You can share walls and bathrooms. Set boundaries and expectations for tenants early on. Legal obligations: You must comply with all federal, state and local zoning and landlord tenant laws, including fair housing, lease requirements and eviction rules. Use screen tenants carefully to reduce seat availability and avoid legal issues. Short-term hacking may have additional restrictions under city ordinances (like New York). Investment risk: There is no guarantee that there will always be a renter. This means that you don’t always collect rent for a mortgage.
What is the future of house hacking?
House hacking is a great way to generate supplementary or profitable income. People usually use it to cover monthly housing costs, start investing in real estate, or both.
But no matter how seasoned you are, it’s essential to consider your monthly budget, return on investment and potential drawbacks. This is especially true in today’s high-cost market. In this market, success depends on budgeting and planning for changes in rental demand.
Looking ahead, as more Pandemi-era apartment buildings are completed, it can become more difficult to attract tenants. As the increase in share of new apartments caters to mid-to-high-income renters, you can reasonably combine prices to achieve more success. However, rental demand is expected to only increase, and prices could rise in the future. This means you can increase your monthly income.
