House Hacking is an excellent strategy to build wealth that is becoming more popular. House Hacking 101 will teach you everything you need to know about House Hacking.

Part 1: Introduction to House Hacking

What is House Hacking?

House Hacking is a wealth-building strategy where you rent a portion of your primary residence to generate income. The income generated from renting part of your property offsets the cost of expenses associated with owning your home so that you can reduce your monthly expenses.

How Does House Hacking Work?

To House Hack, you purchase a single-family home or small multi-family property as your primary residence. You live in one portion of the property and rent out the other(s). The rent from your tenants cover all or part of your mortgage, helping you save money while building equity in an asset.

What Are the Benefits of House Hacking?

House Hacking has many benefits, including reduced living expenses, stabilized living expenses, increased net worth, tax advantages, real estate investing experience, and more.

For a more thorough look at the benefits of house hacking, read House Hacking Pros and Cons (From Experience).

Is House Hacking Legal?

House hacking is legal in many areas. To be sure that house hacking is legal in your area, reference your local laws. Some jurisdictions don’t allow you to rent any space in your primary residence, so double check your local laws before purchasing a house hack.

Why is House Hacking Popular?

House Hacking is gaining popularity because it makes housing more affordable. House Hacking empowers homeowners to save money on rent while simultaneously building wealth. 

Additionally, house hacking can empower you to purchase real estate with a low down payment and reduced monthly expenses compared to an ordinary primary residence or investment property.

Part 2: Different Types of House Hacks

House Hacking with a Single Family Home

To House Hack with a single-family home, purchase a single-family home that has one of the following: more bedrooms than you need, a mother-in-law suite, an Additional Dwelling Unit (ADU), a large lot, or significant storage areas. Then, find ways to rent the portion of the house you don’t use.

For example, if you purchase a four-bedroom house and you only need one bedroom, find three roommates to rent the other three rooms from you. If you buy a single-family home with a mother-in-law suite, you can live in the house’s main portion and separately rent out the mother-in-law suite. If you purchase a single-family residence with an ADU, you can live in the ADU and rent out the main house or vice versa. These are all common ways to house hack with a single-family home.

There are other creative ways you can house hack with a single-family home that don’t involve renting rooms. For example, you can buy a house on a large lot with open space and then rent out the space for something like boat storage, RV parking, or a tiny home (check your local laws first). 

If you purchase a home with significant storage (such as an oversized detached garage or shed), you can also consider renting that space as storage units or workshops (again, check your local laws to see what is allowed first).

There are many different ways to house hack, but the underlying principle remains the same—you rent out a portion of your primary residence to lower your living expenses.

If you’d like a real-life example, read this house hack analysis from my first house hack.

House Hacking Small Multifamily Properties

To House Hack a small multifamily property, purchase a duplex, triplex, or fourplex. Then, live in one unit and rent the other(s).

For areas with a reasonable number of multifamily properties, this is an excellent way to house hack because it provides you with a little more privacy than house hacking in a single-family home. Here’s what they look like in more detail:

House Hacking with a Duplex

A duplex is one property split up into two units, often with similar layouts and different addresses. To House Hack a duplex, you live in one unit and rent out the other unit. 

The nice thing about house hacking a duplex is that, more often than not, duplexes are usually separately metered and viewed as different households in the eyes of utility companies. As a separately metered unit, you can usually require the tenants to pay for their own utilities even though you live on the same property.

Depending on your scenario, you can take house hacking in a duplex further by renting out the unit you don’t live in and also rent out any spare bedrooms you have in your unit.

For example, if you buy a duplex that consists of two 2br/1ba units, you can rent one side as a full unit and then rent out the second bedroom on your side.

You can quickly start to see that there is a lot of flexibility in house hacking. It all depends on your comfort level, budget, and market.

If you want an example of house hacking with a duplex, read this real-life analysis from Retire by 40.

House Hacking with a Triplex

A triplex is another type of small multi-family property. A single building is often split into three units, frequently with similar layouts and different addresses or unit numbers. When house hacking a triplex, you treat it similarly to a duplex where you live in one unit and rent the others. 

If you want an example of house hacking in a triplex, read this excellent analysis from FamVestor.

House Hacking with a Fourplex

A fourplex is arguably the best type of multi-family house hack because the rent from three units often empowers you to live for free while earning rental income. Just like house hacking any other small multi-family property, you live in one unit and rent the others. 

House Hacking a Condo, Apartment, or Townhouse

To house hack with a condo or apartment, you simply rent out any additional rooms in the condo or apartment. If you only use one bedroom in a 2br/1ba apartment, you can rent out the spare bedroom to someone else while you’re living there. If you can get a three or four-bedroom condo or townhouse, you can rent out the additional bedrooms just like you would in a single-family house hack.

House Hacking with Friends

If you’re at a stage in life where you have several friends interested in being your roommates, house hacking with friends can be a great option. 

To house hack with friends, you simply fill the spare rooms or units with your friends instead of strangers. Renting to your friends can be a significant benefit because you already know and trust the people moving into your space.

However, it’s essential to exercise caution when you consider house hacking with friends. While it can be great, you need to know that it will be great before moving forward with the process. If there is a chance that your friends will not pay you on time, not take care of the property, or expect special privileges because they’re your friends, it’s not a good idea to house hack with friends. 

Why?

Because if they fail to pay on time, or at all, you run the risk of losing out on your investment and—more importantly—losing friendships.

House Hacking with a Family

House Hacking is certainly possible with a family. The strategies and principles all remain the same; you simply have more people in the portion of the property that you occupy. Small multi-family properties or single-family homes with a detached carriage house or Additional Dwelling Unit are probably your best options so that you have distinct, independent space for your family. 

However, house hacking all boils down to personal preference and personal goals; if you want to purchase a four-bedroom condo, have your family use three of those rooms and rent out the fourth, by all means, go for it!

For an example of what it is like to house hack with a family, read “How to House Hack with Kids” from Family Size Finance.

Can I House Hack with a Multifamily Property Bigger than Four Units?

Yes, but you will be required to pay a larger down payment.

One of the main advantages to house hacking is the financing that comes along with a primary residence. Primary residence funding can be as little as 3.5% to 5% down. To qualify for this type of funding, your multi family house hack must be a fourplex or smaller.

If you want to house hack a property that is larger than a fourplex, you will be required to put 15% to 20% down. 

To better understand the financing behind house hacking, let’s move to the next section to discuss how to fund a house hack.

Part 4: How to Finance and Fund Your House Hack

There are different types of loans that you can use to acquire real estate. Two of the most common categories of loans are Owner-Occupied and Investment Property loans.

House hacks are purchased as a primary residence with an owner-occupant loan. The reason for this is because you’re living in it while charging rent to help offset your living expenses.

Additionally, owner-occupied loans have slightly better terms because you likely aren’t raking up hundreds of them the way you could with investment properties which makes them slightly “safer” loans in the eyes of the banks.

Here’s an example of the difference between the owner-occupied and investment property terms:

Owner-OccupiedInvestment Property
Down Payment PercentageAs little as 0%, 3.5%, or 5% down depending on what type of loan you use.15%, 20%, or 25% down, depending on what type of loan you use.
Interest RateThe lowest available on the market—often the rates you see advertised online.Typically 0.75% to 2% higher than owner-occupied, depending on the deal, down payment, property type, and other factors.

Part 5: How to Find a Good House Hack

Principle Rule: House Hacking is an Investment so Treat it Like One

The most important thing to remember when searching for your house hack is that it is an investment.

You are not buying your dream home.

You are buying a house that needs to earn money while you live in it, and it needs to cash flow when you move out of it.

If you purchase a house hack that doesn’t meet this qualification, I do not recommend buying it.

With this primary principle in mind, here’s how to find a suitable house hack.

Step 1: Save for Your Down Payment

Depending on the market you’re in, you may need a lot of money for this.

The good news is that you can put as little as 3.5% or 5% down.

Dedicate a few hours one day to browse your local market and determine the median cost for the types of properties that you’re evaluating for your house hack.

When you have this median number, multiply it by 0.05.

That number is the amount you should save for your down payment (assuming 5% down). Then, add $10k–$15k to it for closing costs and repairs.

This number is the total amount you’ll probably want to have in cash for your house hack purchase.

Can you get away without having the extra cash on hand for repairs?

Maybe.

But I’d personally wait until I had those extra funds so that I have the cash to handle a new water heater when the old one goes out after two months of living in the house rather than having to put it on a credit card and go into debt.

Once you have your number, identify how much you can save every month for your down payment fund. Divide the down payment amount by the amount of money you can save each month. This calculation will tell you how many months you’ll need to save before you’re ready to purchase.

Now that you have the data, you’re ready to start! Be diligent about your saving, and celebrate your milestones along the way!

Step 2: Get in Tune with the Market Inventory and Market Numbers

Once you have your down payment saved, it is time to start hunting!

The market might have changed a little bit since you first started saving. Spend time researching what type of properties are on the market and how much they cost.

Become intimately familiar with the hot spots of town, as well as the areas that may appreciate more over time. 

The better you know your market, the better you’ll be able to inform your decisions.

Step 3: Set Your House Hack Criteria

With the market in mind, it’s time to sit down and determine what types of properties you’re going to target.

Write down your parameters, including:

  • Price point
  • Area/Neighborhoods
  • Property type(s) (duplex, SFH with ADU, SFH, etc.)
  • Number of beds/baths
  • Etc.

When you have this, save the various searches on your Redfin or Zillow app. Doing this will help you filter out all of the properties that don’t meet your criteria and make it easier to see when new options pop on the market.

Step 4: Outline Your Financing Strategy

Now that you know your criteria, you can also determine what type of financing you want to secure.

Write out what type of loan you wish to use and why you want to use it compared to others. This thought exercise will help you double-check your assumptions.

Step 5: Interview Lenders and Get Pre-Qualified With Your Favorite

With your financing strategy in hand, begin researching lenders and create a short-list to call.

To source your list, you can ask for recommendations from friends and family, search online, look at real estate forums, etc.

Once you have your list, begin calling to interview them.

As you talk to each lender, provide them with a brief overview of what you want to do along with your established criteria. 

Ask them about their process, what type of rates you can expect to access, and get a feel for the general way they do business.

After talking with a handful, select your favorite and go through the process of getting pre-qualified.

Step 6: Interview Agents and Select Your Favorite

The next step is to do the same thing you did with lenders, but for agents. 

The one caveat here is that it’s essential to find an investor-friendly agent.

Real estate agents that work with investors understand real estate as an investment. This is a different perspective and mindset than real estate agents who solely view real estate as your home.

The investor-friendly real estate agent will help you understand the numbers of a house hack and determine if it’s the right fit for your financial goals.

A regular real estate agent may organically steer you to make more emotional choices based on different criteria than you’ve established because they default to considering it your “forever” home.

After you have interviewed several investor-friendly agents, pick your favorite and begin working together.

Step 7: Look for House Hacks that Meet Your Criteria

With your agent on board, ask them to help you refine your criteria and set up MLS searches to begin reviewing available properties. 

Additionally, ask them to set up automatic notifications so that you receive notifications when new properties come on the market that fit your criteria.

When you see a property pop up, run the numbers.

Determine:

  • How much the monthly mortgage will be
  • Estimate monthly utilities and expenses for the property
  • Determine what portion of the property you can rent while living there
  • Determine how much revenue you can generate while living there
  • Determine how much you can rent the property for when you move out

When you have both of these numbers, run them twice by subtracting the expenses from both sets of revenue. This will give you the amount you make/pay while living there and the amount you make/pay when you move out.

Note: if you are still paying money out of your pocket while living there (e.g., you’re renting out two rooms in the house that cover ¾ of the mortgage and expenses, I personally still consider that a win). However, if you are still paying money out of pocket after moving out and the property is cash flow negative, I don’t recommend moving forward.

The point here is to acquire a property that will cash flow when you move out.

Step 8: Tour the Property and Take Notes

When you find a winner on paper, it’s time to look at it in person.

Go with your realtor to tour the property and get a feel for the location and property condition.

Take note of any structural issues that may be lingering and any significant repairs that need to be made immediately and in the next few years.

Remember, no property is perfect. Every property will need some type of maintenance. The goal here is to estimate your out-of-pocket expenses for initial repairs so that you can factor them into the equation.

Step 9: Make an Offer

If you’re happy with the property’s condition and the numbers still check out (keep running those numbers throughout the process to ensure you’re confident they’ll work!), then it is time to make an offer.

Work with your agent to create a competitive offer for the market to help you get the best price possible on the property.

If the seller doesn’t accept your offer, it’s okay! As they say, there are more fish in the ocean—keep hunting.

If the seller accepts your offer, congratulations!

Step 10: Complete Your Due Diligence

During the first few days of being under contract, you’ll have the opportunity to complete your due diligence.

DO NOT TAKE THIS PHASE LIGHTLY.

Order your inspection and appraisal, and gather as much information as you can about the property during this time. Call the city to learn about the zoning, permit history, future construction plans within the area, etc. Additionally, investigate if the house sits within a floodplain and what that can mean for your monthly insurance. Drive the neighborhood more and confirm you like the area.

This is your chance to uncover any potential red flags, so invest a lot of time and energy here so that you know what you’re getting yourself into with the property.

Step 11: Negotiate

During the inspection, there may be things that pop up that need to be fixed.

Take the time to request reasonable repairs or credits from the seller to ensure you receive compensation for these repairs.

This is the last chance that you have to add value to the deal.

Step 12: Pack Up Your Boxes and Move Into Your New House Hack!

After you make it through inspection contingencies and finish negotiating, it should be relatively smooth sailing until closing!

Once you close and have the keys to your new place, it’s time to move in and get ready to rent out a portion of it to tenants as planned!

Part 6: How to Find Good Tenants for Your House Hack

Now that it’s time to fill your space, you want to make sure you fill it with good tenants who will respect you—and your property—and pay on time.

One of the best ways to save yourself a lot of time, effort, and headache during your house hack is to fill it with excellent tenants. The best way to do this is by establishing a thorough screening process. Here’s one way to go about it:

1. Set Clear Requirements and Include them in Your Listings

By establishing precise requirements upfront and only showing your room(s) or unit(s) to qualified people, you can be more efficient with your time.

Before taking a look at the best tenant screening questions, keep in mind what information you’re looking for in your applicants. General tenant requirements can include:

  • Monthly income 3x the rent
  • Clean eviction report
  • Clean criminal background
  • Good credit score
  • Positive references from previous landlords
  • Steady employment history

In addition to these requirements, take time to establish policies for pets, smoking, parking, and utilities so that applicants can determine if they’re a good fit for your property.  

By including these requirements and policies in your listing, you will receive a smaller yet better-qualified pool of applicants to review. 

2. Request an Application

With your listing in hand, post it to the major rental sites and ask every prospective tenant to complete the application. 

Here is a preliminary list of information you should request and review in your application:

  • Employment History
    • How long has the tenant been at their current job? Do they have any significant periods of unemployment? If so, what caused those?
  • Current Income Level 
    • Does the tenant earn enough every month to pay for the rent plus other living expenses comfortably?
  • Financial Health
    • What type of cash reserves do they have readily available? If they were to lose their job, could they float a few months of rent?
  • Credit Score and History
    • How much debt does the applicant have? Is it a manageable monthly payment for their income when you include monthly rent and living expenses?
    • Has the applicant ever missed a payment?
    • Does the applicant have any collections?
  • References from Previous Landlords
    • Call the listed landlords and ask about the applicant as a tenant.
  • Background Check
    • Look for any criminal history.
    • It’s up to you to determine what type of criminal history you will accept.

Be prepared that most people who reach out will not fill out an application.

Because of this, I will answer initial questions to people who inquire about the property, but I quickly direct them to fill out an application if they’re interested so that I don’t waste hours answering questions only to have them prospects stop responding. 

The application serves as a great litmus test to gauge how interested someone is in renting from you.

Note that if an applicant excludes requested information, it could be a red flag. If this happens, follow-up with the applicant and ask them to complete the application in full so that you can thoroughly review it.

2A. Details on Running Credit Checks for a House hack

Running a credit check on your applicants can tell you a lot about how they pay their bills, so running the check is a great idea.

However, check with your state laws to determine who needs to pay for it. Some states allow the landlord to charge an applicant for the credit and/or background check cost. Other states require the landlords to pay for it.

Regardless of who pays for the report, it’s a good idea to run it.

2B. Details on Running a Background Check for a House Hack

Like a credit check, some states allow the landlord to charge the applicant for it, whereas others require them to pay for it. Since this applicant will be living in your property, it is a worthy investment to run a background check either way.

A background check provides a report of the applicant’s past legal encounters. This can range from traffic violations to warrants and public records to arrests. 

Consider the following when you request a background check:

  • Evictions
    • If the applicant has an eviction history, you may want to reconsider renting to the person or ask for more information about the eviction to inform your decision.
  • Criminal Records
    • Often an applicant will have traffic violations on their record or history from their youth. Traffic violations and distant history shouldn’t require too much alarm if it’s clear the applicant corrected their behavior. However, if the applicant has continued or more serious criminal records, you may want to reconsider renting to them.
  • Public Records
    • If the applicant were involved in a legal case, it would likely show up on the background check. Try to gather information as to what the battle was about. If it was for something along the lines of unpaid rent, unpaid child support, or other serious financial matters, it might indicate a habit of nonpayment.

3. Contact Previous Landlords

The landlord community tends to be friendly and informative. The practice of calling current and prior applicant landlords is expected, so most are comfortable receiving the calls and open to helping because they know they’ll have to make similar calls to other landlords in the future.

To get a sense of the applicant, you will want to ask some basic questions about the landlord’s experience with the applicant without invading anyone’s privacy.

Questions to Ask a Former Landlord Can Include:

  • Did the applicant inform you of their intent to move? (for current landlords)
  • Does the applicant owe you any outstanding debt?
  • Does the applicant have a history of late payments?
  • Has the applicant caused any major damage to your rental unit?
  • Did the applicant disrupt the neighbors or cause any significant issues while living there?
  • Did the applicant receive their full security deposit when moving out?
  • Would you rent a property to this applicant in the future?
  • Is there anything else you think I should know about this applicant?

If the landlord you call responds with a raving review and says something to the effect of, “They’ve been a wonderful tenant, and we will genuinely miss them when they leave. You won’t have any problems,” you’re likely in good company. 

If the landlord doesn’t give you a lot of information or seems overly eager for the applicant to no longer be their tenant, you may want to investigate why. 

Know that when talking with a landlord reference, what goes unsaid can often be as valuable as what is said.

5. Review the Applicant’s Paystubs

One of the most important things is to verify that the applicant has consistent employment and that their monthly income more than covers the rent.

One of the best ways to do this is to request two to three of the most recent pay stubs.

By doing this, you can verify employment and income.

6. Interview the Applicant

If all of the background information meets your application requirements, it’s generally a good idea to give the applicant a call to ask them if they have any questions about the property, understand what they want to get out of their stay at your property, and see what type of information you can learn through general non-invasive questions.

By doing this, they may voluntarily disclose information about themselves or their lifestyle that you weren’t aware of from the application. This information can be extremely valuable.

As you go through the screening process, keep in mind that you need to follow the Fair Housing Act stipulations. Never discriminate based upon color, disability, family status, national origin, race, religion, or sex.

Final Thoughts on Finding Good Tenants for Your House Hack

As a new landlord and real estate investor (you will be both when you get your first house hack!), it is imperative that you thoroughly screen every applicant.

If you don’t, you run the risk of ruining your house hack experience—whether financially or emotionally—and losing interest in a powerful investment tool.

The simplest way to set yourself up for success is to be diligent with your numbers when you purchase your house hack, and that you thoroughly screen for good tenants by: setting application requirements, doing your due diligence to confirm an applicant meets the requirements, and using your instincts as you move through the process.

Lastly, always remain mindful not to overstep your boundaries established by the Landlord and Tenant  Act’s privacy laws.

Part 5: House Hacking Conclusion

Is House Hacking a Good Idea?

Your situation determines whether or not house hacking is a good idea. However, if you can purchase a property and rent out a portion while living there, house hacking can be an excellent vehicle to help build long-term wealth.

To ensure that you have an excellent personal experience while house hacking, it is crucial to ensure your comfort levels are suitable for sharing whatever shared space comes with the property and thoroughly screen your tenants.

Why You Shouldn’t House Hack

House hacking may not be the best fit for you if:

  • Sharing space with others causes a great deal of stress or anxiety.
  • You don’t have an emergency fund to help cover house costs as they pop up.
  • You live in a market where house hacking numbers aren’t working well at the moment.

Is House Hacking Worth it?

After two house hacks of my own, I firmly believe that (when done right and executed with diligence) house hacking is worth every penny.

This is just my personal belief, and you can learn more about my house hacking experiences here.