So you’ve stumbled upon the phrase “House Hacking” and now you’re wondering…
What is House Hacking? Is it something I can realistically do to build financial wealth or get started in real estate investing?
In this post, you’ll learn the answers to both of those questions.
What is the Definition of House Hacking?
Simply put, House Hacking is a wealth building strategy where you rent out a portion of your primary residence to generate income. This income is used to offset the cost of your mortgage and other expenses associated with owning your home.
House Hacking can look very different from one property to the next depending on the type of home you own. For example, you can purchase a:
- Condo to live in one room and rent out the other rooms
- Duplex to live in one unit and rent out the other
- Single family home with a mother-in-law suite or Additional Dwelling Unit to rent out those areas
There are a lot of different ways to House Hack, but at the end of the day, House Hacking simply means you have found a way to monetize your primary residence to help pay for your mortgage.
When done right, House Hacking allows you to significantly reduce the amount of money you have to pay out of pocket for your living expenses.
In some instances, it can empower you to live “rent free” or even generate positive income each month. This is a key benefit because it’s a tool for one of the most important principles to building financial wealth: it’s not about how much money you make, it’s about how much money you keep.
What are the Benefits of House Hacking?
The concept of House Hacking has been around for a long time—people have consistently purchased small multi-family homes to live in one unit and rent the other(s), or rent out rooms in their condo/home to help pay the mortgage.
However, House Hacking has become more popular in recent years as 1) real estate becomes more expensive and people are looking for a way to get started and 2) financial independence becomes more of a focus area for younger generations.
House Hacking is an excellent vehicle to achieve both of those objectives because House Hacking:
- Lowers your monthly housing costs by generating income
- Lowers your taxable income via additional tax write-offs (mortgage interest deduction, etc.)
- Adds an asset to your portfolio can appreciate over time
- Helps protect you against inflation with both the asset price and price of rent
All of these things make a significant impact on your wallet over time.
Is House Hacking Something I can Do?
The short answer: Likely!
The initial hurdle to acquiring your first House Hack is significant. However, I believe it is worth the effort because House Hacking can accelerate your financial wealth building process.
In order to get started, you’ll need to work on four main components:
- Down payment
- Good Credit
- Ability to qualify for a home loan
- A respectable rental market
Depending on your personal and financial situation, you may be ready with all four of these things, or you may be a few years away. Here are some things to consider for each component as you begin laying the foundation for your first House Hack:
1. Down Payment
This can be a lot of money depending on your market and your loan. There are different programs and grants that you can use to lower this significantly, so be sure to talk with a variety of loan officers in your area to see what options you have and what special programs you may qualify for. As a general guideline, plan on having 5% plus closing costs for a conventional loan.
2. Good Credit
If you haven’t been tracking your credit score, now is the time to start! Run a credit check on yourself to see what your score currently is, and then be diligent about making all of your appropriate payments every month to ensure you are maintaining and improving your credit score. Here are some additional tips on how to improve your credit score.
3. Ability to Qualify for a Loan
Loan officers look at specific criteria to determine if you meet their lending standards or not. These criteria can differ from lender to lender, so this is another reason it is important to talk to multiple lenders early in the process. Ask them what criteria they evaluate, and then take action to ensure you have all of it squared away. In the event that you are a contractor, service provider, or have a job that isn’t a full time W2 position, be prepared to show two years of consistent income on your tax returns and jump through a few additional hoops. Again, this process can vary from person to person and lender to lender, so talk with others to put all the pieces together.
4. A Respectable Rental Market
A House Hack isn’t a good idea everywhere. If you purchase a single family home with the intent to live in one room and rent out the others, but you don’t have a rental market that has enough individuals who want to rent rooms to fill your home, it’ll be extremely hard for you to fulfill your House Hack goals. Ensure that you live in a location with the rental market needed for the particular type of House Hack that you’re trying to pursue.
House Hacking is an investment strategy. Therefore, you need to treat it as such. Before you purchase a property, set out financial goals based on the market conditions in your area. If you are purchasing a duplex, and renting out one side, what will that side realistically rent for? How much of the mortgage will that cover? Is it worth it for you? Will you get better returns if you purchase a single family home and rent out rooms? These are all questions you should explore PRIOR to purchasing your first House Hack so that you have solid reason to believe it will work according to plan.
Hopefully this provides you with the initial answers you were looking for as you consider House Hacking. In future posts, we’ll explore all of these components (and more) in greater detail.