House hacking is just finding ways to make money from your home.
Traditionally, it meant purchasing a multifamily property, living in one unit, and renting out the others so that the tenants paid the owner’s mortgage and the owner built equity while maintaining the property.
Savvy investors have long recognized that owning a multifamily property or implementing some of the other house hacks listed below can be a simple way to learn about property management and the work required to be a landlord.
What is House Hacking? Why House Hack?
To answer what is house hacking – It is a modern lifestyle choice that allows borrowers to generate cash from their houses.
House hacking provides extra revenue and a view into what becoming a landlord requires, allowing you to determine whether you want to develop your real estate interests in the future.
House hacking is a temporary solution to decrease living expenses, but it may also be the start of a real estate investing career.
With the high cost of housing, it’s a way to use an asset you currently own to pay for your lifestyle, save money, or buy more real estate investment property, all while increasing your home equity.
Can you house hack if you don’t already own a home?
If you are already a homeowner, house hacking is one of the quickest and least painful ways to cut down on your living expenses and begin building wealth almost overnight.
However, if you’re not a homeowner yet and are struggling to generate some meaningful cash flow, you won’t be able to pull it off, at least in the beginning.
It will be easier to get hold of a house to hack compared to a conventional investment property loan, which requires 15% to 20% in down payment and a higher credit score.
This method of real estate investing is very unique because of the low barriers to entry. For example, with some government-backed loan programs, you can get a multifamily home for as little as 0% to 3.5% down as long as you are going to live in it too. On the other hand, conventional loans allow 3% down
5 house-hacking strategies
If you want to live in a house of your own for free, then selecting the right house hacking strategy will be key to making that happen. And so, here are five different approaches to house hacking.
1. Rent out extra bedrooms
If you are house hacking a single-family home, taking on a housemate or two is probably your best option. If you have an extra bedroom or an office that you hardly make use of, you can choose to rent it out.
You will need to find out how much rent you can charge as a function of the local housing demand. At the minimum, you can still save part of your money as part of your rent or mortgage payment.
If you don’t want to stay with a stranger, then think about renting a room to a family member.
2. Lease out a finished basement or in-law suite
Suppose you have a finished basement, an in-law suite, or an accessory dwelling unit (ADU) in your home. In that case, it may turn into an excellent rental property if you include facilities such as a private kitchen and bathroom.
This will work because you’ll not share them but collect the money for the spaces each month passively.
3. Buy a multifamily home
Perhaps you’re in the market for a new home and are wondering how you might make it pay for itself, at least partially.
House hacking a duplex, or any sort of multifamily housing, allows you to set up your personal room while renting out the remaining units.
You’ll have more isolation and privacy than if you shared a room with someone, just like in an in-law suite.
4. Rent garage, driveway, or attic space
Many ways of house hacking don’t necessarily require a live-in tenant.
For example, for those who can’t or don’t want to sacrifice any of their extra bedrooms, renting out storage space in their garage, driveway, or attic might be the way.
5. Rent out your yard
Perhaps you’re looking for a new home and wondering how you can make it pay for itself, perhaps even partially.
House hacking a duplex, or any type of multifamily property, lets you set up your own room while renting out the other units. You will have more isolation and solitude than if you shared a room with someone, similar to an in-law suite.
Types of Loans for House Hacking
There are several loans that one can use to house hack, especially when buying multi-family homes. These include:
Advantages: Government-backed and allows low down payments as low as 3.5%. Has more relaxed credit scores
Requirements: You must reside in one of the units for at least one year as your primary residence. There can be up to four units.
Advantages: Traditional financing has pretty competitive interest rates and may be used on multi-family properties.
Requirements: Compared to an FHA loan, the buyer must have a higher credit rating and a larger down payment-often 15 to 25% or greater on multi-family property.
Advantages: The VA loan is only available to veterans and active members in the military, so a veteran or an active-duty military member gets a zero down payment option, which also includes no private mortgage insurance.
Requirements: You must be a resident of one of the units as your main residence.
Tips for Successful House Hacking
- Choose the Right Property: You should always select properties in desirable areas that have high rental demand. Property close to public transport, schools, and amenities always attract potential tenants.
- Run the Numbers: Be precise in estimating how much rental income you can charge so that it covers all your mortgage, insurance, property tax, and upkeep expenses. You want to know whether you can charge enough rent to cover your expenses.
- Screen Tenants Carefully: Good tenants are the heart of house hacking. Study backgrounds, verify income, and check references.
- Stay Informed: Pay attention to local rental laws and rules to avoid any legal nightmares. Know your rights as a landlord.
- Plan for Vacancies: Develop a fund when your rental units might be vacant. Having a financial cushion can help you traverse these stressful times easily.
Conclusion
House hacking is a great strategy for paying your mortgage and acquiring equity in your property. You can drastically reduce housing costs by using rental income or even make money from it.
Therefore, house hacking may be a very smart move for those who would like to buy their first home in a higher-priced market or begin working on their investment portfolio.
FAQs
Is house hacking only for persons who have previous real estate experience?
House hacking is excellent for both new and seasoned investors. Anyone with the proper research and preparedness can easily hack a house.
Do I need a hefty down payment to begin house hacking?
While a bigger down payment can result in better financing conditions, there are solutions for people with lower down payments. Investigate loans or consider collaborating with other investors to combine resources.
Can I house hack on a single-family home?
While the usual strategy for house hacking involves multi-unit buildings, a single-family home can be house hacked by renting out extra rooms or turning a piece of the property into a rental unit (for example, basement apartment, garage conversion).