House hacking. You’ve heard about it, and people in the ChooseFI community gush over how awesome it is. So, what the heck is house hacking and how can you do it?
House hacking is a term used by both real estate investors and the Choose FI community pretty regularly.
Traditionally, house hacking refers to buying a multi-unit home (as opposed to a single family home) and living on-site. Ideally, your tenants pay enough in rent to cover the mortgage, and you live there for free. But there are many ways to house hack well beyond the multi-unit home.
More Than One Way To House Hack
House hacking has also expanded beyond the traditional “multi-unit” definition to encompass any creative ways you can get your housing cost reduced or even down to zero by renting out a spare room with a long-term tenant or buying a multifamily property and living in one unit and renting out the others.
For some, that means they’ve converted a garage in a hot urban area into a rentable unit, and for others, they find that an airstream trailer they previously let sit in the yard can be monetized.
The final way you could house hack is to find creative ways to significantly reduce or eliminate your rent. Sometimes referred to as “Rent Hacking,” many people have found unique ways to do this.
If you’re thinking, “Why would any landlord agree to let me live in their house for free, or even at a heavily discounted rate?” here are some ways that you could pull this off:
- Live with an elderly person and agree to take care of some of the house chores and shopping trips.
- Take care of the property management and maintenance of your landlord’s other rental properties if he or she owns several rentals.
- Offer to your landlord to list one of the additional bedrooms in your house on Airbnb and manage the listing for them. (They may even pay you a little for this one!)
- Agree to be the nanny for the landlord’s children in exchange for reduced rent.
- Find homes that have on-property RVs that you could rent cheap.
Rent hacking can be a great way to minimize your housing expenses while you save money for your first home. Below we explain why you should consider house hacking that first home purchase.
House Hacking Is A Faster Track To FI
House hacking can be done without having to make sacrifices on other categories you spend on. Housing, for most people, is the biggest monthly expense. If you focus on housing costs, you save a bunch. If you are spending a lot on housing, every single month can take the wind from your sails, despite your efforts made in other categories.
On average, housing accounts for around 33% of your budget, and in some urban areas, it can ratchet up to over 50% of your take-home pay. That’s a lot of coin!
If you’re like most people, your home is a place to sleep and store your stuff. If it comes with a hefty price tag, it can put a dent in your ability to reach FI. Some of us don’t have much choice (at least at this chapter in our lives) in where we live, but we can evaluate creative ways to get costs down and sock away cash.
While you can totally try to stop grabbing beers during happy hour with coworkers or cancel your Netflix, your biggest gains can be made by finding ways to hack away your housing costs.
Related: How To Get Started With House Hacking
How To Prepare for House Hacking
Save An Emergency Fund
Everyone needs an emergency fund, but that’s especially true for homeowners. If you’re a landlord renting out part of your house, an emergency fund becomes even more crucial.
A substantial emergency fund mitigates the risks of house hacking, although it doesn’t eliminate them entirely. When you have extra money for major repairs and mortgage payments, you’ll be prepared for a broken heater or an unexpected gap between tenants.
Six months’ worth of expenses should be enough. Keep this money in a savings account where you can easily access it if something goes wrong.
Make A List Of Contractors
Responsive landlords tend to have happy tenants, and happy tenants tend to stick around longer. The faster you can fix problems, the happier your tenants will be.
It can take some time to find a good contractor, but you won’t have hours to do research when a tenant’s roof springs a leak. Make a shortlist of contractors to call when there’s a problem. This should include a plumber, electrician, HVAC expert, appliance repairman, and a general handyman. The list should have multiple options, in case your first choice is busy.
Build a personal relationship with these contractors so they’ll always respond quickly to your call. Share the list with your tenants in case you’re on vacation and can’t be reached.
Learning to fix basic problems can save you hundreds or even thousands of dollars a year. If it’s not an emergency, don’t be afraid to research solutions yourself before calling an expert. If you do need to call someone, ask them lots of questions so you understand the problem.
YouTube has a wealth of information if you know what to look for, and some home improvement stores even offer free home repair classes. You don’t have to repair everything yourself, but you’ll save money every time you do.
How To House Hack Single-Family Homes
So, let’s just say you already own your home and it’s a single-family home–don’t despair! You can still benefit from house hacking or at least another form of it. If you have a spare room, a basement, a pool room, or some sort of space that can be utilized for someone to rent–you too can house hack.
This is one of the most common ways to house hack: Think about owning a four-bedroom home where the mortgage is $1,800 a month. If you lived in one bedroom and rented each of the other 3 rooms out for $600 per month each, then you live for FREE.
Ultimate House Hacking–Multi-Family Homes
If you’re in the market for a house, consider buying a multi-family home. Decent at-home repairs? Don’t be afraid to whip out YouTube and make some basic improvements and regular maintenance, all the better.
If you purchased a duplex, and your mortgage was $1,200, can you rent out the other side for at least $1,200? This is the ultimate form of house hacking. Screen your tenants carefully and calculate what you’d need to break even on your mortgage by factoring in other costs. Even if you can’t get your housing costs all the way to zero it might still be of interest.
List All Expenses To Find Your Break-Even Point
In the example given above, $1,200 in rental income wouldn’t actually be enough to get you to cash-flow positive because other expenses need to be accounted for. To discover your break-even point, do your best to estimate these various expenses and add them to your mortgage cost.
Below is a list of costs that you need to consider. Many of these expenses will apply to every house hack, while others will depend on your specific situation.
- Property insurance
- Property taxes
- Common utilities
- Business License
- Vacancy reserve (not a required expense, but definitely recommended)
Once you’ve added all these expenses together, you need to add them to the mortgage to find your true cost of the rental. We have an example for you to check out below:
- Repairs: $150/month
- Property insurance: $80/month
- Property taxes: $105/month
- Common utilities: $0/month
- Business License: $5/month
- Vacancy Reserve: $50/month
- Total Expenses = $390
So continuing the example, let’s pretend the mortgage on the property is $1,200. Adding $1,200 and $390 together gives you a break-even point of $1,590.
In this situation, you would need to ask yourself if you could expect to get around $1,600 in rent for the portion of your home that you will be renting out. If the answer is no, then you either need to find a better deal on a multi-family home to lower your mortgage or be ok with still having to pay a little money towards your housing each month.
Advantages Of House Hacking For Real Estate Investing Beginners
If you’ve always hoped to someday get involved in real estate investing, house hacking could be a great first step for you. House hacking offers many of the same benefits as traditional rental properties while offering some additional perks.
For real estate beginners, here are three reasons you should consider starting out with house hacking.
Better interest rates than investment loans
In the lending industry, there is a belief that owner-occupied homes are safer bets because homeowners are more likely to take good care of a home than a tenant. For these reasons, investment properties are viewed as higher risks and come with higher mortgage interest rates.
But when you house hack, you can get access to the lowest owner-occupied interest rates on the market!
Lower down payment requirements than investments loans
Mortgage insurance doesn’t cover rental properties so to secure the financing you have to put down at least 20%.
But with owner-occupied homes, you could secure an FHA, HomeReady, and HomePossible, or Conventional loan for as low as 3% down. The bank will take some of the rent into account as income but not all of it.
This article from Bankrate explains the ins and outs of financing a multi-family property.
Less risk while you learn how to be a landlord
Living in the property means you will be a hands-on landlord. You’ll be able to keep a close eye on things and make repairs and corrections quickly if something goes awry. You’ll see your tenants often, and they will see you. It’s much more difficult to care for a house from a distance.
Also, if you are house hacking as a way to reach FI you likely are banking the money you would have normally paid to a mortgage. If you lose your tenant you can easily cover the mortgage for a bit while your space is vacant. Obviously, you’ll want to minimize this time, but you won’t be at risk of losing your investment. You’ll just have extra costs for a month or two.
Want To House Hack? Here Are Some Tips Before You Buy
Nobody likes to excitedly jump into something new and subsequently get blindsided with a bunch of “gotchas.” To help ensure that your house hacking venture turns out to be a positive experience for you, keep these tips in mind.
Tips For House Hacking Multi-Family Homes
Before buying any home, you need to make sure credit is in order. Check your credit to ensure there are no errors. You can do this for free with several services.
If you do find errors in your report, get them taken care of before filling out any loan applications. Also, refrain from opening new lines of credit once you are considering getting a new mortgage. According to Lending Tree, you shouldn’t apply for credit cards or any other form of credit within at least four months of applying for a mortgage. Learn more about that here.
When looking at properties, take time to assess any upcoming upgrades or repairs the property would need, along with average rents for the area to figure out if the purchase would be hack-friendly.
The annual repair costs of a multi-family will likely be double (if not more) of a single-family home. For this reason, we recommend having a larger amount put in savings before buying a multi-family property.
Do your research ahead of time to ensure you find the right renter. Writing up a thorough listing of your home is essential to weed out bad matches, and vetting is critical. Remember, you are hand choosing your neighbors. Choose wisely!
Tips For House Hacking Single-Family Homes With Full-Time Tenants
Plenty of FI’ers have rented out a portion of their primary residence with some shared spaces (like a kitchen or bathroom) to lower or eliminate their housing costs.
Where can you find potential tenants? Many people put out ads on classified sites like Craigslist or you could use a service like Roommates or Roomgo.
Another great option if you happen to live near a college is to rent out a room to a college student. We love the college student option for two main reasons:
- College students are usually crazy busy, so their actual “in-home” time is typically pretty low.
- There’s a natural “ending point” after each semester where you could put a kibosh on things if you’re unhappy with your college student tenant for any reason.
Let’s say your brother and sister-in-law rent starting renting out a room in their home to a college student last semester, and it has given them a lot more breathing room in their monthly budget.
Where do you find college students that are looking for a room? You could call up your local college’s housing office, or you could list your room on sites like StudentRent.
- If you’re buying a condo or any property with an association, be sure to read through the contract to see if sharing your single-family home is allowed.
- Take full advantage of split floor plans so that you each have your own space. For example, in the above hypothetical brother and sister-in-law’s case, they felt most comfortable moving into one of the bedrooms in the same hallway as their young children and letting their student tenant take the master bedroom on the far side of the house.
Tips For House Hacking Single-Family Homes With Short-Term Rentals
Do your research to see if your city has any ordinances about services like Airbnb, or if some may be planned for the future. Some cities are restricting or banning short-term rentals in residential neighborhoods.
Before buying, and certainly before listing, read through other listings on Airbnb to see how other people pitch their space. You’ll get a feel for what is desirable in a listing and make sure that your listing is as attractive as possible.
Once you are in business, be sure to stay on top of your calendar. Block off dates that you don’t want the room available, like when you know your family is going to be coming down to visit.
You’ll probably want some extra sheets and towels. That way you can quickly get clean sheets on the bed and clean towels in the bathroom. You can wash the dirty ones later when you have the time.
Buy an electronic lock or key box so guests can let themselves in and out. You want to be able to live your own life without worrying that you won’t be home when guests arrive for check-in.
For more exposure, you could list your room on multiple short-term rental sites, like VRBO. If you do this, just make sure that you sync the calendars together so you don’t get double bookings!
Related: How To Become An Airbnb Superhost
Cons Of House Hacking
Lack Of Privacy
Remember what it was like having a roommate in college, or sharing your room with a sibling? If you’ve never had either of these experiences, count yourself lucky. When you don’t have a space that’s truly yours, it can quickly start to feel claustrophobic.
House hacking can lead to similar problems, especially if you’re renting out a room in your home. Even if you own a duplex and rent out the other side, it can still feel like you never truly have privacy.
This kind of situation is more difficult for some people than others, especially those who work at home or introverts who crave alone time.
Before you start subletting a room in your house, really think about whether you’d be fine sharing your space with strangers. Try renting out the room or apartment on Airbnb for a few days, booking at least two or three times to get a diverse mix of people.
Problems With Tenants
Finding the right tenant can be harder than finding the right property. Even if you find the perfect renter, their circumstances–and their ability to pay rent–can change quickly.
A tenant who seems clean and quiet at first can turn into an obnoxious nuisance, and a seemingly stable renter can lose their job or suffer another financial setback. You might wind up with a tenant whose lack of hygiene creates a pest problem, which can spread to other units–including yours.
Getting references from a previous landlord is a start, but they might not be able to judge the tenant’s day-to-day behavior if they didn’t live nearby. Paying rent on time and avoiding major property damage may be all it takes to make a landlord happy, but there are other factors to consider when you’ll be living in the same house.
The worst part about difficult tenants is how hard it is to get rid of them. Many potential landlords think they can just evict problematic renters from the property and move on, but that’s easier said than done.
One surprising aspect of owning a multi-family property is that your tenants may be more likely to complain about minor issues. When you live under the same roof and see each other frequently, there are an infinite number of opportunities to nitpick the property.
If this becomes a bigger hassle than you anticipated, hire a property management company to deal with repairs and other issues. You’ll pay them a flat rate or percentage of the rent. This can be a good middle-ground for anyone interested in house hacking, but less interested in dealing with difficult tenants.
Damage To The Property
It’s every landlord’s worst nightmare: you stop by the house and discover that your tenants have damaged the property. A contractor comes by to assess the damage and estimates the repairs to cost more than the security deposit. Suddenly, a year’s worth of profits are down the drain–oh, and the actual drain is clogged too.
As a landlord, you can sue for extra damages. Unfortunately, that also means giving notice to the tenant and waiting for a court date. Even if you win the lawsuit, you’ll have to wait for the tenant to pay. The court doesn’t automatically collect the payment for you. Actually getting the money can end up being the most frustrating part of the whole process.
This is why vetting a potential renter is so important. Check credit scores, call previous landlords, and tour the apartment regularly, even if you live right next door. Be picky about renters and don’t settle for the first person who fills out an application.
Even if you’re a good judge of character, don’t judge applicants based on your gut. Almost every landlord has a story about how a nice-looking couple ended up being nightmare tenants. It may be tedious, but doing your due diligence now could save you thousands later on.
Lack Of Liquidity
House hacking will likely tie up a good chunk of your net worth in a property you can’t easily unload, as it almost always takes longer to sell a multi-unit house or building than a single-family home. If you lose your job and need to sell, it may take months before you can cash out.
Related: What You Need To Know Before Buying Rental Property
Other Ways To Make Money In Real Estate
If you’re not sure about house hacking, there are other ways to invest in real estate:
Real Estate Investment Trusts (REIT) are an easy way to dip your toes in real estate investing without the time commitment of house hacking. REITs are funds that primarily invest in properties and holdings such as hotels, office buildings, or mortgage-backed securities.
When you buy a REIT share, you’re investing in several different kinds of properties. For example, the Charles Schwab U.S. REIT ETF has holdings in storage units, national malls, and apartment buildings. Consumers like REITs because of their high returns.
REITs can be a great way to add real estate to your portfolio without buying a property yourself. It’s a more diversified approach than house hacking since your success won’t be determined by a single unit. These funds may be riskier than index funds because they’re based solely on one market sector.
Invest In Crowdfunding
Crowdfunding real estate isn’t like donating to your cousin’s Kickstarter. Real estate crowdfunding means joining hundreds of other people investing in a property like a mall, office, or apartment building.
According to the crowdfunding platform Fundrise, investors earn between 8.7 – 12.4% a year on average. The annual average return for the S&P 500 is between 8 – 10%.
Until 2016, investors needed a certain income or net worth to participate in real estate crowdfunding projects. Now, anyone with a little extra cash can join the game. Fundrise is a great place for beginners and lets investors start with as little as $500. Another option is CrowdStreet, which was recently named Best Overall Real Estate Crowdfunding Site by Investopedia for 2021 and 2022
Flipping houses is a great way to make some money in real estate without needing to deal with tenants–but it comes with its own set of unique challenges. HGTV shows have made flipping seem easy, but it’s more complicated and time-intensive than it looks.
Successful flippers will find an undervalued or outdated property, fix it up, and then sell it for a profit. Some will hire contractors to do the repairs, while others take a more DIY approach.
Flippers can live somewhere else or move into the home while they work on the renovations. The latter can be a better strategy because mortgages on investment properties have higher interest rates and usually require 20% down. If you move into a home and use it as a primary residence, you can get a conventional loan with 5% down or an FHA loan with only 3.5% down.
Investors who live in the home for at least two years will also avoid paying capital gains taxes on the profit. That may not be the best option if renovations can be finished quickly and buyer interest is high, but flipping houses often takes a year or two–especially if you are doing the work yourself on nights and weekends.
While house-flipping might sound like a home run investment opportunity, it can be an overwhelming challenge for someone with little experience. The financial viability of the investment depends on coming in under budget and on schedule, and novice flippers often run into setbacks they never anticipated.
Many people choose to house hack because they can save on housing expenses, which frees them up to save and invest more for retirement and other goals.
If you don’t want the commitment of a mortgage or the hassle of managing tenants, house sitting may be a viable option. Professional house sitters live in someone else’s home. They might also take care of their pets, water their plants, and provide basic upkeep in exchange for free lodging. You can house sit in your own city, around the country, or even around the world.
Since the average American spends 37% of their budget on housing, you could save a pretty penny by house sitting. This is a good option for nomadic personalities looking to travel extensively and not spend money on a house that will sit empty.
If you’re self-employed or work remotely, you can even try house sitting internationally. ChooseFI Podcast guests Amy and Tim Rutherford house sit in the US and Europe, staying in some cities for months at a time.
The main problem with house sitting is that you need a place to stay in between house-sitting gigs. Most people work around this by crashing with their parents, relatives, or a good friend. This works best if you only have a few days in between gigs, as crashing with someone too often can strain your relationship.
Successful house sitters are responsive, respectful of the home, and attentive to any pets who live there. Homeowners will generally leave reviews and talk to their friends, so these qualities can also help you drum up business. A job well done could land you a referral for another gig, while a negative review can kill your chances of meeting more clients.
The most popular cities will usually have dozens of candidates, so take the application process seriously. Try to build your network over time, as personal referrals tend to carry more weight in this industry.
Listen: Embracing Retirement | Amy And Tim Rutherford
The Bottom Line
House hacking is one lever of FI that is relatively easy to implement, but it does take some thought into what “normal” living looks like for you.
If you’re willing to adjust to a new normal–like flipping rooms on Airbnb a few days a week or having a med student rent out your basement, you can easily take advantage of decreasing one of your biggest recurring expenses!