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?
So, What Is House Hacking?
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 single family home) and living on-site. If done correctly, through their monthly rental payments your tenants in a multi-family home pay enough to cover your portion of the mortgage as well, and you live there for free.
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 using Airbnb to bring in cash to cover your living expenses.
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 for cost-conscious travellers on Airbnb. Spend any time on Airbnb and you can see a plethora of people being creative to utilize their space, and luckily–that’s part of the allure!
House Hacking Is A Faster Track To FI
What’s so appealing about house hacking is that it can be done without having to make sacrifices on other categories you spend on. Housing, for most people, is the biggest monthly expense and it rolls over every single month. If you do housing costs well, you save a bunch. If you are spending a lot on housing, every single month it 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 very popular urban areas, it can ratchet up to over 50% of your take home pay. That’s a lot of coin for a place you only get to enjoy for ⅓ of your day!
If you’re like most people, your home is a place to sleep and store your stuff, and if it comes with a hefty price tag, it can really 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 from finding ways to hack away your housing costs.
Ultimate House Hacking–Multi-Family Homes
If you’re in the market for a house, consider buying a multi-family home. If you’re decent at home repairs or aren’t afraid to whip out YouTube and make some basic improvements and regular maintenance, all the better.
Screen your tenants carefully and calculate what you’d need to break even on your mortgage, factoring in other costs. If you purchased a duplex, and your mortgage was $1,200, can you rent out the other side for at least $1200? This is the ultimate form of house hacking.
You find a property in a hot neighborhood that might need some work, and find someone you wouldn’t mind sharing a wall with, with a monthly rent you collect to cover your mortgage. If you can get more, even better!
Still Awesome But Alternative Forms of House Hacking
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.
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. One of the great things about renting out a single family home is that you can get creative with the space you have, as your needs change.
While you might size out of a small duplex if you have children or a relative needs to come stay, you have a bit more flexibility in what portions you rent out of a shared space later on. What is for a time an Airbnb room, can later be a nursery or at-home office, and you can still reduce costs for some of the time you own your home.
Kristine Nicole of Frugally Reckless owns a four bedroom home in St. Petersberg Florida, and her home brings in over $35,000 a year with Airbnb, covering her housing costs. I also house hack through Airbnb with my single family home near downtown San Antonio. While I’m not completely at $0 housing costs, with a boyfriend and Airbnb guests, I have my $1788 monthly mortgage payment covered to all but $588 a month (give or take.)
Had I known about house hacking, I may have picked a different home for better earnings, but I still have an opportunity to rent out my office if needed. House hacking is a work in progress, and I’m chipping away at my 20 year mortgage while maxing out my 401k at work- not too shabby!
So, Want To House Hack? Here Are Some Tips Before You Buy
- Decide if you want to buy a multi-family or single family home, there are benefits and drawbacks to each. Do your research.
- 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. Do your research to see if your city has any ordinances about services like Airbnb, or if some may be coming.
Be aware that as sharing economy services like Airbnb and Uber continue in popularity, both HOA and cities will be examining and potentially changing what they allow. You can always rent with other methods, just be aware.
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 purchase would be hack-friendly.
- Do your research ahead of time to ensure you find the right renter. Writing up a thorough listing of your home is essential to weeding out bad matches, and vetting is critical.
- Read through other listings on Craigslist or Airbnb to see how other people pitch their space, it’s the easiest way to ensure your listing is well thought through.
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.
Want to read more from Shannyn? Check out the rest of her articles here.