Everything You Need to Know About House Hacking

March 7, 2022

If your home has more space than your family requires, house hacking may be an option to bring in a little extra income. House hacking can take many forms, but essentially it means renting out part of your primary residence to cover living expenses. It can be a great solution if you want to start a business in real estate investment but lack the capital to buy another property.

Before you decide that house hacking is right for you, there are few things you should know.

Benefits of House Hacking

Whatever your goals and financial situation, there are some serious benefits to house hacking.

Afford a (Better) Home

House hacking can make home ownership affordable or enable you to purchase a better property than you’d otherwise be able to afford. In addition to improving your living situation, you’ll be building wealth — especially if it means making no more rent payments.

Reduce Expenses

When you make the right choices, house hacking means you spend much less on the upkeep of your home. Many property owners find they’re able to cover their mortgage entirely through tenants’ rent payments. You’ll also pay less in taxes, as you’ll be able to use write-offs like the mortgage interest deduction.

Gain Experience as a Landlord

If your ultimate aim is to rent out several units, house hacking can be the perfect introduction into working as a landlord. You’ll learn how to create listings, find suitable tenants, manage a property, and more — all with minimal risk. You can use your experience to decrease the learning curve when you eventually rent out an investment property.

Common House Hacking Strategies

There are numerous strategies for house hacking. If you haven't yet purchased a property for this purpose, consider all of the following options to decide what’s likely to work best for you.

Short-Term Rentals

One possibility is to rent out the spare rooms in your house. The most common method people emply when they do this is as a short term rental. For instance, you could list the rooms on a platform like Airbnb, where you can decide how often you want to have renters. This has the several advantages, allowing you to charge a higher day rate, and ensure you have your spare room available for your own use should you need it.

If you do choose a more permanent solution, the good news is that you can be more selective about your tenants than if you were renting an independent property. This is because the discrimination laws that apply to regular propertiesdon’t apply when the tenant lives in your home with you.

Whatever you choose to do, you’ll need to check state and local laws to ensure you’re allowed to rent out part of the property. This is particularly important for properties that are part of homeowners associations (HOAs), since some HOAs permit neither short- nor long-term renting.

Multi-Family Home

Many house hacking investors prefer to have their own living space and rent out a separate space to tenants. One way to do this is to purchase a multifamily home like a duplex or triplex. The larger you can afford, the better — as you’ll be able to have more tenants and generate more rental income without the high interest rates and down payment you incur when you purchase separate investment properties.

Additional Dwelling Unit

Another option to maintain your own personal space is to set up a property on your land called an additional dwelling unit (ADU). Options include converting a barn, building a guest house, using a detached garage or basement that has its own entrance as a living space, or purchasing an RV. Depending on the size of your family, you may like to rent the accessory building or live in it yourself and rent out the main house.

Rental Space

If you’re currently unable to provide a living space, you still have the opportunity to house hack: by renting out storage space or parking. Renting a garage, shed, or basement is ideal for dipping your toes into the landlord business.

How to Be Successful with House Hacking

It’s relatively easy to be successful with house hacking — you just need to follow some basic best practices.

1. Know How You’ll Finance the Property

The great thing about house hacking is you have more options for financing than if you were purchasing an investment property because you’ll be an occupant. For instance, you can buy a property up to a fourplex with a Federal Administration loan and you may only need to make a down payment of 3.5 percent.

However, purchasing the property is just one expense. You’ll also need to able to pay for insurance, utilities, and various operating costs. It’s particularly important to ensure you’ll have enough funds available to make repairs, including in emergencies. When calculating what you’ll receive in rent, bear in mind that your unit may be vacant at times, even if you do want to rent it out permanently.

2. Choose the Right Property (or Strategy)

Purchase a property with one of the above strategies in mind. For instance, if you want to rent out rooms in a house where you’ll live, find a property that has plenty of rooms you can convert into bedrooms. As we’ve already mentioned, you must check local laws to ensure the strategy you want is possible in the area. The fewer regulations about how you can use the property and land, the better. Finally, consider what kinds of tenants you’re likely to attract and what sorts of amenities they’ll need.

If you already have a property, you’ll need to choose an appropriate strategy. If your options are limited and it proves too difficult to house hack your home, searching for a different property to buy and selling your current residence is likely your best bet.

3. Treat House Hacking as a Business

Just because you’re earning a passive income doesn’t mean house hacking involves no effort. Even house hacking on a small scale makes you a landlord — and you need to take this responsibility seriously. This means keeping up with maintenance requests, collecting rent, setting boundaries with tenants to ensure they respect your personal space, and being prepared to make evictions, if necessary.

Since house hacking means sharing your property with tenants, it’s even more crucial to find renters you can trust and who won’t cause you problems. Landlord Studio provides you with an app where you can screen tenants, automate rent payments, and manage the accounting for your house hacking strategy. If your goal is to become a real estate investor on a larger scale, this software will help you efficiently manage your investments and scale your portfolio.

 

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