A house hacking guide can change how people think about homeownership. Instead of paying a mortgage every month, homeowners can have tenants cover most, or all, of their housing costs. This strategy has helped thousands of people build wealth faster than traditional homeownership allows.
The concept is simple: buy a property, live in part of it, and rent out the rest. The rental income offsets mortgage payments, insurance, and maintenance costs. Some house hackers even generate positive cash flow each month.
This guide covers everything readers need to know about house hacking. It explains what house hacking is, the most popular strategies, how to get started, and the benefits and drawbacks to consider before taking the plunge.
Key Takeaways
- House hacking lets homeowners reduce or eliminate housing costs by renting out part of their property while living in it.
- Multifamily properties (duplexes, triplexes, fourplexes) qualify for owner-occupied financing with down payments as low as 3.5% using FHA loans.
- Popular house hacking strategies include renting individual rooms, building ADUs, or listing space on short-term rental platforms like Airbnb.
- Before starting, analyze local rental rates and property prices to ensure rental income can cover a significant portion of your mortgage and expenses.
- House hacking builds wealth through tenant-paid mortgage paydown, property appreciation, and valuable tax deductions on the rental portion.
- Consider the tradeoffs: reduced privacy and landlord responsibilities come with the financial benefits of this real estate strategy.
What Is House Hacking?
House hacking is a real estate investment strategy where the owner lives in a property while renting out portions of it to generate income. The goal is to reduce or eliminate personal housing expenses.
The term gained popularity in the early 2010s through real estate investing communities. Brandon Turner of BiggerPockets helped bring house hacking into mainstream conversation. Since then, it has become a go-to strategy for first-time investors and anyone looking to cut housing costs.
House hacking works with various property types. Multifamily homes like duplexes, triplexes, and fourplexes are the most common choice. Single-family homes with extra bedrooms, basement apartments, or accessory dwelling units (ADUs) also work well.
The math behind house hacking is straightforward. If someone buys a duplex and lives in one unit, the rent from the second unit pays part of the mortgage. In many markets, rental income can cover 50% to 100% of housing costs. Some investors even generate monthly profit.
House hacking differs from traditional landlording because the owner lives on-site. This setup allows for easier property management and qualifies buyers for owner-occupied financing with lower down payments and better interest rates.
Popular House Hacking Strategies
Several house hacking strategies exist, each with different levels of commitment and income potential.
Multifamily House Hacking
Buying a duplex, triplex, or fourplex is the classic house hacking approach. The owner lives in one unit and rents out the others. Properties with up to four units still qualify for residential financing, which means lower down payments (as low as 3.5% with FHA loans) compared to commercial loans.
A fourplex offers the highest income potential. Three rental units can often cover the entire mortgage plus generate positive cash flow.
Rent by the Room
This strategy works with single-family homes. The owner rents individual bedrooms to tenants and shares common areas. Rent-by-the-room typically generates more total income than renting to a single tenant because each room commands its own price.
College towns and cities with high housing costs make ideal markets for this approach. Young professionals and students often prefer affordable room rentals over expensive apartments.
ADU or Basement Apartment
Some homeowners convert garages, basements, or detached structures into rental units. This house hacking method preserves privacy since tenants have separate entrances and living spaces.
ADU construction costs vary widely, but many municipalities now offer incentives to encourage their development. The rental income can justify the initial investment within a few years.
Short-Term Rentals
Listing extra space on platforms like Airbnb or Vrbo can generate higher income than traditional rentals. Homeowners can rent spare bedrooms, guest houses, or entire units when not using them.
Short-term rentals require more hands-on management. Owners handle bookings, cleaning, and guest communication. But, the income potential often exceeds long-term rental rates by 20% to 50% in popular markets.
How to Get Started With House Hacking
Starting a house hacking journey requires planning and research. Here’s a step-by-step breakdown.
Analyze the Local Market
Not every market supports profitable house hacking. Investors should research rental rates, property prices, and vacancy rates in their target area. The goal is finding properties where rental income covers a significant portion of expenses.
Online tools like Zillow, Rentometer, and local MLS data help estimate potential rental income. Talking to local property managers provides real-world insights.
Get Financing in Order
Owner-occupied properties qualify for favorable loan terms. FHA loans require just 3.5% down. Conventional loans may require 5% to 20% depending on the lender and borrower qualifications.
Buyers should get pre-approved before shopping for properties. Pre-approval shows sellers the buyer is serious and speeds up the purchase process.
Find the Right Property
The best house hacking properties have strong rental demand and good cash flow potential. Multifamily homes in stable neighborhoods often perform well. Single-family homes in areas with roommate demand work too.
Buyers should run the numbers on every property. Calculate expected rental income, mortgage payments, insurance, taxes, and maintenance costs. The property should at least break even after all expenses.
Prepare for Landlord Responsibilities
House hacking means becoming a landlord. Owners must screen tenants, collect rent, handle maintenance requests, and understand local landlord-tenant laws.
Many house hackers manage their properties themselves to maximize savings. Others hire property managers once they scale to multiple properties.
Pros and Cons of House Hacking
House hacking offers clear financial benefits, but it’s not right for everyone. Here’s an honest look at both sides.
Advantages
Reduced Housing Costs: The primary benefit is obvious. Rental income cuts monthly expenses significantly. Many house hackers live for free or even profit each month.
Easier Entry Into Real Estate Investing: Owner-occupied financing makes house hacking accessible. First-time buyers can enter real estate investing with minimal capital.
Wealth Building: While tenants pay down the mortgage, the owner builds equity. Property appreciation adds another layer of wealth creation over time.
Tax Benefits: Landlords can deduct mortgage interest, property taxes, insurance, maintenance, and depreciation on the rental portion of their property.
Hands-On Learning: Living on-site teaches valuable landlord skills. House hackers learn property management firsthand before scaling to larger investments.
Disadvantages
Reduced Privacy: Sharing a property with tenants means less personal space. This is especially true with rent-by-the-room strategies.
Landlord Responsibilities: Being a landlord requires time and effort. Midnight maintenance calls and difficult tenants are real possibilities.
Tenant Turnover: Vacancies reduce income. House hackers must budget for periods when units sit empty between tenants.
Location Constraints: The best house hacking deals aren’t always in the most desirable neighborhoods. Investors may need to compromise on location.
Upfront Costs: Even with low down payments, closing costs and initial repairs add up. Buyers need some capital saved before starting.
