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What is House Hacking?
If you look at your regular monthly budget, your largest expense is typically your housing costs. House hacking offers a unique opportunity to significantly reduce these costs! However, it is important to first learn the 8 types of house hacking, because each is a unique way to reduce your living expenses
In this article we will go over if house hacking is a good option for you, why you should not consider house hacking, and eight different ways to house hack.
The eight types of house hacking include:
- Buy and Live in a Multifamily Property
- Rent Out a Room
- Rent Out the Home (while living in one room)
- Mother-in-Law Suites
- Additional Dwelling Units (ADU’s)
- Mobile home and RV’s
- Live-in Flipping
- Airbnb
Why You Should House Hack
The concept of house hacking has been around for a long time but the terminology for it has been coined by the famous rental investing education company, BiggerPockets!
There are many benefits to house hacking and it only recently has been gaining popularity! Although each of the house hacking methods will not be possible for every person or family, there is at least one way that could be the difference between a large mortgage and not paying for your living expenses at all!
Let’s dive into a few of the benefits of house hacking:
- Easiest way to begin rental investing
House hacking is considered the easiest way to practice rental investing. You get to practice being a landlord and you get first hand experience with contracts and setting boundaries. If you consider purchasing a property for Airbnb or buying a multifamily house hack, this will give you significant experience with the process of buying and renting out properties.
- Gain experience with tenants
No matter what method of house hacking that you choose, you will get great experience with being a landlord and learning how to choose tenants. One of the best ways to start this is if you rent out your house on Airbnb or Vrbo, since this is not a long-term commitment like the other methods may be.
Nevertheless, as the easiest real estate investing method, this experience will be a great asset as you continue to grow in your wealth with rental investing!
- Reduce your living cost
The reason house hacking has become so popular is because it reduces your largest monthly expense. Each house hacking method is for the purpose of getting extra money in order to pay less for your mortgage.
- Practice rental investing with multifamily units
Buying a multifamily property requires additional research and effort at first. however, this house hacking method is a great way to learn how to rehab properties in learn how to connect with tenants – because you will be living right next door!
This is a very different situation than buying an out of state rental investment or buying a single family home that is not in your neighborhood.
- Build equity using other people’s money
As mentioned above, many people are seeking out house hacking methods in order to reduce their living costs. One of the great pros of house hacking is that you can build equity, yet not have to use your own money!
Is House Hacking Legal?
When it comes to house hacking, some of the most creative ways may not be allowed in your area.
It is always important to check zoning codes and local laws, especially if you live in suburbs. Additionally, some local was may not allow a certain number of family units to live with in one household.
If you plan to consider house hacking to save money and achieve your financial goals sooner, be sure to do your research before diving in!
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8 Ways to House Hack
There are many ways to house hack. Let’s dive into the eight different types of house hacking!
1. Multifamily House Hacking
The concept of buying and renting out a multifamily property is the most common house hacking strategy.
You are likely to have heard the terms duplex, triplex, and quadplex. These are all properties that are connected with the same roofs and walls, but house multiple families in multiple units. A multifamily property differs from a single family home in the fact that it has multiple separate “homes”. These can range from being the size of a small apartment for each unit all the way to each unit being equivalent to large homes.
In order to house hack, this method is best done with a low down payment loan. As in, a loan like the FHA 3% down payment loan. Reason being, buying a duplex, triplex, or quadplex typically costs more then a single family home.
However, you then have the unique opportunity to live in one of the units Ann rent out the other attached units.
The way that this house hacking method works is that the tenants’ rent will cover your overall mortgage – or, reduce it significantly!
2. Rent Out a Room
One of the most common ways for anyone new to rental investing is to rent out a room.
This can be very effective if you live near a University and you choose to rent to a college student or near a large corporation.
This method would require rules to be set in order to maintain boundaries. It is important to detail to the renter what do you expect regarding cleaning, parking, and kitchen use. This method may not be the best option if you have younger children in the home, or are uncomfortable being alone by yourself.
3. Rent Out the Home (while living in one room)
The method of renting out your entire home can bring you more money per month than just one bedroom.
The way this works is to only live in one room or living area while the other individuals live in the rest of the house. Although this can be difficult for some time and can be an adjustment, living this way could allow you to live for free!
4. Mother-in-Law Suites
If your home has a mother in law suite, or can be adapted to create a mother in law suite, you can rent out this suite. this is a bit different than just renting out one room or renting out your whole home.
Renting out a mother-in-law suite is a more private option! You can typically lock a door between your area and the suite’s area. Additionally, this rental option is more favorable for the renter because it is more private and they likely won’t have to impede on your space and privacy as much.
5. Additional Dwelling Units (ADU’s)
The concept of renting out additional dwelling units is similar to the idea of a mother in law suite. However, the way this works is to either live in, or rent out, your additional dwelling unit.
An additional dwelling unit, abbreviated as “ADU”, could be a basement, attic, or even a garage. Think of it as an area that can be separate but it is literally a unit of space for additional dwelling. Depending on your house, accommodations can typically be made to separate an ADU from your part of the home.
6. Mobile home and RV’s
A unique and growing opportunity to house hack is to live in a mobile home or an RV on your property while renting out the home.
This opportunity allows you more freedom while the tenant pays your mortgage and you get extra money per month due to their rent.
The one caveat with this method is to be conscious of your local regulations. Additionally, not all properties will have enough space or area for parking for your mobile home or RV. However, many people have found this to be an advantageous method to earn extra money each month while building equity!
7. Live-in Flipping
A live in flip is a unique rental investing method that will give you a lot of hands on experience with rental investing.
This unique house hacking method essentially requires you to purchase a home that requires some rehabilitation and is below market value, then to improve the home (flooring, paint, add a bedroom, etc.), then sell the property.
This is a popular method of rental investing because you can avoid paying capital gains taxes on the sale of the property, but you need to have lived in the home for 2 of the previous 5 years.
The reason this works out as a house hack method is because you are hacking the typical “buying a signle family home” concept! By purchasing a property, rehabbing it, and selling it 2 years down the road at a much higher price, you not only have a financial gain, but a lot of experience, too!
8. Airbnb
How’s hacking with an Airbnb is not only a great way to trial house hacking before being officially committed to it, but can be a very profitable way to earn extra cash!
Renting through a service like Airbnb can be helpful since you will have tenants for a short period of time. This comes with its pros and cons, because the tenants maybe there for a day or two compared to a traditional house hack where they may have a 6 to 18 month lease.
However, you will have far more control through this method and be able to earn extra money on the side to pay down your mortgage.
Before simply listing your house on Airbnb or Vrbo, here are a few considerations to make!
- You are likely to have more people interested if your property is in a popular area of town
- Consider renovating your home to include an additional dwelling unit, separate basement, etc. Having a private area is more appealing to potential renters.
- The more amenities that can be offered, and the better condition that your property is in, the more money can charge rent for it.
Don’t miss out on the Newbie’s Guide to Rental Investing!
How to Start Your Next House Hack
Before diving right in and listing your house for rent, it is important to step back and realize what needs to be done before you can begin house hacking!
Step #1 – Get Your Finances in Order
The most important step you can take before starting house hacking is to first get your personal finances in order.
What this means is to learn your net worth, understand how much money you earn and all of your expenses, and to have a monthly budget.
The reason is part important to have your personal finances figured out is because when you add in your income from house hacking, you will need to have experience with budgeting and organizing your money.
Getting a good understanding of your own finances will help you realize and understand exactly how much money you want to be bringing in through house hacking, and will give you experience for tracking your finances as it gets more complicated with the introduction of your house hack.
Step #2 – Get Your Family on Board
If you read through all of the house hacking methods detailed in this article, you will understand that some of the options are not very family friendly.
In fact, most of these methods are best done when you are single or when you don’t have young kids. Due to noise, messes, and safety, your chances of getting a long term tenant in a house hack such as only living in a basement, would pose to be difficult.
Therefore, it is very important to get your family on board! since there are many house hacking options, it is best to discuss with your spouse and consider your children when making your decisions.
Step #3 – Research Your House Hack Method
After you have spent time to organize your personal finances and have the support of your spouse and or family, the next step is to choose your house hacking method.
Each of the eight types of house hacking require different set up, research, and overall effort. Remember that the purpose of house hacking is too save money on your largest monthly expense: your housing costs!
Step #4 – Learn Local Laws and Regulations
This is an important step that many people skip over, but is important to do! Before you can take the step forward with buying a multifamily property, or changing your home, it is important to make sure you are not violating any local laws.
As mentioned above, there may be laws that prohibit you to doing certain types of house hacking.
Step #5 – Learn From the Best, First
Once you know that your house hacking idea is a possibility, I suggest taking sometime to learn from others. Although you will never get the true experience of house hacking unless you do it yourself, it is always important to do your research beforehand.
This is especially important if you are going to purchase a property specifically to do Airbnb or as a multifamily house hack.
Step #6 – Start House Hacking
The next step is to begin your first house hack! too many people get scared and don’t take this step going forward. It may be weird opening up your house to renters or scary to take the risk to buy in additional property.
However, this is why it is so important to do your research and learn as much as you can before taking the dive into becoming a house hacker! I included a handful of additional resources throughout this article and down below for you to continue to learn so you can gain confidence as a new rental investor.
How Can I Learn More?
- Ready to dive into learning about real estate investing? Learn from my FREE course here!
- Are you a beginner at rental investing? Discover the most important terms to memorize, here!
