What Is House Hacking and Is It Right For You?

The real estate market is bonkers right now. And has been for awhile. A CNBC article came out with the ridiculous title, “Millennials and Gen Zers do want to buy homes—they just can’t afford it.” Of course many of us would rather not have landlords and loud upstairs neighbors and itty bitty kitchens! There are many great things about renting, don’t get me wrong. But given the choice, many of us would love to take that big adulting step and own a home. With the current housing affordability crisis, it can feel like there are no options for anyone without a tech job or Mom and Dad’s money. One option for improving home affordability, however, is house hacking.

What is house hacking? Broadly, house hacking is generating income from property you live in (i.e. your primary residence). House hacking can include using your home for short-term vacation rentals, turning your home into a long-term rental property, renovating and flipping the home you live in, or even renting out extra space for parking, storage, or RVs or campers. 

Additionally, you don’t have to be a big time real estate investor to get started. Depending on the strategy, house hackers can jump in with relatively little money or even know how about real estate investing. As a result, house hacking can be a great way to make extra income. Plus, that extra income can make your mortgage payments and housing costs more affordable.

I’ll delve into each of the house hacking strategies in more detail.

What Is a Cash Flow Property?

First, a quick definition. Ideally with house hacking you want positive cash flow properties. That means that you are earning more from your property than you are paying in terms of the mortgage, maintenance costs, etc. It often takes real estate investors awhile to get to that point. And with some of the house hacking strategies below, you may have negative cash flow (pay more for your housing than you earn), but renting out space in your home still offsets your living costs.

Real estate investors can improve their net cash flow through a few methods. For example, high tenant turnover comes with a lot of costs. One of the best ways of improving your annual cash flow is to find and keep good tenants. If you can find good tenants, you can reduce the costs of maintenance and tenant screening.

Additionally, it’s easier to have positive real estate cash flow if your property value is lower. This is because your mortgage costs and taxes will be lower and you’ll need to make less money from rental income to offset those costs. Keep this in mind if you are interested in real estate investments in high cost areas. You can also sometimes find off-market properties for a good deal. While real estate supply is super low right now, it’s worth keeping an eye out for deals just in case.

Finally, you can, of course, increase your average cash flow by increasing your rental prices. That being said, remember that driving out tenants is also super bad for business. Finding a new tenant costs a lot, as does any vacant time. So do a comparative market analysis to make sure your rental rates are consistent with market value and focus on cultivating good relationships with your tenants and community.

Space Rentals: The Easiest House Hacking Option

Starting with the easiest house hack option, renting out space requires relatively little in the way of know-how or upfront costs. With this option, you can rent out part (or all) of your garage space, storage unit, basement, attic, or yard. People can park their car or stow their belongings in this extra space. Alternatively, some families with large yards rent out space for people to camp on. This involves lower upfront costs than an Airbnb listing. Depending on your location and the square footage of the space, you could make about $200-$400 a month renting out a parking space. 

While this is the easiest house hack option and can earn you thousands, it does come with some work. First, you’ll want to make sure your lease, HOA, and/or local laws don’t prohibit you from renting out space. 

Second, you’ll need to clean up your space and make a compelling ad to distribute. Most people list their spaces on Craigslist or Facebook marketplace. 

Next, draft up a rental contract and determine how the renter will get access to the space, how often, at what times, length of the agreement, etc. This website has a good overview of things to consider when drawing up an agreement and considering prospective renters.

Fourth, you may want to do a background check on any prospective renters. 

While this option comes with some hassles, it is a relatively easy way to earn hundreds or even thousands of dollars if you find a good renter. Plus, it’s the closest option to earning passive income. Unlike the other strategies that tend to require quite a bit of maintenance and ongoing work, this strategy mostly involves upfront time costs.

Short-Term Rentals: An Intermediate House Hacking Option

Starting an Airbnb might not be the first thing on your mind when you’re buying a house, but it can earn you tons of money if you’re willing to put in the time. An Airbnb in Seattle, for example, earns $1,600/week, on average. Aside from Airbnb, you can rent out your home (or part of your home) for short-term rentals on VRBO, Golightly, or your own website. Many owners decide to list their homes on multiple sites. Golightly is a great option for women owners to only rent to other women. This helps limit safety concerns women renters and travelers often experience. The website vets all of its users.

As with space (or any) rental, you’ll want to check on any HOA rules or local laws to make sure opening a short-term rental isn’t prohibited or restricted. 

You’ll then want to consider the costs associated with making your space rentable. For example, you’ll need to stock toilet paper, towels, bedding, cleaning supplies, etc. Your utilities are also likely to increase. And you may want to hire a cleaning service or do renovations to make your space nicer. Some people even decide to build separate units or guest houses. You can see this guide for a nice list of potential costs. Consider these costs and the fees associated with listing to help you determine a) whether you want to move forward and b) what your list price would be to make all this a good deal. 

Once you have assessed these costs (and made any home update/purchases if you decide to proceed), you can list your home. As you are building your listing, think about what makes you more or less attracted to homes on vacation rental sites. Poorly lit pictures and incomplete descriptions are likely to hold you back.

Long-Term Rentals: The Advanced House Hacking Option

Long term rentals can make lots of rental income. They also have lots of hassles. This is where we’re getting into more expert-level house hacking territory. As with the other steps, you need to first check your local municipality/state laws and HOA rules.

With long-term rentals you have two options: you can rent out a spare room or section of a house in a single-family home.  Alternatively, you can rent out a unit in a multifamily property that you live in as well, like a duplex.

Assess Your Costs to Determine Fair Market Rents

Before renting out part of your property, you’ll want to consider other phantom costs, like insurance costs, property taxes, maintenance costs, housing expenses, rental licensing, and more. These costs will eat into your cash return. A multi-unit property will, of course, have even more of these expenses. Some people decide to work with a property manager through a property management company to ease some of these burdens. However, that will eat into your returns. You can see this site for a helpful list of unexpected costs. 

Additionally, you may have to share common areas with tenants. It’s important to assess whether you are willing to do so. Based on these costs, your location, comparable rental units in the area, the vacancy rate (i.e. a lower vacancy rate means that there are few unlived in units and greater demand for rentals), and your mortgage, you can determine a price for your tenants’ rent. You can also determine whether that price is worth it for you!

Finally, you can draft up the lease agreement, list the rental, and screen prospective renters. Many landlords prefer to run a credit check on new tenants to determine how reliable they have been with debt payments previously. As you can see, this all takes a lot of know-how. So it can be worthwhile to chat with other landlords before jumping in. 

Consider Local Laws

Some cities (like Seattle) are very favorable to tenants. I’m personally very grateful for this. However, it does mean that being a landlord can come with extra costs and pitfalls. For example, new laws in Seattle limiting evictions, preventing landlords from running criminal background checks, and requiring landlords to pay relocation costs for tenants in some situations led thousands of small-time landlords to flee the city. You’ll want to do your due diligence and be aware of these potential phantom costs before getting yourself into a stressful and potentially very costly situation.

House Flipping

Last but not least, is house flipping. In some ways, house flipping requires the most experience and knowledge. While long-term rentals certainly require a lot of work, the work itself isn’t super specialized. You can learn these skills without too much time and effort. If you are flipping a house, however, you need to have knowledge in home repair and restoration, design, and an understanding of the housing market and selling costs. At the very least, you need to know people who have these skills and who you can trust.

The 2008 housing market crash decimated the construction industry. The construction industry still hasn’t returned to its pre-2008 levels. Given that, it can be difficult and expensive to put together a reliable crew of contractors. It’s certainly not impossible, but is an important cost to keep in mind.

Unless you have a lot of money for multiple properties, you’ll likely want to do a live-in flip. This means you live in the house you’re flipping. Indeed, as mentioned above, it’s not technically house hacking if you don’t live in your investment properties. Consequently, the other downside of this strategy is that you will likely have a lot of construction and ongoing repairs in your own home. For families with children or pets, this may be an especially tricky option. 

Finally, you should also account for selling costs and fluctuations in the real estate market. Selling costs usually amount to 10% of the property’s value. And as we have seen recently, property values can change at a moment’s notice. Before proceeding, make sure you have a realistic sense of whether you would make enough from a home sale to cover all of the costs of repairing and selling the home.

How to Purchase a Home for House Hacking

It’s pretty obvious, but you need a home to house hack. If you do not currently own a home and are interested in buying a home for the purpose of house hacking, it’s helpful to keep in mind a few key tips. I go over all the details of the numbers you need to know before you buy your first home in a different post. 

Calculate Your Monthly Mortgage Payment

To give a few pointers here, you need to assess what your monthly mortgage payment will be before you buy a home. The cost of the home is, in my opinion, less important than what you will be paying every single month. Your monthly payment is made up of the principal (i.e. the amount that goes towards the actual cost of the home) and interest. The total amount you pay each month ends up depending on the amount you put down on the home, the  purchase price of the home, the prevailing mortgage interest rates, and your credit score. 

For example, if you have a high credit score, you’ll likely pay less each month for interest than someone with a low credit score. Likewise, if you purchase your home when there are lower interest rates (as was the case in 2020-2021), your monthly cost will be lower than if interest rates are high (like they are as of this writing).

Prospective first time home buyers should use a calculator to determine how much home they can afford. I like Nerdwallet’s calculator for this purpose.

Mortgage lenders can also help you determine how much you qualify for and the best loan for you. However, keep in mind that a mortgage broker will calculate the absolute maximum you can afford to pay each month. When Andrew and I qualified for a home loan, we found that the monthly payment we qualified for would leave virtually no room for saving or having fun.

Determine How Much You Can (and Want) to Put Down

Like I mentioned, the down payment influences the amount of money you pay month to month. The biggest difference occurs when you pay less than 20% of the house’s value versus when you pay 20% or more. If you pay less than 20%, you’ll have to pay for private mortgage insurance (PMI), which, as of this writing, frequently costs $200-$300 dollars a month. 

However, if you do not have 20% down, never fear, most people don’t pay 20% down. And, ideally, if house hacking works out, you should be able to pay off your mortgage faster with your earned income. Specifically, you can pay as little as 3% down with conventional loans and 3.5% down with Federal Housing Administration (FHA) loans. FHA loans are easier to qualify for than conventional loans. However, FHA loans can only cover primary residences. As such, you can’t use them for properties you don’t plan on living in most of the time. And if you’re a veteran, you can qualify for super favorable VA loans that allow you to put 0% down and have really competitive interest rates.

When deciding how much to put down, it’s important to keep in mind that you should have an emergency fund after you buy a home. This is especially true if you are house hacking. For example, you do not want to purchase a home and suddenly have no money for repairs on your rental unit. Consequently, you may want to put slightly less money down on a home and maintain an emergency fund that covers 2 months of living expenses.

Should I Buy An Investment Property?

As mentioned above, house hacking involves using your primary home to earn money. Once you become comfortable with house hacking and have a sufficiently large net worth, you could consider purchasing multiple rental properties. Keep in mind, however, that a mortgage loan on an investment property (i.e. one you don’t live in) generally requires a higher credit score, down payment, and income to debt ratio compared to an owner-occupied loan. Consequently, you might consider being a live-in landlord and renting out a spare bedroom or space in your home or building an accessory dwelling unit on your property before moving to the stage of purchasing investment properties.

Finally, if you are buying a home and hoping to house hack, it’s extra important you find a good real estate agent. They will be able to provide insights into pitfalls of homes that you might not have thought of.

Is House Hacking Right For You?

There are numerous benefits of house hacking. House hacking can help defer property expenses and living expenses, increase your monthly cash flow, and allow you to afford more home than you otherwise would be able to. Indeed, many people achieve financial independence through house hacking. Or cover their entire mortgage through Airbnb and/or rental options. Regardless of whether you reach that outcome, the goal of house hacking is to produce additional income and use a crazy housing market to your advantage. That extra money just might enable you to buy your dream home one day.

House hacking can be a good fit for those with an entrepreneurial spirit and who don’t mind rolling up their sleeves, learning a few new things, and very likely having more shared spaces than you otherwise would have. If you’re interested in house hacking, you might want to make your first house hack the simplest option (renting out space) and see if it’s right for you. You can then move up from there. And if you’re lucky, your house could suddenly become much more affordable (or even profitable!) 

If you liked this post, please consider liking, subscribing, or sharing. I always really appreciate it. And if you’re interested in related content, check out my posts on how to invest, saving for any goal, and numbers you need to know before buying a home.