Pros and Cons of House Hacking

Homeownership in Utah is a dream for many, but it comes with financial challenges. With rising housing costs and growing expenses like mortgages, insurance, and property taxes, finding ways to ease the burden is crucial. Enter house hacking—a creative approach that can transform your homeownership journey.

What Is House Hacking?

House hacking is a strategy where homeowners rent out part of their property to generate income. Whether it’s a spare bedroom, a basement apartment, or a unit in a multifamily home, the rental income can cover mortgage payments, utilities, or home improvements. It’s like having your home help pay for itself!

This concept isn’t new, but it’s gaining popularity as Utahns look for innovative ways to manage housing costs. Nearly 30% of homeowners across the U.S. say their monthly housing expenses are high, and 65% admit to feeling anxious about the financial pressures of owning a home, according to a NerdWallet survey.

Why Consider House Hacking in Utah?

Utah’s growing population and strong rental market make it an ideal place to try house hacking. With students, young professionals, and outdoor enthusiasts flocking to cities like Salt Lake City, Provo, and Ogden, there’s no shortage of potential tenants.

Take Amy Breyer, a 28-year-old tax accountant, as an example. She rents out three bedrooms in her home and says it’s been a game-changer. “The tenants cover the whole mortgage and almost all the utilities. I’ve been able to save for retirement and pay off debt,” Breyer shares.

7 Key Considerations for Success

House hacking can be a fantastic financial strategy for Utah homeowners, but it’s important to plan for both the present and the future. Here’s an expanded guide to help you navigate this process effectively.

1. Make Sure It’s Legal

Check local zoning laws and housing regulations in your Utah city or county. Some areas may limit the number of tenants, require permits, or impose other restrictions.

Tip: Consult a local real estate attorney or zoning expert to ensure you’re fully compliant.

2. Double-Check Your Insurance

Adding tenants can affect your homeowners insurance. Ask your insurance provider about adding liability coverage and consider requiring renters insurance for your tenants. This ensures their personal belongings are covered and protects you from potential liabilities.

3. Decide Between Friends or Strangers

Living with tenants can be intimate, so consider whether you’d prefer someone you know or a stranger.

• Renting to friends offers familiarity but could complicate relationships.
• Renting to strangers keeps it professional but requires careful screening, including background checks.

Pro Insight: Amy Breyer, a successful house hacker, avoids renting to friends. “I prefer not being friends with the tenants because then I don’t have to worry about ruining relationships,” she explains.

4. Know What to Charge

Research rental rates in your Utah market to set competitive pricing. Use tools like Rentometer.com or ApartmentList.com, or check local listings on Craigslist for comparisons. Setting the right price ensures your space is both attractive to tenants and financially worthwhile.

5. Use a Written Lease

Even for close friends or family, a written lease is essential. This document sets expectations, protects both parties, and formalizes your landlord-tenant relationship.

• Use a standard, Utah-specific lease template.
• Consider a month-to-month lease for flexibility, allowing either party to exit the arrangement with proper notice.

6. Pay Your Taxes

Rental income is taxable, but proper documentation can make the process manageable. Keep records of rent payments and expenses, such as repairs or upgrades. Additionally, consult a tax professional to understand your obligations and potential deductions.

7. Think About the Future

House hacking may fit your lifestyle now, but what happens if you start a family, sell the home, or encounter changes with your tenants?

• Include an exit strategy in your lease or a separate agreement. For instance, outline how tenants will be reimbursed for contributions to permanent home improvements.
• Be honest about the responsibilities of being a landlord. “You’re always on call, and no tenant will care about the house as much as you do,” Breyer notes. Patience and a hands-on approach are key.

Mortgage and Refinancing Benefits

Renting rooms doesn’t just cover your mortgage—it could also enhance your future borrowing power. Some mortgage programs, like Fannie Mae’s HomeReady, let you count boarder income as part of your qualifying income.

• To qualify, you’ll need proof of consistent rent payments for at least 12 months. This may include canceled checks, bank statements, or tax forms.
• If done correctly, up to 30% of your qualifying income could come from rental payments, improving your debt-to-income ratio for refinancing or upgrading your home.

Pros and Cons of House Hacking in Utah

House hacking can be a powerful tool for Utah homeowners looking to offset housing costs and build wealth. However, it’s not for everyone. Here’s a breakdown of the pros and cons to help you decide if it’s the right strategy for you.

Pros of House Hacking

1. Reduce Housing Costs - Renting out part of your home can cover a significant portion—or even all—of your mortgage, utilities, or other housing expenses. This can free up funds for savings, investments, or paying down debt.

2. Build Wealth Faster - House hacking allows you to build equity in your home while using rental income to reduce your financial burden. Over time, this can help you grow your net worth and achieve financial independence.

3. Enter the Real Estate Market Affordably - For first-time buyers, house hacking can make homeownership more attainable. By generating rental income, you may qualify for a larger loan or handle higher monthly payments more comfortably.

4. Gain Landlord Experience -  If you’re interested in real estate investing, house hacking is a low-risk way to gain hands-on experience as a landlord, including tenant management, leases, and property maintenance.

5. Leverage Future Benefits - Rental income can improve your debt-to-income ratio, making it easier to refinance your mortgage or purchase a new property in the future. Programs like Fannie Mae’s HomeReady mortgage even allow you to count boarder income toward qualifying for a loan.

6. Adaptable to Utah’s Rental Market - Utah’s growing population and strong demand for rental properties—especially in areas like Salt Lake City, Provo, and Ogden—create a prime opportunity to find tenants quickly and maximize rental income.

Cons of House Hacking

1. Privacy Challenges - Sharing your home with tenants means giving up some personal space. If you value privacy, this may not be the right fit for you.

2. Legal and Zoning Issues - Utah’s cities and counties have varying laws about renting out parts of your home. Some areas may require permits or limit the number of tenants, and failing to comply could lead to fines or legal issues.

3. Maintenance and Repairs -  As a landlord, you’ll be responsible for handling repairs and addressing tenant concerns, often on short notice. This can be time-consuming and stressful.

4. Tenant Risks - Even with thorough screening, tenants may fail to pay rent, damage your property, or create conflicts. Managing these issues requires patience and problem-solving skills.

5. Tax Implications - Rental income is taxable, and failing to report it properly could lead to IRS penalties. You’ll also need to keep detailed records of income and expenses, which can add complexity to your finances.

6. Long-Term Considerations - House hacking may work well for your current situation, but plans change. If you start a family, decide to sell, or face tenant complications, you’ll need a solid plan to adapt.

Start Your House Hacking Journey Today!

House hacking is a smart way for Utah homeowners to reduce expenses, build equity, and achieve financial freedom. Whether you’re ready to buy your first house hack property or need advice on maximizing its potential, the Red Sign Real Estate Team is here to help. Contact us today to learn more!