“If you have decent credit, a stable job, and a small amount of savings, you can enter the world of homeownership. And if you’re smart about it, you can enter the world of real estate investing at the same time and start hacking your living expenses.”– Brandon Turner
So What is House Hacking?
House Hacking is a real estate investing strategy that involves buying a property and then renting part of the property out. In this blog post we’ll explore house hacking as a way to make homeownership more affordable.
“House hacking” was coined on the BiggerPockets podcast by Brandon Turner in 2014. When investor Mark Ainley described how he rented out bedrooms to cover rent in college, Turner exclaimed, “You were hacking. I call that house hacking—where you buy a house, live for free because your buddies pay for it.”
House hacking is hardly a new idea. As far back as the 1800s, people ran boarding houses. They rented extra rooms to provide supplemental income. Today, when home prices conspire with mortgage rates to make homeownership feel out of reach, house hacking is a particularly useful strategy for first-time home buyers.
3 Steps to House Hacking:
Step 1: Decide if House Hacking is For You
House hacking is not for everyone. You not only need to be financially capable but also responsible enough to maintain it. While house hacking can help solve the affordability issue, buyers should understand that house hacking comes with extra responsibilities that regular homeowners don’t have to sweat about. You must put your investor shoes on. It’s not just about changing the AC filter and mowing the lawn. House hacking combines homeownership with real estate investing. House hackers must screen tenants, understand leases, manage deposits, collect rents and act as landlords.
For the right buyer, the benefits far outweigh the additional responsibilities. With leases in hand, a lender will likely consider the rental income as qualifying income making it much easier to qualify for a loan. House hackers can also enjoy benefits of ownership, like building equity and mortgage interest tax deductions.
Step 2: Find The Right Property
Once you’ve decided to try your hand at house hacking, deciding on the right property is a function of finances and lifestyle. While single first-time buyers may be more willing to have roommates in a single-family home, this is less attractive for buyers with a spouse or kids. In this situation, they can consider small, multifamily properties. Most duplexes, triplexes, and fourplexes qualify for conventional financing. You can also hunt for homes with rentable garage apartments, built-out basements, or ADUs (accessory dwelling units). These properties tend to be more common in more densely populated areas.
Step 3: Lease Unoccupied Rooms or Units
The final step in house hacking is to lease any unoccupied units or bedrooms. The most common way to fill initial vacancies is by reaching out to friends or personal network. This can invite a hazardous level of informality. Leasing to friends is great from a roommate standpoint, but it can create real challenges when the rent is past due. Establish clear criteria for applicants. Set up a separate account for security deposits. Use promulgated forms for leases and enforce rental agreements evenly. Basically, treat the property like a business, because the IRS certainly will.