What is house hacking? House hacking is when you rent out one or more parts of your home (on sites such as Airbnb) to cover the cost of your mortgage—or even make a profit.
House hacking can help you afford to buy real estate in expensive areas that would normally be beyond your financial reach, or to turn your primary residence into an investment property.
If this sounds intriguing, read on to find out more about what house hacking is, the benefits, and how to avoid potential pitfalls if you want to try this yourself.
What is house hacking?
House hacking is a new name for an old housing concept. For years, people have purchased duplexes, with the intention to live in one unit and rent out the other to generate income. You could also rent out individual rooms or areas within your home, such as a spare room or a finished basement.
The term “house hacking” was introduced by Brandon Turner of the website BiggerPockets.com in 2013. Turner explained the concept in accessible terms, making it appealing for novice and experienced home buyers alike.
Lots of property types are well-suited to house hacking. Kevin Sneddon, a real estate broker with Compass Real Estate in New York City, recommends the following properties:
- A two- to four-family house
- A single-room-occupancy house, such as a townhouse with two apartments per floor
- A home with a finished basement including a kitchenette
- A home with an apartment over the garage
- A home with an attic apartment
- A home with a guesthouse
- A home with extra rooms and bathrooms
The best property for house hacking depends on your personal preferences and need for privacy.
Tali Berzak, a real estate broker with Compass Real Estate in New York City, recommends looking for a property with two means of entry. For example, you could go with a property with a main residence, where you live, and a secondary structure like a guesthouse in the backyard that can be accessed independently. If privacy is a concern for you, renting out a spare room may not be the best fit, even if it brings in extra money.
How do you get started with house hacking?
To get started with house hacking, you need to secure funding. As with any other property purchase, you may want to get pre-approval for a mortgage before you go house hunting. If you’re going to be looking at a multiple-unit purchase, let your potential lenders know that you’re planning to live on the property and rent out the other units.
“From a lending perspective, we are able to offer higher loan amounts with lower down payments if you plan to live in one of the units,” said Jennifer Beeston, vice president of mortgage lending with Guaranteed Rate Mortgage in Santa Rosa, CA.
If you’re planning to rent out rooms of a single-family home, though, it’s less likely that the lender will take the rental income into account. After all, just because you can rent out areas of your home, it doesn’t mean you will. Nonetheless, doing so can still ease the financial stress of making your mortgage payments, and is therefore worth considering.
The benefits and potential pitfalls of house hacking
The main benefit of house hacking is that it provides extra income, which can make it easier to pay down your mortgage. You may even be tempted to buy more house than you can afford on your own because of the potential rental income.
Cornelius Charles, co-owner of Dream Home Property Solutions, in Ventura, CA, cautions against this approach.
“We always advise that, while [buying a higher-priced property] makes sense, you never know what the future holds, and [clients] may want to consider buying a property that they can afford on their own,” says Charles.
Berzak also recommends caution: “The risks are that the rental agreements in house hacking tend to be less formal and could be short-term.” This means that your rental income could be unreliable, making it risky to count on that income to pay your mortgage.
“House hacking should only be used as supplementary income, and should not be relied on to carry the cost of the home,” says Berzak.
Another potential pitfall is ending up with a less-than-desirable tenant. When you decide to house hack, you’re deciding to become a landlord, with all of the challenges that entails. A difficult tenant could make your life difficult and expensive by damaging your property or not paying the rent on time.
To help the rental process go more smoothly, take your role as a landlord seriously, and take the following steps:
- Have potential tenants complete a rental application
- Complete a criminal background check on potential tenants
- Find tenants through word of mouth and through friends and family whenever possible
- Collect a security deposit
- Complete a lease agreement with tenants
If all of this sounds like more work than you’d prefer, you could also work with a rental management company. There are even management companies that specialize in working with short-term rental platforms such as Airbnb, if you want to go that route.
Tenants can also be a benefit in other ways. Sneddon recalls that his grandmother rented out a spare bedroom in her home after her husband died. She did this for both the extra income and the company. Having good tenants that you feel comfortable with can provide a sense of safety as well as companionship.
With careful planning, house hacking can make owning a home more affordable, and maybe even more fun. Make sure to work with a tax adviser to ensure your rental income is accurately reported, carefully screen your tenants, make sure everything is in writing, and enjoy the extra funds and peace of mind.
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