In today’s real estate market, many people are looking for ways to build wealth while minimizing living expenses. One increasingly popular strategy is house hacking—a real estate investment technique that allows you to live in a property for free or at a reduced cost while earning rental income from part of the same property. It’s an ideal solution for anyone who wants to start investing in real estate but doesn’t have a lot of upfront capital.
We’re here to help you make your money work for you. MY SMART COUSIN specializes in providing tailored solutions that will suit any aspect of owning investment property, from buying a house for the price of a car, something that is still entirely within the realm of the possible, to managing these properties once you own them. As an experienced Real Estate Investment Coach, we help you develop and implement a real estate investment strategy. We work with all clients and focus particularly on Black and Brown folks and women, providing advice that helps you build generational wealth.
In this blog, we’ll explore what house hacking is, how it works, its benefits, different house hacking strategies, and steps you can take to start house hacking to grow your wealth.
What is House Hacking?
House hacking is a real estate investment strategy where the owner lives in one part of the property and rents out other parts to cover the mortgage, property taxes, and other living expenses. Essentially, the rental income you generate helps you live for free (or nearly free), while also building equity in a property that can appreciate over time.
This strategy typically involves multi-family properties such as duplexes, triplexes, or fourplexes, but can also include renting out extra bedrooms, basements, or even accessory dwelling units (ADUs).
Benefits of House Hacking
- Live for Free or at a Reduced Cost: One of the most attractive aspects of house hacking is the potential to eliminate or drastically reduce your housing costs. By using rental income to cover your mortgage and other expenses, you can essentially live for free while building wealth over time.
- Build Equity While Earning Passive Income: As you live in the property, you are also paying down the mortgage, which builds equity. Over time, as the property appreciates in value, you’ll benefit from the increased equity, which you can leverage for future investments or sell for a profit. Additionally, the rental income can provide a steady stream of passive income.
- Tax Benefits: Owning and renting out real estate comes with various tax advantages, such as deductions for mortgage interest, property taxes, depreciation, and operating expenses. These tax benefits can lower your overall tax liability and increase your return on investment.
- Learn Real Estate Investing: House hacking is a great way to get your feet wet in real estate investing. It teaches you the ropes of property management, tenant relations, and the financial aspects of owning rental properties without the full risk of being a landlord from afar.
House Hacking Strategies
There are several ways to approach house hacking, depending on your living preferences and investment goals. Let’s look at the different strategies available.
1. Buy a Multi-Family Property
One of the most common house hacking strategies involves purchasing a multi-family property, such as a duplex, triplex, or fourplex. In this setup, you live in one unit while renting out the others. The rental income generated by the other units can cover most, if not all, of your living expenses.
This approach is ideal because multi-family properties often have higher rental income potential, and you can benefit from economies of scale by managing all the units within one property.
2. Rent Out Extra Bedrooms
If buying a multi-family property isn’t feasible, you can still house hack by purchasing a single-family home and renting out extra bedrooms to tenants. This strategy works well if you don’t mind sharing common spaces like the kitchen or living room.
By renting out extra bedrooms, you can still cover a portion of your mortgage and other expenses, all while maintaining ownership of the property.
3. Create an Accessory Dwelling Unit (ADU)
Another option is to build or convert part of your property into an Accessory Dwelling Unit (ADU), such as a basement apartment, garage conversion, or separate guest house. You can rent out this ADU to generate rental income while maintaining privacy and living in the main home.
This strategy is particularly appealing for homeowners who prefer a more private living arrangement but still want to benefit from house hacking.
4. Short-Term Rentals (Airbnb)
In some cases, homeowners can turn a portion of their property into a short-term rental through platforms like Airbnb. Renting out a spare room or unit for short-term stays can generate higher rental income than traditional long-term leases. However, short-term rentals also require more active management and upkeep.
Keep in mind that local regulations regarding short-term rentals can vary, so be sure to check your city’s rules before using this strategy.
Steps to Start House Hacking
Now that you understand the basics of house hacking, let’s outline the steps to get started with this wealth-building strategy.
#1 Determine Your Budget and Financing Options
Before purchasing a property for house hacking, you’ll need to assess your budget and financing options. Many house hackers use low-down-payment financing options, such as:
- FHA loans: Require as little as 3.5% down for a multi-family property (up to four units) if you live in one of the units.
- Conventional loans: May require a higher down payment but offer more flexibility.
- VA loans: Available to military veterans with no down payment requirements.
Work with a mortgage broker or lender to find the best financing option based on your financial situation and goals.
#2 Research Local Real Estate Markets
To succeed with house hacking, you’ll want to invest in a property located in an area with strong rental demand and appreciating property values. Research local real estate markets to find neighborhoods where rental income can cover your expenses and where property values are likely to increase over time.
#3 Find the Right Property
When looking for a property to house hack, consider factors such as the potential rental income, property condition, and layout. Properties that need minor renovations or updates can offer great opportunities to add value, but be mindful of how much time and money you’re willing to invest upfront.
For multi-family properties, look for buildings with separate entrances and utilities for each unit to simplify the rental process.
#4 Run the Numbers
It’s essential to run a thorough financial analysis before purchasing a house-hack property. Consider factors like:
- Mortgage payment
- Property taxes
- Insurance
- Maintenance and repair costs
- Rental income potential
Ensure that the rental income will be sufficient to cover your expenses and leave some room for profit.
#5 Prepare for Landlord Responsibilities
House hacking comes with the responsibility of being a landlord. You’ll need to screen tenants, manage maintenance requests, and handle rent collection. Familiarize yourself with landlord-tenant laws in your area to ensure you’re compliant with local regulations.
You may also want to establish a contingency fund for unexpected repairs or vacancies.
FINAL THOUGHTS
House hacking is an excellent strategy for anyone looking to reduce living expenses while building wealth through real estate. By living in part of your property and renting out the rest, you can generate rental income, build equity, and gain valuable experience as a real estate investor. Whether you opt for a multi-family property, rent out extra bedrooms, or create an ADU, house hacking offers a flexible and low-risk way to get started in real estate investing.
YOU CAN ALSO READ: THE BRRRR METHOD EXPLAINED: A STEP-BY-STEP GUIDE TO REAL ESTATE INVESTING
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