House Hacking: Turn Your Home into an Investment

Imagine cutting your monthly mortgage payments down to a fraction of what they are now, all while living in a comfortable home that still feels like your own. Sounds too good to be true? Welcome to the world of house hacking—a clever strategy where you live in one part of a multi-unit property and rent out the rest.

If you’ve ever dreamed of earning passive income without diving into complex real estate investments, house hacking might just be the perfect fit for you.

What Is House Hacking?

The concept is simple: you live in one unit of a multi-unit property—often a duplex, triplex, or quadplex—and rent out the remaining units to tenants. This approach not only lets you become a live-in landlord, earning rental income to help pay off your mortgage and potentially turn a profit, but it also serves as a savvy form of real estate investing.

But you don’t need a multi-unit property to get started; house hacking works just as well with a regular single-family home. Renting out extra rooms to friends, acquaintances, or even strangers can significantly reduce your living expenses, as you’ll share the cost of utilities and other household expenses. This setup is especially great for first-time buyers, allowing you to offset your mortgage payments and make owning a home far more affordable—whether you choose a multi-unit property or a single-family home with roommates.

How House Hacking Works

Find a Suitable Property

Finding the right property is key to successful house hacking. Look for a 2- to 4-unit property, like a duplex, triplex, or quadplex, where you can live in one unit and rent out the others. If a multi-unit property isn't an option, consider a single-family home with extra rentable spaces, such as a finished basement or a separate guest suite. These spaces can also provide rental income while you enjoy your own private area.

When choosing a property, think about the potential rental income and how well the space fits your lifestyle. Make sure it aligns with your budget and living needs. And remember, lenders may have specific requirements for rental properties, so share your house hacking plans with them when you’re applying for a mortgage.

Finance Your Purchase

Financing an investment property can differ from financing a primary residence. While conventional, hard money, and private money loans are available, investment properties typically require a larger down payment—usually at least 20%—because mortgage insurance doesn’t cover them. However, if you buy a home and use it as your primary residence, you could qualify for a loan with a significantly lower down payment.

For instance, with an FHA loan, you might only need as little as 3.5% down, depending on your credit score and financial situation. This can make it easier to start with a smaller upfront investment if you plan to rent out the property later. Keep in mind that for most loans, you'll need to live in the home as your primary residence for at least 12 months before renting it out to avoid breaching your loan agreement.

Find Tenants

Once you’ve closed on your property, it’s time to find renters. A common rule of thumb is the 1% rule—charging rent that’s 1% of the property’s value. For example, if you purchase a home for $225,000, you might charge $2,250 per month in rent. Staying competitive with local rental prices in your area is key to attracting quality tenants and ensuring steady occupancy.

Ensure you're screening potential tenants - good tenants pay rent on time, take care of your property, and are more likely to stay long-term, reducing turnover costs. On the other hand, problematic tenants can lead to late payments, property damage, and even legal disputes, which can be costly and stressful.

Pros and Cons of House Hacking

House hacking offers several benefits, but it also comes with its challenges. Here's a closer look at the pros and cons:

Pros:

• Smaller Mortgage Payments: Rental income can significantly reduce your monthly mortgage payments.
• Faster Mortgage Payoff: With additional income, you can pay off your mortgage faster, building equity more quickly.
• Wealth-Building: House hacking is an accessible way to start building wealth through real estate investment.
• Flexibility: You can adjust your rent to cover costs or attract tenants, and you have the option to expand your investment portfolio over time.

Cons:

• Extra Responsibilities: As a landlord, you’ll be responsible for property management, including finding tenants, handling repairs, and ensuring compliance with local ordinances.
• Carrying Costs: If you have vacancies or unexpected expenses, you’ll need to cover the costs out of pocket.
• Taxable Income: Rental income is subject to taxation, which can eat into your profits.

Is House Hacking Right for You?

House hacking can be a great fit for some people, especially if you work from home, since you're around to handle property-related tasks. It’s also a smart move if you’re handy or can afford to hire someone for repairs. Singles or couples who don’t need tons of space can benefit, as well as families who want to rent out space to relatives at a lower rate.

That said, house hacking isn’t for everyone. If you’re in a pricey market, buying a multi-unit property might be tough. Plus, if the idea of being a landlord doesn't appeal to you, the whole process can be a bit much. And if you need a lot of space—say, for a big family—it might not be the best option.

Final Thoughts

House hacking is a flexible and potentially lucrative way to dip your toes into real estate investing. It’s an accessible strategy for those who want to generate passive income, pay off their mortgage faster, and build wealth over time. However, it requires careful planning, a willingness to take on landlord responsibilities, and an understanding of the risks involved. If you’re up for the challenge, house hacking could be the perfect way to start your real estate journey! Not sure if you're ready to buy a home? Take our readiness quiz!