The average U.S. household earns $84,352 a year and spends almost 35% of that on housing, according to the Consumer Expenditure Survey published by the U.S. Bureau of Labor Statistics. But what if you could generate enough extra income from your home to make your mortgage payment each month and put the excess cash towards other expenses, retirement, or financial independence goals?
With house hacking, you can. A relatively new concept that borrows from old-school traditions, house hacking is a way of using an existing property to reduce living expenses, build wealth, and get started in property management.
House hacking explained
House hacking is a way of generating rental income from your home, either through buying a multifamily property and renting out the units you don’t live in or renting out bedrooms, garages, attics, etc., in a house you already own. The goal of house hacking is to cover part or all of your housing costs, and if done very well, it could lead to purchasing more properties.
For home buyers without deep pockets, house hacking can work as an excellent real estate investing strategy that gets you started without any additional investment. Traditionally, being a house hacker has meant buying a multi-unit property—such as a two-unit duplex or a three-unit triplex— and living in one unit while renting out the others. Depending on the property, the monthly rent from the rental units can be enough for most, if not all, of the monthly mortgage payment. Essentially, house hacking allows you to live for free or almost free while also building an asset that will appreciate and give you consistent cash flow in the long term.
3 primary benefits of house hacking
If free accommodation, passive income, and an increase in property value aren’t incentives enough, here are a few more benefits of house hacking that might make it worth looking into:
1. Cheaper financing options
Financing a property as an owner-occupied primary residence has far more benefits than financing an investment property. For one, the down payments are much smaller (3-5% instead of 10-20%), and you can often get better loan fees and interest rates. Fannie Mae and Freddie Mac offer mortgage products for 2- to 4- unit primary residences with affordable down payments and low interest rates. This means lower monthly mortgage payments, higher cash flow, and an easier route to the housing market.
2. Easy start in real estate investing
House hacking is a quick and straightforward way to rent out units without investing in additional real estate. Not only can you minimize the amount of capital you have tied up in rental properties, but house hacking also allows people who don’t have much money to take advantage of the perks of real estate investing. Building equity in your home is faster since you have renters paying part or all of the mortgage. It’s also easy to learn how to become an effective landlord with your renters living right next door.
3. Tax savings
As a homeowner, you get several tax advantages from property ownership. However, when you purchase a home as a real estate investor or turn your property into multiple rental units, several additional tax breaks and benefits become available. Landlords can deduct expenses incurred to maintain the property. These include repairs, ongoing maintenance, and depreciation. You can also deduct the cost of owning and marketing it, which includes property taxes, mortgage interest, property management fees, property insurance, and the cost of finding renters.
How to successfully hack a house
There are several ways to successfully hack homeownership that work for your finances, your life, and your family. You will, however, need to consider zoning laws and HOA (Homeowner Association) rules before proceeding. Here are a few house hacking strategies to consider:
- If you own a multifamily home, you can turn one unit into your primary residence while renting out the rest.
- Convert a bedroom in a single-family home into a self-sufficient suite by adding a bathroom and kitchenette.
- Remodel a spare bedroom, a basement, or a garage and set it up as a short-term rental or vacation rental through Airbnb and Vrbo.
- Sharing your home with roommates can be an effective way to hack your house while saving up for a separate unit or remodeling. It does mean you’re sharing your living space with someone, but it can be an easy way to save up cash quickly.
- Build an accessory dwelling unit (ADU), which are separate living units that come with a home. Think basement apartments or detached garages.
Buying a house to hack
As mentioned above, financing a primary residence is often much cheaper than financing an exclusively rental property. The interest rates are often low and down payments are affordable at 5% or less. Standard options for borrowers looking to finance or refinance a property include:
- Conventional loan: A conventional loan, offered by lenders such as banks or credit unions, is rarely guaranteed or insured by the federal government. The down payments can be as low as 3% of the purchase price, and interest rates, while low, can vary depending on your credit rating and history.
- Conforming loan: A conforming loan is a mortgage that meets the dollar limits set by the Federal Housing Finance Agency (FHFA) and the funding criteria of Freddie Mac and Fannie Mae. A conforming loan can be a good option if you have good credit, owing to its low interest rates.
- FHA loan: These are loans backed by the Federal Housing Administration. They’re typically more flexible about credit score requirements than most other types of loans.
- VA loan: For veterans, active-duty military members, and surviving spouses, VA loans can be a fantastic option. They don’t require a down payment or mortgage insurance.
Start your real estate investing journey
Personal finance experts believe real estate to be one of the fastest and most reliable ways to build long-term wealth. House hacking can be an incredibly profitable way to use an asset you own to eliminate housing expenses and get started in real estate investing without having to purchase a rental property.
If you don’t own a property to house hack, however, don’t fret. Investing with Arrived allows you to take advantage of all the benefits of real estate investing and house hacking without owning anything upfront. Through our fractional real estate model, experienced and first-time investors can invest in exclusive properties that generate rental income. Head over to this page to check out our available properties and see which one is right for you.