If you’re like most Americans, then your mortgage payment is probably your biggest monthly expense. According to the U.S. Census Bureau, the median monthly mortgage payment is $1,558.
That’s a lot of money to spend on housing, especially considering the median household income is $60,293. This is why some people use a strategy called “house hacking” to cut down or eliminate their monthly expenses altogether.
But what is house hacking, and is it really a good strategy? That’s exactly what this article will discuss.
What is house hacking?
The term “house hacking” was coined by Brandon Turner from the BiggerPockets podcast, but the strategy itself is not new. House hacking is when you use your personal home as an investment property.
Basically, you live in your house and rent out some portion of it to tenants. These tenants pay rent every month, which helps offset the cost of your monthly mortgage. If done strategically, house hacking could allow you to essentially live in your home for free.
In theory, you could house hack with any home, but most people use a single-family home and either rent out one or more rooms, or a basement area.
Why should you house hack?
House hacking has become a popular strategy in recent years, especially for individuals who live in cities with a high cost of living. If you’re currently on the fence, here are the top five advantages to house hacking:
- Reduce your living expenses: When done strategically, house hacking could allow you to live in your home essentially for free. When you bring in tenants who pay your rent every month, this helps cover your mortgage payment and any additional costs, like utilities and insurance.
- Boost your monthly cash flow: House hacking is a great way to boost your monthly cash flow, especially if you are in the beginning stages of your journey to financial independence. Since you aren’t spending money on your mortgage or rent every month, you have more money to save and invest.
- Good rental experience with low risk: One of the biggest advantages of house hacking is that it teaches you how to be a landlord. And unlike traditional rental properties, you’re right there to address your tenant’s questions and concerns. You’ll also know immediately if your renter isn’t living up to their end of the bargain.
- Reduce your taxable income: You’ll be able to save money in taxes since you’re allowed to deduct a portion of your housing expenses.
- Build wealth over time: If you find that you enjoy house hacking and it works well for you, this could be a great long-term investment strategy for you. The experience you gain will set you up nicely for future real estate investments. And potential lenders will look upon your experience more favorably.
4 Ways to Hack Your House
So now that you understand what housing hacking is and what the benefits are, how do you get started? Well, depending on your goals, here are four different ways you can go about it.
1. Rent out a portion of your home
The most common way to get started is by buying a home and then renting out a portion of it. For instance, if you bought a two-story home you could rent out the downstairs. Or if you buy a home with a finished basement, you could live upstairs and rent out the basement.
This is a good strategy in low-cost living areas because the money you earn in rent could actually cover your monthly mortgage payments. However, this may not work out in parts of the country that have a high cost of living.
2. Rent out your home entirely
If renting out a portion of your home isn’t enough to move the needle financially then you could try renting your entire house. This could be a good option for anyone who is young and able to find an alternative, affordable living situation.
For instance, if you could temporarily live in a trailer or rent an apartment with a roommate, you could rent out your home for more money. This would allow you to pay off the house and cover your monthly rent payments.
3. Rent out by the room
If you’re just looking for a little extra money every month and don’t want to sacrifice the majority of your home, you could just try renting out one room. For instance, if you have a large four-bedroom home, you could rent out one room.
This gives you some extra money to put toward your mortgage payments, but you still get to enjoy the benefits of being a homeowner.
4. Rent out an additional unit
Many of the options on this list are ideal for young, single people. But what if you’re married and have a family? In that case, the idea of living with full-time roommates might not interest you.
If so, you could rent out an additional unit that’s attached to your home. This could be a unit that either comes with the house or one that you build yourself.
This will obviously take some effort because you’ll need to fix it up and turn it into a space someone would want to rent. But if you have the interest, this could be a great way to become a house hacker while still protecting your family’s personal space.
Things to Consider Before Getting Started
House hacking can be a great way to boost your monthly cash flow and create a form of passive income, but it isn’t for everyone. Here are a few things you’ll want to consider before you get started:
- The location: When you’re looking for the right home to purchase, you may be tempted to look for the best deal possible. But you should think carefully about the location you’re buying into. Buying a house in a great neighborhood will allow you to charge premium rates on rent. Not to mention, if you purchase a home in a bad neighborhood then it’s possible you won’t get many interested renters.
- Local ordinances: If you plan to build and rent out an additional unit, make sure you check your city’s zoning ordinances. This will save you from running into fines and legal trouble.
- Your tenants: If you plan to live in the home, you’ll want to make sure to set boundaries with your tenants. Let them know what your expectations are from the start, and how they can contact you if problems arise. Few people want renters banging on their door at midnight.
- Responsibilities as a landlord: And finally, you want to take your responsibilities as a landlord seriously. You’re responsible for maintaining the property, responding to your renter’s complaints, and collecting rent every month. Neglecting these duties could result in serious financial and legal consequences.
Bottom Line
House hacking is a great way to pay off your mortgage, improve your monthly cash flow, and gain real estate experience. You can begin house hacking as a way to earn a little extra cash every month, or you could treat it like a long-term investment strategy. You can put as much or as little into it as you want.
Just make sure you do your due diligence before getting started. Make any necessary adjustments to the house, choose your tenants carefully, and take your responsibilities as a landlord seriously. This will allow you to make the most of your house hacking experience.
