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What Is House Hacking?
House hacking is a strategy where borrowers use their primary residence to generate income by renting out a portion of the property. This method typically involves buying a multifamily property, such as a duplex or a house with separate units, living in one unit, and renting out the others to tenants. It can also include renting out spare rooms in a single-family home or utilizing spaces like basements or garages for rental purposes.
House hacking is popular among first-time homebuyers or real estate investors looking to enter the market, as it allows them to leverage their primary residence as an income-generating asset. It can be an effective strategy to build wealth through real estate while managing living expenses.
House Hacking Strategy
FHA loans, VA loans, and Freddie Mac’s Home Possible program offer multifamily unit home loans with flexible qualification requirements and low down payment options (0% for VA, 3% for Home Possible, 3.5% for FHA).
The only caveat is that you must live in one of the units as your primary residence.
Buying a house and renting it out to pay for your mortgage is not as difficult as one may think.
Here’s an example of how house hacking with an FHA loan could work:
- Triplex Purchase Price: $350,000 ($375,000 minus a down payment of $15,000)
- Interest Rate: 6.8%
- Monthly Payment: $2,388
In this scenario, the buyer resides in one unit and rents out the remaining two units for $1400 a month. In this scenario, the total monthly rental income would generate $2800, netting you a positive $412 after making your mortgage payment.
This additional income can help cover the mortgage insurance premium (MIP), property taxes, homeowners insurance, and all the other costs of owning a home. You can also use the additional income to pay extra on your mortgage payments, allowing you to build equity faster.
Planning to house hack can also help buyers qualify for a higher-priced home than they would otherwise. FHA lenders allow 85% of the overall rental income to be added to a buyer’s personal income to qualify for an FHA loan, while conventional lenders allow up to 75%.
» MORE: See today’s refinance rates
House Hacking vs. Investment Property
This housing hack may sound like you’re turning your home into an investment property, but technically, you aren’t.
House hacking involves using a portion of your primary residence to generate income, while owning an investment property involves purchasing property for the sole purpose of generating income. An investment property is not the owner’s primary residence, and they don’t live on the premises.
Living in a home you purchased as an “investment property” is illegal, even if there are tenants in the other units. It is also illegal to rent out all the units of a property you purchased under the FHA loan, VA loan, or with the Home Possible program since these loans are intended to finance primary residences.
If the home is a mixed-use property, such as a building with a store below and an apartment above, that’s usually considered a commercial loan. If you occupy the apartment and rent out the store, you’ll need to provide the lender with a lease.
House Hacking Tips
House hacking means being a live-in landlord. That can be good and bad.
It can be annoying if your tenants are having a loud party and you have to tell them to quiet it down. And, of course, there’s maintenance, which requires being handy if you want to save money and do the work yourself.
Having renters pay your mortgage
Riley Adams, a licensed CPA in Louisiana with an interest in personal finance, says he spends four to eight hours per month maintaining or repairing the two-unit house that he and his wife own in New Orleans and another four to eight hours each month to upkeep a short-term rental behind the house.
The couple lives in one part of the house, and long-term tenants live in the other half. Adams’ part of the house has a separate side entrance. A separate unit behind the house earns them income as a short-term rental on Airbnb.
“Between the money earned from our tenants and the short-term guests who stay with us, we completely cover our monthly mortgage and associated housing expenses,” Adams says. “This allows us to live in the space for free and ‘house hack.’”
They used a traditional 30-year mortgage to buy the property and included the expected rental income in their income total used to qualify for the loan.
They keep busy flipping the unit between guests during the tourist season from November through May. “But living for free makes all of this worth it,” Adams says. “And this allows us to save for a down payment on our place together in the future.”
Seek legal advice
Some real estate transactions can require a review by a lawyer. Becoming a landlord is one of them.
Kaufman recommends creating an LLC, or limited liability company, to protect you from being personally liable for the company’s liabilities. “This gives you a layer of protection against lawsuits which, as a property owner, can be debilitating to your overall worth,” he says. “If your name is on a deed and you’re sued as a property owner, your entire net worth is potentially in play to satisfy court ordered payments.”
An LLC can limit your liability to just those assets held under the entity. A real estate attorney can help.
House hacking can be a lot of work, but it can also be extremely rewarding. To pull it off successfully, make sure you’re following local guidelines and staying within your mortgage terms.