Whether you stand firmly on the side of mid-century modern or split-level ranch, or proudly wave the flag of condo or detached home; there’s one thing all real estate tribes can agree on: property costs are too darn high!
But, as is so often the case in today’s world, the home-buying race is not always won by the swiftest or deepest-pocketed, but rather the most creative and out-of-the-box thinking.
Enter House Hacking.
Using this approach, potential homebuyers can find themselves in the win-win situation of being able to afford more house than they might have (while also qualifying for the best home mortgages) and paying less than they would have for a starter home.
Let’s unpack that bold claim.
WHAT IS “HOUSE-HACKING”?
House hacking is simply renting out a room or rooms in your primary home (not a rental property) to generate extra income.
Depending on how you implement it—and on your local market, of course—you may end up with little to no mortgage payment, or even earning money every month.
WHAT CAN BE RENTED OUT?
The sky’s not quite the limit, but you have more options than you might think.
- Spare bedroom(s)
- Converted home offices
- Finished basements, garages, lofts
- ADUs (Accessory Dwelling Units) or “mother-in-law cottages” in the backyard (make sure they’re officially permitted)
- 2nd, 3rd, or 4th apartment in the case of a multi-family property (4-units-and-under are considered one property for the purposes of a mortgage)
Pro-Tip: Anything with a separate entrance will rent for more money.
WHAT’S THE CATCH?
The catch primarily depends on your personality and what your comfort levels are.
While this list may seem like a lot, most of these are either easily adapted to or will pay for themselves in short order.
- The routines you enjoy as a non-hacker would have to change.
With roommates/tenants/short-term renters you’re no longer free to spontaneously throw a murder mystery party or take up the drums.
- Inviting strangers onto your property requires a higher level of trust and flexibility than some people are comfortable with.
- If you take the short-term rental route (AKA, Airbnb, VRBO, etc.), you’ll need to either hire a cleaner after each visit or do the cleaning yourself.
- More people means higher maintenance, consumables, and utilities costs.
- House hacking only works if your home is somewhere people want to live. Make sure your home has adequate parking, quiet, low-crime, and access to public transportation.
- Some HOAs, neighborhoods, and even cities don’t allow for short-term rental options so you’d have to make sure long-term tenants would work for you.
Additionally, There are some start-up costs.
- Increased insurance
- Furnishings (if you’re not renting out a bare room)
- Preparation (if you’re converting a garage or outbuilding)
Not-a-catch: Parents frequently think they can’t house hack since they have kids. In fact, regardless of short- or long-term, it only takes a bit more patience to find the right person.
The great thing about house-hacking is it’s not just about the monthly income.
You’ll also enjoy the following and more:
- If you have to move you have a rental property ready and waiting and experience as a rental property owner.
- Moving not only doesn’t require you to sell your home, it actually adds an additional room to rent.
- Greater cash flow and increased equity equal more borrowing power for your next home.
- You can opt to live in the smaller room or ADU, and rent out the larger space, thus earning equity faster.
When you’re tired of roughing it, you can swap.
- You gain write-offs you didn’t have as a renter (e.g., mortgage interest and property tax deductions).
- You can buy closer to where you want to live instead of where you can afford.
- Greater appreciation. A larger, $300,000 house-hackable home will add an additional $2000 a year at a 2% appreciation rate over a $200,000 smaller starter home.
HOW TO TELL IF IT’S THE RIGHT MOVE
All of this is only wishful thinking, of course, until you run the numbers.
There are multiple formulas that analysts will recommend you look at, but here’s the simplest:
- Add up or estimate all of the costs of owning (mortgage, taxes, insurance, utilities, maintenance, etc.)
- Add up all of the costs of renting and deduct that from #1
- Estimate the money you’ll earn from hacking plus any changes that result from your new address (gas, insurance, utilities, deductions, etc.) and deduct these from #1.
The final number is what you’d be paying as a house hacker. If it’s less than #2, hacking is a no-brainer. If it’s more than #2, you’ll need to determine if it’s an increase you can afford and if the other benefits of being a homeowner help offset it enough.
House hacking offers an excellent avenue to owning a home and becoming a real estate investor, but it’s not a get-rich-quick scheme.
The more comfortable you are with taking the “road less traveled,” the more likely you are to enjoy and succeed as a house hacker.
Want to learn more creative ways to become a homeowner? Answer a few questions here, and a home lending expert will contact you!