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House hacking: 5 key strategies to be successful

Owning a home is one of the ways the people build wealth over time. However, another popular but often overlooked way of building wealth in real estate is with a strategy known as house hacking.

House hacking can be a good way to slowly get into the real estate business with a home that people already own, and to learn the ins and outs of being a landlord.

• House hacking is a real estate investing strategy which aims to partially or completely offset the owner’s mortgage payment.
• Single-family and small multifamily homes used as a primary residence may be good candidates for house hacking.
• Financing a primary residence is usually less expensive than buying a rental property, with better terms and interest rates, and down payments as low as 0%.

What does it mean to house hack?

House hacking is a real estate investing strategy that involves buying a property and then renting part of the property out.

One example of house hacking is buying a single-family home, then renting out a room or remodeling the basement or attic into a small apartment unit. Rental income generated is used to pay down the mortgage balance and build equity in the home.

When the time is right, the owner has the option of doing a cash-out refinance to turn the accrued equity in the home into cash, and to use the money as a down payment to purchase another rental property.

Buying a small multifamily property – such as a two-unit duplex or a three-unit triplex – is another way real estate investors house hack.

Both Fannie Mae and Freddie Mac have mortgage products for 2- to 4-unit primary residences with low interest rates and affordable down payments. House hacking a multifamily property happens when the investor/borrower lives in one unit and rents the other units out.

Income from the rental units is used to make extra principal payments on the mortgage. When the accrued equity in the multifamily property becomes large enough, the investor may be able to refinance and pull cash out of the property to purchase another small multifamily building.

The benefits of house hacking

House hacking can be a good strategy for people who want to slowly get into the real estate investing business. Financing a primary residence is generally more affordable than getting a loan for an investment property, with better interest rates and lower down payments.

House hacking can also be a way to get used to being a landlord, because the tenant literally lives down the hall or right next door. Any issues that arise can be immediately addressed, and many beginning investors find that learning-by-doing helps to lay a solid foundation for eventually becoming a full-time real estate investor.

Some of the main benefits of house hacking include:

• House hacking allows people to minimize the amount of capital tied up in a rental property, and is a way for people without a lot of money to begin investing in real estate.
• Financing the property as a primary residence normally does not require a large down payment and usually offers better loan fees and interest rates.
• Reducing personal housing costs by using rent money to pay toward the mortgage helps to build equity faster.
• Using tax deductions, such as the cost of repairs and depreciation expense on the part of the property that is used as a rental, reduces the owner’s taxable net income.
• House hacking minimizes unproductive travel time and transportation costs going to the rental property because the owner already lives there.
• Learning the ropes of being a landlord through house hacking is a good first step to becoming a successful real estate investor.

How to successfully house hack a property

House hacking a single-family home or small multifamily property follows the same general steps:

1. Understand financing options

Conventional loans, along with FHA and VA loans, are three common ways to finance a primary residence through a traditional lender like a bank or credit union.

Interest rates are often attractive, even for borrowers with lower credit scores, and down payments may be 5% or less. VA loans backed by the Department of Veterans Affairs even allow veteran borrowers to obtain 100% financing on a home.

According to the Consumer Financial Protection Bureau (CFPB), before shopping for a mortgage a borrowers should:

• Check their credit report
• Assess how their spending habits will change with a mortgage
• Budget for additional or changed expenses
• Determine how much of a down payment is needed
• Decide on a purchase price of a home
• Create a loan application package with personal and financial information including pay stubs, W-2 forms, copies of recent tax returns, bank statements, and proof of identity

2. Search for a good property to house hack

A property that is a viable candidate for house hacking may have characteristics that are slightly different than a home that the owner will live in year after year.

That’s because eventually, most house hackers will turn the primary residence into a rental property as they grow their rental property portfolio. So it makes sense to choose a home that will make a good rental right from the start.

Common factors that real estate investors consider when choosing a good rental property include:

• The neighborhood, which will influence the type of tenants the home will attract and the rent they can afford to pay.
• Property tax rates, which vary widely from one place to the next and can have a significant impact on the total return of a rental home.
• School district quality, crime rate, and overall neighborhood ratings affect occupancy levels and the overall value of the home.
• Job market and population growth are two indicators real estate investors consider to help predict the future demand from tenants for rental housing.
• Housing Price Index (HPI) and Housing Affordability Index (HAI) are two other metrics investors use to anticipate rental property demand, because when home prices are unaffordable more people may choose to rent rather than own.
• Average rents and rent growth also affect where to buy a home to house hack, since the rental income will be used to pay for part of the mortgage and other expenses. Good tools to use to learn about market rents include Rentometer, Zillow Rent Zestimate, and Zumper.
• The number of rental home listings and vacancies in the area also indicate how strong or weak the demand for rental property is, because high vacancy rates may lead to lower rents and poorer investment returns.

3. Crunch the numbers before making an offer

Before making an offer on a home to house hack, investors crunch the numbers to get a better idea of the potential amount of income the home may generate.

Even though a home being house hacked won’t be used entirely as a rental at first, investors often look forward to the day when the property can be refinanced and the equity turned into cash to use as a down payment to purchase another rental property.

This simple spreadsheet by Roofstock provides an easy way to view the potential financial performance of a given property. You can use it to forecast the potential return of a property. Simply enter some information to view projected key return on investment (ROI) metrics, including cash flow, cash-on-cash return, net operating income, and cap rate.

4. Close escrow, move in, and make repairs

Closing costs on a primary residence normally run between 3% and 5% of the loan amount, in addition to the down payment. Fees to close escrow on a home include costs such as origination charges, appraisal fee, home inspection, title search and lender insurance, prepaids (such as homeowner’s insurance and prepaid interest), and title insurance.

After taking title and moving in, the part of the property being rented out will need to be made ready for a tenant.

The amount of repairs and updating required will vary depending on whether a bedroom in the home is being rented, a basement or attic is being remodeled into a studio apartment, or extra units in a multifamily property are being updated.

5. Find a good tenant

People who are house hacking and being landlords for the first time should take care to understand the state landlord-tenant laws and the Fair Housing Act to avoid breaking the law or discriminating against a tenant.

When the space is ready to be rented, these are the general steps investors follow to screen tenants:

• Determine minimum tenant criteria, such credit score or income-to-rent ratio
• Pre-screen tenants by discussing requirements such as the monthly rent, security deposit, rental application fee, and background check up front
• Gather and review applications from prospective tenants and get permission to run a credit report, conduct a background check, and contact current and previous employers and landlords to verify tenant information
• Decide on the best tenant and sign a lease agreement

How much money do you need to house hack?

Unless a fixer-upper is being purchased or a significant amount of remodeling is required, the amount of money needed to house hack depends on how the home is financed and the size of the down payment.

There are several common options for financing a primary residence to use for house hacking:

Conventional mortgage is a loan that is not guaranteed or insured by the federal government, and may offer down payments as low as 3% based on the borrower’s personal and financial situation.

Conforming loan is eligible to be purchased by Fannie Mae or Freddie Mac with down payment amounts as low as 3%.

FHA loans are backed by the Federal Housing Administration, have less stringent credit score requirements than other types of loans, with down payments as low as 3.5%.

VA loans are available to veterans, active-duty military members, and surviving spouses, and don’t require a down payment or mortgage insurance.

Common house hacking strategies

Here are some common strategies people use when looking for a home to house hack:

• Multifamily housing where one unit is a primary residence and the remaining units are rented to tenants
• Single-family homes with multiple bedrooms that can be converted into a self-sufficient suite by installing a bathroom and kitchenette
• Houses with areas easy to convert to bedrooms, such as homes with a den or playroom that can be turned into an additional bedroom
• Homes with the basements, attics, or garages already partially remodeled are good candidates for house hacking
• Property with a large lot suitable for building an additional dwelling unit (ADU), which is a free standing dwelling similar to a guest home or in-law unit

Wrapping up

House hacking can be a good way to get started in real estate investing without having to purchase a rental property requiring a big down payment. By using an extra bedroom or units in a multifamily property to rent, house hacking can turn a home that’s already owned into a property that generates rental income.

Jeff Rohde

Jeff has over 25 years of experience in all segments of the real estate industry including investing, brokerage, residential, commercial, and property management. While his real estate business runs on autopilot, he writes articles to help other investors grow and manage their real estate portfolios.

House Hacking Guide

House hacking is a real estate investing technique that involves turning your primary residence into a rental property. Doing so involves renting out separate rooms in your home or units in a building you own. Then, you can use the rent to pay your mortgage, allowing you to reduce or even eliminate your personal housing expenses.

House hacking is an excellent strategy for beginners who want to learn the basics of owning a rental property but aren’t quite ready to purchase a separate house. It allows you to be close by to respond to issues if anything happens and keep an eye on your tenants to be sure they’re not breaking the rules outlined in the lease. It’s also a smart strategy for those who want help paying their mortgage and have some extra space they’re not currently utilizing.

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House Hacking Strategies

1. Multi-Family Home House Hack
2. Rent by the Room
3. Create a Separate Suite
4. Put Your Home on Airbnb
5. Mobile Home or RV House Hack
6. FHA House Hack Strategy

1. Multi-Family Home House Hack

The traditional house hacking strategy involves purchasing a 2-4 family building, occupying one of the units, and then renting out the rest. This is the strategy preferred by most house hackers because it offers more privacy than some other methods. You will still have all your tenants under one roof, but each has a separate living space. Duplexes and triplexes are perfect for house hacking, although you can do it with almost any multifamily building.

2. Rent by the Room

Another way to house hack is to purchase a single-family home and rent out separate rooms or a portion of the house. Perhaps you have a spare bedroom that isn’t being used. You may decide to rent it out and use some of the rental income to pay the mortgage. Or perhaps you’re willing to rent out an entire floor and share standard amenities like the kitchen and living room and charge even more in rent. Doing so means you may have to share your home with your tenants. But this is a good strategy if you’re comfortable with the arrangement or know some people looking for a place to stay.

3. Create a Separate Suite

If you want to create more separation between yourself and your tenants, you could also construct a separate suite and rent it out. For instance, you could build a guest house above the garage or in the basement. You could also create a separate casita in the backyard or convert a pool house into a separate apartment. The more amenities and features you include (such as a private entrance, kitchen, bathroom, etc.), the more you can charge in rent. But it may also cost you an upfront investment if you don’t already have this kind of structure in your home.

4. Put Your Home on Airbnb

Airbnb is another valuable resource for house hacking, especially if you live somewhere with a strong tourist season. Maybe you don’t want a permanent tenant, but you don’t mind temporarily renting out a spare room. Or maybe you often travel and want to make some money while you’re away. Airbnb is a great way to find tenants looking for short-term rentals, plus you can often charge higher rates than what you’d get for renting it out yearly.

5. Mobile Home or RV House Hack

If you don’t have much space in your home but have a large plot of land that isn’t being fully utilized, you may consider doing a mobile home or RV house hack. That means purchasing an RV or a manufactured home and parking it on your property. Then you can either rent it out to tenants, or you could live in it yourself and rent out your home.

Mobile home/RV hacks are better in rural areas, as you need a decent-sized plot of land, and many suburban neighborhoods have laws against mobile home construction or RV parking. So be sure to check the local zoning laws before you try this particular strategy.

6. FHA House Hack Strategy

FHA house hacking refers to using a traditional house hacking strategy with an FHA loan. FHA loans have much lower credit and income requirements than traditional mortgages. You can also be approved with as little as 3.5% down. But FHA loans are only available for primary residences, not investment properties.

The beauty of a house hack is that it’s a primary residence and an investment property, so you can use an FHA loan. The FHA house hack is a smart strategy for those who don’t have the credit and income to afford a conventional mortgage but want to begin earning passive income that can help them pay back the mortgage.

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House Hacking Pros and Cons

House Hacking Pros

1. Pay Down Your Mortgage Faster
2. Less Maintenance
3. Fewer Expenses
4. Keep an Eye on Your Tenants

1. Pay Down Your Mortgage Faster

The primary benefit of house hacking is using the additional rental income to pay off the mortgage. Depending on how much space you rent and what you charge, you may be able to cover your entire monthly mortgage payment with the rental income. Or you can continue making regular payments and pay off the loan half the time (just keep an eye out for any prepayment penalties).

2. Less Maintenance

Maintaining one property is much less expensive and time-consuming than managing a portfolio of separate investment properties. You only have one roof, yard, HVAC system, set of pipes, and so on, which you would have to maintain anyway because you live there. Plus, if a pipe bursts in the middle of the night, it’s easier to address if you’re right there than if you have to drive across town.

3. Fewer Expenses

House hacking usually carries fewer expenses than buying separate investment properties. You only have to pay one tax bill, one insurance bill, and one bill for each of the utilities, which is more straightforward for accounting purposes. Plus, you can often save money on a property manager since you’ll easily be able to collect rent and maintain the property yourself.

4. Keep an Eye on Your Tenants

Another benefit is that it allows you to closely monitor your investment. If you’re an absentee landlord, you’ll have to trust that your tenants are on their best behavior or do periodic checkups to ensure they are following the rules in the lease. But with a house hack, you can easily spot prohibited conduct such as smoking, loud parties, extended house guests, unapproved pets, etc.

House Hacking Cons

1. Lack of Privacy
2. May Impact the Resale Value
3. Tenants Will Expect Your to Respond Quickly

1. Lack of Privacy

While house hacks have their benefits, there are several reasons why you may not want to house hack. The most obvious is privacy concerns. Depending on your strategy, you may have to open your home to strangers. That means you’ll have to develop a thorough vetting process and be able to mitigate potential disputes, especially if you have multiple tenants living under one roof. Even with a classic house hack, your tenants will live right beside you, which can get uncomfortable for some. So, you should seriously consider whether you’re comfortable mixing your business and personal life in that way.

2. May Impact the Resale Value

A house hack could also potentially impact the resale value of your home. For starters, it will likely lead to more wear and tear. More people are coming in and out daily, which may impact the property’s condition. Plus, if you have a single-family home being shared with tenants, it may be difficult to find a buyer who is open to that type of scenario, even with the extra income, so you may be forced to ask your tenants to leave before you can sell the property.

3. Tenants Will Expect You to Respond Quickly

If your tenants know you live on the premises, they will likely expect you to respond to requests and issues much faster than if you lived in an entirely different area. So, if you’re going to do a house hack, it’s wise to establish boundaries and expectations early on so you aren’t bombarded with constant requests and complaints.

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Is House Hacking Worth It?

House hacking is a great strategy to help you pay your mortgage or earn extra passive income without all the stresses of managing a separate property. But you have to be prepared for the responsibilities and sacrifices that come with it. If you’re uncomfortable having strangers – or even people you know personally -share your home or live under the same roof, this isn’t your strategy.

The standard house hack appeals to many because it offers the same benefits but more privacy. However, no matter what, you’ll still live in the same building, which presents challenges. So, while house hacking can be a lucrative technique for those willing to share their home or building, you should carefully weigh the pros and cons before jumping in.

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Is House Hacking Legal?

Yes, house hacking is legal, but you still need to respect local laws and regulations while house hacking. For example, if you try an Airbnb house hack, you need to follow local laws, which might mean collecting taxes or implementing a minimum stay.

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House Hacking Bottom Line

House hacking is great for new investors and those with under-utilized space in their homes. If you are looking for help paying the mortgage or want to save for the down payment on more traditional investment property, you should consider house hacking.

But, if you’re uncomfortable with tenants under your own roof or don’t want to deal with the added hassles of being easily accessible, this may not work for you. Ultimately, you should define your investing goals and decide what you’re comfortable with if you’re debating whether or not this technique makes sense.

What Is House Hacking? How Can I Make It Work for Me?

If you are looking into house hacking, let me congratulate you because you are on the right path to getting started in real estate. In fact, this investment strategy can set the path for making money in the business with minimal risks. So, let’s just dive deep into it. I’ll talk about the house hacking definition, the advantages, the different methods of house hacking, how to finance the strategy, and, of course, how to analyze an investment property to make sure it will generate positive cash flow to allow for a successful house hack.

1. House Hacking Definition

House hacking is a very easy real estate strategy to understand. In essence, it is when you buy a property, you live in part of it, and you rent out the rest. All the while, your tenants pay you a rental income which allows you to live for free in your own home. So, now that you know what is house hacking, let’s see how it benefits a beginner real estate investor.

2. Benefits of House Hacking

The main advantage of house hacking is the fact that it helps you save money on living expenses. It might even help you completely eliminate living costs through the rental income you receive from your tenants. Additionally, the rental income will allow you to build equity for free while it pays off your mortgage. Another benefit is that the rental expenses, in this case, are subject to tax deductions (an investor’s best friend!). It’s also important to note that there are various investment property financing strategies that support this particular investment type. Some of these actually have fewer requirements and lower down payments which are a great advantage for beginners.

3. The Different Ways to House Hack

The amazing fact about house hacking is that it’s a real estate investment strategy that gives you options. In other words, there is no one way to do it. Instead, there are a few ways you can choose to house hack. Here are 3 methods to make the best of an investment property while saving up on housing costs:

Traditional House Hacking

This is the method where buying an investment property takes place. Traditional house hacking is when you buy a multi family home (a property with 2-4 living units), you move into one unit and rent out the rest. With the right rental property, the income can cover most, if not all, your monthly mortgage payments.

One strategy that works best for house hacking is a duplex investment strategy. As a matter of fact, buying a duplex is the best way to house hack especially for beginner real estate investors. It is a multi family property that has two living units. House hacking a duplex comes with the benefit of being more affordable than a triplex or quadruplex and you can ease yourself into dealing with only one tenant rather than multiple tenants for your first rental property.

House Hacking Your Own Property

What is house hacking your own property? It simply means that you rent out the place you live in, which you already own. Yup, that’s right. And here, you don’t even need to buy an investment property. You can rent on a room-by-room basis which is perfect for Airbnb. Or, you can rent a room/an entire floor for a tenant long term. This may even be possible if you’re a tenant. Just be sure to check your lease agreement and clear everything with your landlord. Doing this can help you with your own rent or even allow you to save up to buy your own property.

4. Investment Property Financing

If you do choose to go with traditional house hacking, you’ll need to buy a rental property. So, how do you finance such a strategy? There are a few options here, and you can choose whatever applies to you or works best for your situation. Let’s go through them one by one:

A Conventional Loan

A conventional loan works for all types of investments as long as you have a good credit score. The good thing about it is that you are buying an owner occupied multi family home. Therefore, it might be easier for you to get approval for a loan. However, most conventional loans require a 20% down payment. If you have the cash saved up and you are confident in your credit score, go ahead and apply for this type of loan.

An FHA Loan

Another investment property financing option is an FHA loan– Federal Housing Administration loan. This loan is pretty different from a conventional loan. The FHA works as a backup system rather than the actual loan provider. So, private lenders such as banks are the ones who provide the funding but the FHA backs it up which provides a strong guarantee for repayment. In case you fail to repay the lender, the FHA repays them in your stead. From here, you can guess that they have more flexible requirements for application. Here are some advantages/requirements of the program:

1. A down payment of 3.5% or less.

2. Approval is possible with bad credit history.

3. FHA loans are specifically for owner occupied properties. You are required to live there for at least one year but then you can move out and rent out all of the units if you wish.

4. You can easily get extra funding since the FHA backs up your loan with the FHA 203K program.

VA Loan

One of the best property financing programs is the VA loan program. With the government backup system, you won’t have to worry much about how to finance an investment property. This program targets veterans who serve or have served in the military for a specific period of time. Therefore, it provides the most flexible terms for those who wish to own a house of their own. Some of the advantages include no down payment requirements, no pre-payment penalties, low-interest rates, and more than 100% of the property price for a loan.

You can find all the information on this financing strategy here.

5. Real Estate Deal Analysis

It is never enough to just know what is house hacking. In fact, for this to work out for you, you must take the time to perform a meticulous deal analysis. This includes a thorough market and investment property analysis. As for the market analysis, you want to make sure it supports an investment of this kind. Examine the rental demand, the population rate, and the job market to ensure your property doesn’t experience high vacancy rates.

On the other hand, an investment property analysis is essential for making sure the property itself has the potential for generating income. This is called the return on investment analysis where you examine the investment to price ratio through various evaluation techniques such as the cap rate and the cash on cash return.

Now, how do you do all of that? Simply by using a house hacking calculator (investment property calculator). This real estate investment tool provides the most accurate examination of an investment property. It will provide rental income and occupancy rate estimates. Just keep in mind that you’ll have to account for the fact that you are living in one of the units when using tools and data of this kind.

To learn more about how we will help you make faster and smarter real estate investment decisions, click here.

What is House Hacking and Should You Try It?

Steve Rogers has been a professional writer and editor for over 30 years, specializing in personal finance, investment, and the impact of political trends on financial markets and personal finances.

The average American spends 30% of their annual budget on housing costs [1] . Some spend even more: low-income renters, on average, lose nearly 50% of their income to housing payments [2] . That makes it most people’s biggest roadblock to saving money, paying off debt, and achieving other financial goals.

After all, you can find ways to avoid many of life’s expenses, but unless you’re willing to live in a tent or a van (considered it – wouldn’t recommend), housing costs are hard to avoid. But what if you could get someone else to pay those costs for you?

Yes, it’s possible, and no, you don’t have to blackmail anyone. You can just use the time-tested strategy of house-hacking.

If your immediate reaction was to ask, “What the heck is house hacking?” don’t worry. Here’s everything you need to know about the concept to decide whether it’s the right move for you.

What is House Hacking?

House hacking is a real estate investing strategy that involves buying a property, living in one part of it, and renting out the spaces you don’t occupy. It’s a simple strategy but remarkably powerful, and while the term “house hacking” has only become popular in recent years, the concept has been around forever.

House hacking is the perfect gateway into real estate investing. Most people instinctively recognize that buying property has tremendous potential, but it’s also intimidating. The high price tag and the complexity of managing a property scare a lot of people off, but house hacking offers a way to mitigate both of those issues:

• Living in the property makes it easier to keep up with maintenance, collect rent, and deal with problems as they arise.
• When you buy a property as your personal residence, some loans allow you to put as little as 3.5% down as a deposit (they’re called owner-occupant loans and have lower rates, too).

House hacking is also incredibly flexible, and you can make it work with almost any type of property. As long as you can fit more than one person into a space, it can probably work as a house hack. I’ve met people who have bought three-bedroom homes, cordoned off a section of the living room for themselves with a wooden partition, and rented out all three bedrooms.

Of course, that’s an extreme approach, and you don’t have to do that to be profitable, but it goes to show how creative you can get. Let’s take a look at some of the more typical arrangements that people use.

House Hacking with a Small Multi-family Property

A multi-family property is any property that has multiple, separate units on a single lot. For the purposes of house hacking, that means duplexes, triplexes, and quadplexes. If you want to qualify for owner-occupant loans, your property has to be “residential.” That means it can’t have more than four units.

Multi-family properties are usually the standard for house hacking. It’s tough to say whether it’s more profitable to house hack with a multi-family home than a single-family home, but it’s almost always more comfortable. Rare is the person who likes sharing their bathroom with a strange man who always forgets to clean his beard hairs out of the sink.

Unfortunately, these properties are usually harder to come by than single-family homes. There are fewer of them, and there’s often competition from investors. Those factors can drive prices upward.

House Hacking with a Single Family Home

For those who are unable to afford (or find) a multi-family property, single-family homes can be a viable replacement. These are the properties that most people think of as a house. There are a lot more of them on the market in just about every city, so your chances of finding one that’s worth investing in are a lot higher.

There are obvious downsides to this approach. Again, whether or not it will be profitable depends on the location, the property, and the market, but it will always require that you give up some of your personal space. If you don’t mind sharing your sink with Johnny Beardhairs, though, it can be just as effective as house hacking a multi-family property.

If you’re planning to use a single-family property for a house hack, you’ll need to assess the property carefully. Consider ways to divide the property or convert a portion of it to a separate unit. Consider your own comfort and that of your tenants. A well-planned and well-executed division of the unit will have more value and attract a better class of tenant.

�� Want to learn about some of our other favorite real estate investing strategies? Take a look at our introduction to the asset class: Investing 101: Real Estate Investing For Beginners

House Hacking With Long-term vs. Short-term Tenants

Picking a property type isn’t the only choice that will affect your house hacking experience. You’ll also have to decide whether to go with long-term or short-term tenants.

Long-term tenants are what you probably imagine when you think of renters. They usually sign a lease for somewhere between a month and a year. Short-term tenants may only stick around for somewhere between a night and a week (think Airbnb and VRBO).

There are pros and cons to both:

• Long-term: Keeping tenants in your property for months or years at a time is ideal for those who prefer stability. You wouldn’t have to worry as much about generating demand or turning over your property. Your rental income will be predictable. That said, when a tenant does leave, there will usually be much more extensive repairs necessary before it’s ready for the next one, and they’re noticeably less profitable.
• Short-term: Bringing in tenants on a daily or weekly basis is a lot more work than a long-term rental. You’d have to clean the place between each one and worry about a lot more people. Your income may be seasonal or unpredictable. On the bright side, you can charge a lot more for a property on a nightly basis than you can on a monthly one.

In short, you’d want to choose long-term tenants if you want as passive an experience as possible. If your main priority is making as much money as you can, short-term tenants are usually the better way to go. Be sure to consider your available time and your housekeeping skills before deciding on short-term rentals. You’ll also want to consider whether your location attracts a year-round stream of short-term visitors.

The Advantages of House Hacking

I said that house hacking is one of the most powerful strategies for building wealth because it can get someone to pay for your housing. Of course, that’s an oversimplification. Let’s take a look at exactly why it’s so useful. It’s going to be a long list, so bear with me.

A successful house hack allows you to:

• Generate Passive Cash Flow: If your rental income for the property exceeds the cost of owning it, your home will actually put money back into your pocket every month instead of taking some out. Even if you don’t have positive cash flow while you live in the property (those owner-occupancy loans require that you do so for a year), it should if you ever decide to move out. Even if you only manage to break even, that still means you’re living for free!
• Maximize Leverage: Leverage (debt) is a big part of what makes house hacking so powerful. You only have to pay a fraction of the price of a property to gain access to it and benefit from its cash flow and appreciation. Mortgages are also among the lowest-interest loans you can get. That lets you pay for a valuable investment with a low-interest loan, and that’s unusual: good luck getting a lender to give you a mortgage to go buy a bunch of stocks!
• Build Equity: Have you ever heard someone say that renting is like throwing money away? That’s because owning a property allows you to build equity that you can tap into later. You can potentially recoup all the money you put toward the principal balance of the property when you sell it. If you select quality properties in good locations their value is likely to increase.
• Diversify Your Portfolio: One of the keys to successful investing is diversification. If your portfolio is entirely comprised of paper assets like stocks and bonds, having a rental property or two is a great way to hedge your bets against market downturns and inflation.
• Receive Tax Incentives: The tax code has dozens of rules that incentivize real estate investing. You can take deductions for maintenance, depreciation, property taxes, mortgage interest, and more. If you decide to sell your property, the IRS will tax the capital gains at rates far lower than ordinary income rates. If you live in the property for two years, you can even exclude $250,000 of those gains.

Honestly, the list above probably isn’t exhaustive, but it should get the point across. House hacking can turn the most common obstacle to saving money (having to spend thousands of dollars a year on shelter) into a wealth-generation machine.

Let’s take a look at a couple of examples that demonstrate the power of house hacking.

House Hacking in Action

Example 1	Example 2
Property Type	Triplex	Single-Family Home (3BR)
Purchase Price	$250,000	$500,000
Down Payment	$12,500 (5%)	$100,000 (20%)
Monthly Rent per Unit/Bedroom	$850	$1,150
Monthly Rent While Living in the Property	$1,700	$2,300
Monthly Principal, Interest, Taxes, and Insurance (PITI)	$1,483	$2,545
Private Mortgage Insurance (PMI)	$123	$0
Reserve for Vacancies, Utilities, and Maintenance	$208	$416
Net Monthly Cash Flow While Living in the Property	-$114	-$661
Net Monthly Cash Flow After Moving Out	$736	$489

Take a look at the numbers above. They’re just approximations, but they’re realistic ones. Both would be solid deals, but not extraordinary.

�� Let’s walk through the first one. Finding a triplex in a mid to low-cost-of-living city for $250,000 might be tough, but it’s doable. If you rent each unit for $850 a month, put 5% down, and reserve 1% of the value of the home each year for miscellaneous costs, you’d have to pay just over $100 a month for your own housing. After moving out, you could get another $850 a month, bumping your cash flow up to $736 a month.

�� Next, the second example. Buying a single-family home in a mid to high-cost-of-living area for $500,000 is achievable. You’d get more rent for each bedroom due to the location, but the extra debt would outweigh the benefits by a bit. Still, you’d only pay $660 a month for housing live in a location where homes are worth half a million dollars. Once you moved out, you’d be up almost $500 a month in cash flow.

Now, consider how much better off the owner of each of these properties would be than their tenants. The owner of the first property would pay $736 less than their tenants to live in the same place. How much better off would you be if you could save $700 more a month? That would compound into more than $120,000 of additional wealth if you lived in the property for just a decade. What if you did a second house hack the next year? What if you kept going?

�� Want to see how much wealth your house hack could generate? Use this calculator to see the effects of saving extra money each month: Savings Calculator

The Disadvantages of House Hacking

A good house hack is one of the best investments that you can make. It can revolutionize your life and put you on the fast track to financial independence. That doesn’t mean it’s all puppies and rainbows. There are risks involved and obstacles to overcome. Like any worthwhile goal, house hacking takes some hard work.

So before you go rushing off to throw money at a random real estate agent, let’s take a pause. Investing can always go wrong, and house hacking is no exception. It presents four major challenges. They are:

• Saving the Cash: Real estate is a capital-intensive investing strategy. There are costs to get into the property upfront (downpayment, closing costs), and costs to own it each month (mortgage, taxes, and maintenance). Don’t try to jump into real estate without a strong financial foundation.
• Getting a Loan: Having the money for a down payment doesn’t guarantee that you’ll qualify for a mortgage. These days, you’ll need to have at least a good credit score, a stable income, and the patience to work through the property purchase process.
• Finding the Deal: Compared to investing in something like passive index funds, real estate takes a lot of research. Good deals usually don’t just fall into your lap. You’ll need to learn to analyze properties, get over the fear of making offers, and likely look at many properties you don’t want and deal with more than a few rejections before you can close on a property.
• Dealing with Tenants: Once you have your property, you need to get some into it, collect rent from them each month, keep them from destroying it, and fix the things they break. Some house hacks also put you in direct contact with your tenants. It might not be so bad if you live in separate units, but sharing a living room might not be fun.

House hacking is a powerful strategy, but it’s not foolproof. There are risks and limitations, as there are with every investing tactic. It will take more effort, thought, and energy to pull off than sticking your cash in an index fund, even if you get a property manager and only rent out your garage.

Don’t underestimate the challenges of real estate investing. It’s not a get-rich-quick scheme, and anyone who tells you otherwise is selling you something you probably don’t want.

�� Are you hunting for new ways to reach financial independence and retire early? Take a look at our suggestions: How to Retire Early: The Shockingly Simple Path to Freedom

Should You House Hack? Ask the Experts

House hacking has the potential to be a life-changing investment. It’s one of the best ways to rapidly scale your net worth, develop a passive income stream, and reach financial independence. That said, it’s not the right move for everyone. Tying up your cash and taking on a mortgage can be daunting, and there are significant personal considerations.

If you’re unsure whether house hacking makes sense in your situation, don’t hesitate to talk to an expert (or ten). There are plenty of local real estate meet-ups across the country, and you can find plenty of more experienced real estate investors there. You should also reach out to lenders, real estate agents, and a Certified Public Accountant to make sure that your investments make sense before you commit.