House Hacking 101: A Smart Way to Get Started in Real Estate

Rose Morrison

Sep 25, 2020


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For almost all homebuyers, owning a home ends up being worth every challenge involved in real estate. It allows you to put your money in a property you own rather than paying rent you’ll never see again. However, first-time homeowners often find real estate daunting. From down payments to maintenance and upkeep, buying a home comes with serious commitments.

Thankfully, house hacking may be the solution to getting started in real estate when you feel a bit unsure of the responsibilities. It’s a trick that people use to help offset living costs. This way, you can afford to make your first move in the real estate game. Let’s take a look at how you can use house hacking the right way.

  1. Choose an affordable home
  2. Look for investment potential
  3. Understand local rules and regulations
  4. Ask the sellers for help
  5. Consider larger properties like fourplexes
  6. Place an ad for roommates
  7. Purchase a trailer or RV

What Is House Hacking?

How does house hacking work? There are a few different ways to try house hacking — but the goal remains the same: have tenants help pay your rent and utilities. If you own a home, you might rent a room to someone. If you have a rental property, you’d live in one unit while leasing the others. Essentially, your goal is to gain equity while off-setting your living costs.

This strategy has various advantages. It can help you save money for specific goals because you won’t have to put your main income toward your living expenses. If you want to be a landlord down the line, you’ll have a mostly risk-free way to gain the necessary experience, as well.

Remember that house hacking doesn’t have to be a permanent situation, which will be another perk. If you only need to save money for a year, you can rent a room in your house for 12 months. It’s a smart way to test whether you’re ready to become a real estate investor, as well. If you realize that managing tenants isn’t for you, you can back out when the lease ends.

It can help you afford to live in a particularly expensive area. There are numerous articles about how millennials often delay buying homes due to the hefty down payments and rising housing markets in major metropolitan areas. According to the National Association of Realtors, 33% of buyers are first-time purchasers with a median age of 33.

If you’ve avoided buying a home because you have financial concerns, like significant student loan debt, house hacking may help you fulfill your dream. It’s an extra income source that goes toward your mortgage and utilities — or your savings account for future expenses. Plus, you might be able to qualify for certain loans that require “owner occupancy,” which will further offset your costs.

Financial Points to Remember

Before you dive into real estate, you need to consider how you’ll benefit financially. Otherwise, you won’t be able to try house hacking in a way that sets you up for success. That’s why you should do calculations like the 1% Rule to determine your future income.

This math will help you see whether the rent you charge will be more than your mortgage payments. It’s every property manager’s goal to at least breakeven on their investment. Therefore, the 1% Rule will help you see whether a property will be right for house hacking.

It states that gross rent should be 1% of the home’s value in total. If you buy a house for $300,000, you should theoretically be able to charge at least $3,000 every month for rent. Then, you can use that number to secure a loan that amounts to no more than $3,000 each month.

Of course, you won’t always be able to charge exactly what the 1% Rule states. Consider your location’s comparable rent values so you can settle on a figure that earns you money but doesn’t turn away potential tenants. It might turn out you need to charge less than you want so you can attract renters.

If you want to consider another method, you can consider the gross rent multiplier, which uses the monthly rent figure to determine how long you’ll need to pay off the mortgage. That’s a calculation that will help you plan for future property purchases. Plus, you can judge how much you should charge for rent.  

How do you start house hacking? This process can take several steps because you need to think about your goals along the way. Here are a few points to consider:

1. Choose an Affordable Home

Understand that your dream home may not be your first home. While you search for your first property, you must look at the purchase as an investment opportunity. It’s true that houses can appreciate in value over time, so you can make money from your purchase later. That said, you have to be able to afford your house now.

What happens when you can’t find a suitable tenant or someone doesn’t pay rent? If you don’t have the means to pay your mortgage when an emergency occurs, you’ll be in a tough spot. It’s important to look for homes in your budget so you don’t fall behind on your payments.

Plus, you want to be able to completely offset your living expenses. There’s no point in house hacking when you still have to put your primary income into your mortgage and utilities. Be sure to stay on the less expensive side during your house hunt.

2. Look for Investment Potential

There’s an old rule of thumb to buy the cheapest house in the most expensive neighborhood you can afford. This trick helps your property’s value increase over time. It’s also easier to resell a home in a desirable neighborhood.

Remember to look for any opportunity to turn the property into cash flow. For instance, you might purchase a multi-unit building and live in one of the units while renting the others. If you can live rent-free and allow the other tenants to pay your mortgage, you’re essentially getting paid to grow your net worth.

This point doesn’t just apply to rental properties like duplexes and triplexes. It’s also important to consider when shopping for a single-family home. If you want to rent out a room or section in a single-family property, you should look for components that increase accessibility for future tenants, including a separate entrance or a basement kitchen.

3. Understand Local Rules and Regulations

Get to know the area before you buy. This effort should include checking into local zoning laws so you can plan accordingly for future additions you might build. Some city regulations and homeowners’ associations don’t let you rent out single-family homes whatsoever — and you don’t want to end up with a property you can’t house hack.

Keep in mind that you could face stiff penalties by ignoring the rules. If you lease a room in a way that doesn’t align with your area’s regulations, you’ll have to stop renting the space, which means you’ll lose that income. That’s obviously tough when you rely on that money.

A real estate professional can help you navigate the potential pitfalls. Be upfront about your plans for the property so they only pull listings that work for your specific house hacking needs. This way, you can ensure you do everything by the books.

4. Ask the Sellers for Help

If you find the perfect home but don’t have enough money for the down payment and closing costs, you could make an offer where the sellers pay some expenses for you. Many older couples are willing to help first-time buyers secure a home. While you may wind up paying the asking price, you won’t have to spend any money out of pocket.

A large downpayment means less interest on your loan. However, you don’t want to spend every penny of your savings because you need an emergency fund to handle any expenses that come up with homeownership. It makes more sense to pay a bit more for your loan than struggle to make ends meet later because you spent your savings on closing costs.

5. Consider Larger Properties Like Fourplexes

Don’t forget about multi-unit housing as an option. It could be the best first investment you make. That’s why you should consider a fourplex. If you have three other people helping pay the bills, you can live for free. If one fails to chip in their fair share and you have to start eviction proceedings, you’ll still have two other units paying. 

As you live in one of the units and let the others pay the mortgage, you can save for your first single-family home. Once you pay off the mortgage on your fourplex, you’ll have an investment property that brings in income — and you can move a step closer to your dream home. Eventually, you should be able to afford your house using the income you make from your rental property.

6. Place an Ad for Roommates

Another tactic involves buying a home with more rooms than you need so you can take in roommates. It’s a similar idea to house hacking in that you rent out a space in your house to earn a secondary income to offset living expenses. However, you’ll find that the living situation will be more intimate since you’ll likely share the kitchen, bathroom and living room.

An example would be a graduate student buying a home so they can live in the master bedroom and rent the other two rooms. It’s also possible by using services like Airbnb to rent rooms as vacation stays for travelers in the area. This approach brings in additional money to pay the mortgage without signing a long-term contract. However, you might not always be able to bring in tenants whenever you need them.

7. Purchase a Trailer or RV

If you’re unsure about living in your home while renting a room to another person, you could purchase a trailer or RV. This temporary housing usually doesn’t cost more than a few thousand dollars, and you can lease your house for more because you aren’t living there. Park the trailer or RV in your driveway or backyard so you can do so for free.

Anyone who doesn’t mind camping out in a trailer or RV to earn income from house hacking will like this option.

Best Renovations to Attract Tenants While House Hacking

If you want to grab renters’ attention, you may want to add upgrades to your house. Not only will renovations make the space more attractive and comfortable, but you can also help your property sell for more money when you decide to move. It can also make the sale happen faster so your home doesn’t sit on the market for too long.

1. Add Some Curb Appeal

Every house needs curb appeal. It may not seem like a huge deal, but your tenants’ first impression will be how your home looks on the outside — and you want to wow them. That’s why you should do a little work to ensure the front areas look fantastic.

Do some landscaping to spruce up the lawn and plants. Be sure the front door doesn’t have any peeled or cracked paint. It should lock securely, too. If you need a new one, you’ll only need to spend a few hundred dollars. Feel free to incorporate window flower boxes and front porch chairs for the final touches, as well.

These updates will be inexpensive, straightforward, and effective.

2. Incorporate Must-Have Amenities

Amenities are a top priority for most renters. It can be a dealbreaker for an apartment or house not to have a dishwasher or storage, so you’ll want to find ways to make your home as accommodating as possible. Plus, you may be able to charge more for rent.

Try to offer at least a few items listed below:

  • Air conditioning
  • A washer and dryer
  • A fenced-in yard
  • A free, on-site parking space
  • A dishwasher

It won’t always be possible to incorporate specific updates, like extra yard space, but you should still consider how you can make the property a better fit for potential tenants.

3. Apply a New Coat of Paint

Never underestimate what a little paint can do for a home’s interior. With a brush and a roller, you can completely transform each room. This project will take a weekend at most, so you can get everything done fast.

Remember that what you like color-wise won’t always be what your tenants prefer. Therefore, your best bet will be to choose neutral tones that brighten up the space. Try warm creams, grays, beiges, and tans. If you still want to pick a more vibrant hue, you can aim for subtle tones that don’t overwhelm the room.

4. Consider Smart Home Technology

These days, we have endless smart home technologies at our fingertips. From thermostats to clocks and everything in between, you could outfit your home with a few gadgets to entice tenants. These devices don’t have to be complicated or expensive — and you can increase your energy efficiency as a result.

Consider security cameras and door locks to ensure your tenants stay safe. Additionally, smart lightbulbs and air conditioners can help you limit your carbon footprint. These are just a few smart gadgets your tenants might like to have over the course of their lease.

Is House Hacking Right for You?

This strategy offers a way to buy your first house with some financial help from tenants. Everything you make from house hacking can be put toward your mortgage and utilities, but you can also set aside the extra income to build up your savings account. There are a few ways to start, whether you want to buy a single-family home or invest in a fourplex.

Eventually, you’ll be able to use the money you earned by house hacking to afford your dream home. This trick is the perfect option for anyone who wants to purchase their first home without spending their own money on the property. It’s also a smart choice for those who want to learn how to be landlords, as you can gain important experience.

It’s up to you whether house hacking makes sense for your goals. If you don’t want to deal with any tenants or buying a rental property, you might find that house hacking isn’t the right move for you. Be sure to consider your financial situation, too. This way, you can make the best decision for yourself.

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