What is a House Hack or House Hacking?

House hacking’s popularity has increased over the past few years. Bloggers and podcasts alike are discussing the topic. Twitter is tweeting about house hacking. Heck, house hacking allowed me to go from a negative net worth to over $500,000 in 4 years. But….

What is a House Hack or House Hacking?

Simple.

House hack noun – an owner occupied property that keeps the owner’s cost of living low. This is achieved by renting out extra rooms or apartments. In some cases the owner makes a profit while living at the property.

House hacking verb – the act of living in a house hack to keep one’s cost of living low or getting paid to live while living in said house hack.

Example:

Bob: Dude, Joe just bought a duplex and will use it as a house hack.

Jessica: Yeah, Joe will rent out one unit while living in the other. I heard his tenant’s rent is $300/month more than the mortgage.

Bob: House hacking sounds amazing; I bet Joe will be financially independent in no time.

A house hack or house hacking sounds pretty good right about now, right?

Ways to House Hack

Single family homes and multi-unit buildings with four or fewer units are two common property types used for house hacking. Why? Because the financing options are attractive and it’s easier to qualify for a loan. We will get more into the financing options later.

house hacking

Single Family Homes

Single family homes provide a great way to house hack, especially for younger people that are single. The single family house hack is not rocket science. In fact, it’s very simple.

The following steps will help you house hack with a single family home:

  1. Buy a home with multiple bedrooms. The more rooms the better. Seriously, find a property with three, four or five bedrooms. Or, find a property that you can add a room or two to.
  2. Advertise the extra room(s) for rent. I recommend using resources like Craigslist, Zillow or Apartments dot-com; these sites provide free listings. Paying for marketing is silly in the age of technology. I market my properties this way and have enjoyed great success finding roommates and tenants.
  3. Host an open house to meet prospective roommates/tenants.
  4. Have interested renters fill out a rental application.
  5. Screen your applicant(s). This includes landlord references, credit checks and employment verification. Hint: this should all be in your application.
  6. Select your tenant(s), collect the security deposit, first month’s rent and sign the lease. Make sure you have a real estate attorney review or prepare your lease. Attorneys are an important member of your real estate team.
  7. Move in and have a beer.
  8. Sit back and get paid to live.

Sound simple enough? Thought so. House hacking is not rocket science.

Multi-unit Buildings

Multi-units buildings with four or fewer units provide another great way to house hack. Duplexes (2 units), triplexes (3 units) and quads (4 units) can be financed with low down payments or conventional financing. FHA will provide a loan with as little as 3.5% down on owner occupied properties that have four or fewer units.

Also, anyone at any point in life can utilize this house hacking method. Some people may be turned off by the single family house hack if they are married or have a family.

Steps to multi-unit house hacking:

  1. Buy a property with two, three or four units.
  2. If the property is not fully rented when you buy the place, advertise the vacant unit(s) on Zillow, Craigslist or any other free marketing site.
  3. Show the vacant unit to potential renters.
  4. Have interested renters fill out an application.
  5. Screen your applicants. This includes landlord references, credit checks and employment verification. Hint: this should all be in your application.
  6. Select your tenant(s), collect the security deposit, first month’s rent and sign the lease. Make sure you have a real estate attorney review or prepare your lease.
  7. Tenants move in.
  8. Sit back and get paid to live.

The multi-unit house hack offers a few advantages over the single family house hack.

First, house hacking with multiple units allows you to not live with your tenants.

Second, the income from the other units counts towards your income to qualify for the loan.

Third, multi-unit house hacking generally provides better cash flows.

Also, multi-unit buildings reduce vacancy risk. Assuming you move out of your house hack (single family home or multi-unit), there will inevitably be a vacancy one day. With a single family home, its binary – you either have a renter or you do not.

A four unit building allows you to weather vacancies much easier. If you have four tenants and one leaves, you are still collecting rent on 75% of the building.

How I have House Hacked

My first property was also my first attempt at house hacking. The house was a 3 bedroom/2 bathroom duplex of which I owned only one side of the duplex. I bought this property less than a year after graduating college and rented the two extra rooms.

This property served as a great house hack by keeping my cost of living extremely low. Equally as important, I did this in the Washington, D.C. area which is a high cost of living (HCOL) city. House hacking is possible almost anywhere if you are willing to search for opportunities.

Currently, I live in my 2nd (of 3) property which was a fixer-upper. The house was built in 1910 and had 3 bedrooms/1.5 bathrooms. After a complete gut renovation, the house has 5 bedrooms and 2.5 bathrooms. I currently get paid to live at this house. This is my best house hack so far.

I also had the honor of appearing on The FIRE Drill Podcast where I shared my experiences house hacking and path to FIRE. The FIRE Drill podcast is awesome and I highly recommend checking it out.

You can also listen to the house hacking podcast here:

Examples of House Hacking

There are several great stories about people using house hacking to build wealth, keep their cost of living low and achieving financial independence. You can find a house hack most anywhere. Below you will find four great examples of house hackers house hacking around the country.

Gwen from Fiery Millennials

Gwen from Fiery Millennials was kind enough to guest post about her first house hack earlier this year. She was only 26 when she bought her triplex.

Gwen and her triplex

Gwen also shares more about buying her first house hack with a VA loan.

Her triplex is a great example of house hacking in the midwest. I recommend following her journey; she writes about  what it’s like to be a live-in landlord, renovating her property, dealing with contractors and even EVICTING tenants.

Coach Carson

Coach Carson bought his first house hack with private financing. The property was a quad (4 units) and a fixer-upper. He fixed the property up, lived in one unit, and rented the other three. Nothing like getting paid to live somewhere.

Coach Carson’s house hack before renovations

Coach Carson’s quad was in a college town in South Carolina. In addition to house hacking, he has successfully invested in real estate for more than a decade and owns dozens, yes, DOZENS of properties. His blog is definitely worth reading. I also recommend checking out his online real estate courses.

Coach Carson’s house hack after renovation
Erik from The Mastermind Within

Erik bought a a single family home which he uses as a house hack. He rents the extra rooms to friends and former roommates from when he was a renter. Erik provides a great example of single family house hacking and an example of house hacking in the North (Minnesota – not the midwest, right?)

Bonus, Erik shares REAL NUMBERS for his house hack. He is in his mid 20s and house hacking increased his net worth by more than $100,000 in two years; very impressive guy.

Scott Trench from BiggerPockets

Scott Trench from BiggerPockets has a great story about house hacking in expensive markets. He lives in Denver, which is provides many potential challenges.

Denver is a higher cost of living city, the local real estate market is on fire, and the market is not friendly for first time home buyers. Despite these obstacles, Scott was able to find a great house hack close to Downtown Denver. He proves that house hacking is possible in most any city.

Buying a House Hack with Little Money

Real estate is a wonderful thing. In some instances it can be a great investment that provides passive income. Unfortunately, real estate also requires at least some money.

Why? Well, in order to purchase real estate you must have money for a downpayment. The days of $0 downpayment loans are essentially gone unless you are a veteran or active military. BUT! You do not need to be Warren Buffet to buy real estate either. There are plenty of options that require less than a 20% downpayment.

FHA Loans

FHA loans require a 3.5% downpayment and provide a great way for young investors or those with little cash to buy a home. This type of loan is a great way to break into house hacking.

The loan requires the home to be the buyer’s primary residence and can be used to by a single family home or apartment building with four or fewer units.

FHA loans are easier to qualify for since the underwriting metrics allow for a debt to income ratio (DTI) up to 50%. Most ‘conventional loans’ will not allow a borrower’s DTI to exceed 41-43%.

FHA loans offers a lower interest rate compared to conventional loans but the lower interest rate is negated as borrower’s are required to pay PMI (private mortgage insurance).

Given that FHA loans are subsidized by the government, some fixer-upper properties may not qualify. FHA loans require that the home be in decent shape.

I used an FHA loan for my first house hack. About a year later, I refinanced to lower my monthly payment and get rid of my PMI.

As of June 2017, the median home price in the United States was $258,300. A house hack that costs the median price would require a $9,040.50 downpayment. With some planning, frugality and side hustling, many can save this amount in a year (or less).

Bonus fact – if you buy a two, three or four unit property with an FHA loan, you can count 75% of the market rate rents on the other units towards your income to qualify for the loan.

203k FHA Loans

Similar to the traditional FHA loan, 203k FHA loans are subsidized by the government and require a 3.5% downpayment. Borrowers also enjoy the easier underwriting metrics which make it easier to qualify for the loan. The 203k FHA loan can be used for either type of house hack (single family or multi-unit) and also has PMI.

So what is different about this loan? The property can be in any condition. In fact, this type of loan is great for ugly homes that are falling apart.

Guy, what are you talking about?

Well, the 203k FHA loan allows you to buy a home in any condition. Why? Because this loan product also lends you additional money to fix up the house.

Want a new kitchen or bathroom? Boom, roll the work into your loan.

Want to buy the ugliest house in a gentrifying neighborhood and completely renovate it? Boom – this is the loan for you. In fact, I used a 203k FHA loan for rental property #2.  This property needed a complete renovation and I replaced almost EVERYTHING.

So, what’s the catch? The closing process takes longer. The government requires a certified 203k FHA inspector to inspect the property and monitor draw request. The loan also requires a licensed contractor and scope of work prior to closing.

The permitting process requires a modest amount of time and energy. Rehab/construction funds will only be released after the inspector and contractor sign off on the work. The loan also requires that all work must be completed within six months.

If you are willing to put in the effort time and energy, 203k FHA loans provide a great way to build sweat equity and buy a house hack with a small downpayment.

VA loans

Veterans and active members of the military have access to VA loans. This loan product is a great benefit for members of the military. VA loans do not require a downpayment and typically provide the lowest possible interest rate.

Similar to the FHA loan products, VA loans require the property to be in good condition. Most fixer-uppers will not qualify for a VA loan. Also, the closings process for VA loans does not move quickly.

VA loans provide a great way for members of the military to break into house hacking since no downpayment is required.

Benefits of House Hacking

The average American spends roughly a third (32.9%) of their income on housing. In larger cities like San Francisco, New York City and Miami renters often spent more than 50% of their income for housing.

House hacking allows individuals to reduce their housing expenses dramatically. Some house hacks will require an owner to pay only 10% of their income to housing, which frees up an extra 20% of income for saving and investing.

The best house hacks eliminate housing expenses for house hackers. By house hacking, some individuals are able to free up to 33% of their income that would otherwise be consumed by renting.

Successful house hacks give house hackers the ability to easily increase their savings rates. The higher savings rates and increased investing shortens the time to financial independence.

To Sum it All Up

In summary, and to simplify the benefits of house hacking, you save a shit ton of money. In some instances you even make money.

More money saved means more money available for investing. More funds available for investing means acceleration towards financial independence….

Financial Independence allows us to buy back our time. More time = more cowbell

What are your thoughts on house hacking? Do you own a house hack? After reading this post, do you have plans to house hack? Or, do you think house hacking is crazy and reserved for us weirdos?

We are currently working on a house hacking guest post series and would love to hear your story about house hacking or a house hack you purchased. Please comment below. Oh and we are not sorry if you were offended by our demands of more cow bell.

9 thoughts on “What is a House Hack or House Hacking?”

  1. Great post Guy! I also live in DC and am living in my first house hack as a 3bed/2bath condo. It is going well but not as well as your hacks sound like! I reduced my housing expenses by 43% but still pay a reasonable amount in housing. I had the fear going into this hack but it was 95% turnkey so in the end it wasn’t that bad. My fear level definitely would increase if I went through your 2nd hack using the 203k loan. How did you get through that?

    Thanks,
    Dan

    1. Wow, reducing your housing expenses by 43% is still a victory! Plus you get to build equity and gain some tax benefits.

      The 203k Fha loan is a great tool, but I won’t lie, there were plenty of sleepless nights. Long term, definitely worth it.

      Thanks for reading, Dan

  2. The 203k FHA loan sounds like a great deal, especially for those who are willing to put in a little extra work to get a greater return. Are there any extra closing fees that might make it less attractive? Either way, financing renovations and saving your cash for other investments sounds like the way to go.

    1. the inspector/FHA consultant charges a $1,000 fee if memory serves correctly. Otherwise, no other fees come to mind.

    1. Depending on how much you can make from AirBnB-ing, couldn’t you make more income from that than a full leased out room? You get to choose when you want to rent out those rooms and can usually charge more for short term rentals.

  3. Awesome job with the house hack (and I loved the podcast on Fire Drill)! Honestly, this is one thing I may have done differently if I knew more about house hacking a few years ago… but Mr. AR and I had our own hack (employer provided housing) so it housing costs were not a factor post-marriage until last year.

    For people who are interested in house hacking but concerned about being “tied down” to a property/location (esp. if they only see themselves there a year or so), what are your thoughts? Still something to pursue or is the ROI in the longer term hacking?

  4. I liked reading all the examples: provides some real world data to go along with the concepts.

    We didn’t realize it at the time, but we were house hacking with our first primary residence, as we rented out a room for the first five years we lived there. We used the funds to help pay off the mortgage (not the smartest use of the money, but better than nothing).

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