Whether you’re looking to save money buying a new home or you’re looking for a new, creative way to get into real estate investing and minimize your risk, house hacking is a great investing strategy.
With house hacking, you can forgo putting up large chunks of cash to buy a home, taking on all the risk of renovating it and hoping it gets sold, in favor of finding the perfect home & living in it while making money.
In this guide, we’ll cover exactly what house hacking is (and isn’t), the pros and cons of using the house hacking strategy, as well as 10 ideas you can use to start house hacking your first (or next) home, even if you’re a complete beginner.
Before we get into those ideas, though…
What is House Hacking?
House hacking, in general terms, means you’re purchasing a property with a low down payment loan (like an FHA loan) and then living in the property.
The strategy lets you start building equity and, if done properly, can help generate passive income above and beyond what you’re paying for the loan.
This is a long-term strategy but it’s one that is quickly gaining steam because it’s so accessible to beginner investors who are looking to get started as a real estate investor and lower their cost of living.
How House Hacking Works
The core of the house hacking strategy revolves around you purchasing a property, like a home, apartment, duplex, triplex, etc, and living in it (or one of the units) then renting out a section of the home or the rest of the units (if purchasing multi-family).
Then, once you’ve purchased the property and moved in, you can begin putting tenants in place to help cover your mortgage costs — sometimes completely covering them.
That means the tenants you place will be helping you build equity in the property while you get the opportunity to live rent free. In the more expensive markets around the country, many investors are using this strategy to simply help cover their cost of living.
The Pros and Cons of House Hacking
To help you understand why house hacking is becoming so popular, let’s dive into some of the pros. We’ll also touch on some of the potential downsides so you know exactly what you’re getting into.
THE PROS:
- Low Down Payments — If you’re a first-time buyer, you may be able to use an FHA loan with a 3% to 5% down payment to purchase the property.
- Reduce Your Housing/Living Costs — With tenants in place helping cover some (or all) of the mortgage, you have the potential to live rent-free.
- Tenants Build Your Equity — As tenants help cover the cost of your mortgage, you get to take advantage of the equity being built.
- You’ll No Longer Rent — When you use the house hacking strategy, you get to stop handing your hard-earned money over to a landlord every month.
- Easy To Get Started — There’s fewer moving parts since you won’t have to hold onto the property until you’re able to sell it.
- Mitigate Your Risks — The house hacking strategy gives you space to grow as a new real estate investor while minimizing your risk since you’ll live in the property.
- Added Tax Benefits — House hacking lets you start tapping into the massive tax advantages that real estate investing offers while reducing your tax burden each year.
THE CONS (+Mistakes To Avoid)
- Undesirable Neighborhoods — If you buy in the wrong neighborhood, it may be hard to charge rents high enough to turn a profit and attract the right tenants.
- Potential Planning Permission — If you’re going to make additions to the property (like adding an extra unit to a duplex), you’ll need to get permission from the city you’re in.
- Budget Creep — As an inexperienced investor it can be easy to underestimate what the repairs and renovations will actually cost.
- You Become A Landlord — Many investors don’t want to deal with the duties of being a landlord, which house hacking forces you to become.
How To Get Started with House Hacking
If the pros outweigh the cons for you and you want to get started house hacking your first (or next) property, here’s 10 different ideas you can use to get your creative wheels spinning.
#1: Multi-Family Home
Buying a multi-family property, like a duplex, triplex, apartment, etc. is one of the most common methods used for house hacking. With it, you can live in one of the units and then rent the rest of them out.
For beginners, this is one of the easiest ways to get started as an investor because you’ll be living rent free while building a ton of equity in a property that’s almost guaranteed to increase in value.
Since you’ll be living in close proximity to your tenants, it’s easier for you to stay on top of your duties as a landlord, too.
#2: Get Housemates
If you’re living alone and want to make money from the extra bedrooms in your home, bringing in housemates can be a great way to generate extra income and cover your mortgage.
Instead of short-term rentals (like we’ll touch on in a second), the tenants living with you as housemates would be more permanent.
Since your housemates will be living in close proximity to you, though, you’ll need to spend extra time vetting them before letting them move in. This will help avoid potential issues that could come up.
Don’t be afraid to say no to someone that sends up red flags or gives you bad vibes.
#3: Find Your Own Deal
If you’re looking to save money, you can use the house hacking strategy to find your own deal and avoid using a costly real estate agent to help locate the property you want to buy.
When you’re working with a real estate agent, you end up paying more in commissions which is money that could be poured back into the property if you’re finding it yourself.
Finding pre-foreclosure properties and making offers on them is a great way to save money and avoid using an agent. We’ve put together a guide that teaches you how to find pre-foreclosure properties if you’re interested in learning more.
#4: Rent a Room
If you’re not able to locate multi-family properties for sale or you just want to purchase a home, getting housemates is another great way to reduce your cost of living and get help building equity.
With this strategy, you’ll purchase the home you want and then rent out a spare bedroom to permanent or short-term tenants.
For short-term rentals, you can use a service like AirBnB to keep the room filled. Or, if you live near a college, you can rent the room to students as they come and go throughout the school year.
#5: Build an ADU
If your home (or the one you want to purchase) has a large lot, you can build an ADU on the property — or accessory dwelling unit — to begin renting out.
Your ADU will have its own electrical and plumbing connections and, in essence, function like a studio apartment or mini house.
With this strategy you will need to check with your local building codes, ordinances, and laws to ensure you’re able to build an ADU and what limits will be placed on it when you do build it.
Putting an ADU on the lot, though, can be a great way to generate extra income without having to share your space with other tenants.
#6: Do a Live-In Flip
If you’re looking to become an investor and want to kickstart your career, doing a live-in-flip is a great way to get your feet wet and get experience with the process.
With a live-in-flip, you’re purchasing the property you want to live in and then maintaining residence for at least 12 months to fulfill the terms of the loan.
While living in the property, you can perform the needed renovations to bring it up to its actual market value. Then, when the 12-month requirement has expired you can flip the property for a profit.
When you flip it, you can take the equity you’ve built and put it into your next live-in-flip until you’re comfortable enough to buy and flip or buy and hold down the road.
#7: Add a Basement or Garage
If you already own the property and are looking for ways to generate extra income or help pay down your mortgage, adding a basement or garage can help you hit those goals.
With a refinished basement, you may be able to cover most (possibly all) of your current living expenses.
With a separate garage, you can either rent the space as a studio apartment or leave it unfinished and rent it out as storage space for people who don’t want to use a storage facility.
When you’re doing this, you’re not only generating extra income every month but also increasing your property’s value.
#8: Rent Out Storage Space
On the same token, if you have unused space in your home, like spare bedrooms for instance, you can rent the space out as climate controlled storage space.
Since people are always looking for more storage space, this opens up a new income stream for you while keeping people’s belongings safe and monitored.
#9: AirBnB Arbitrage
While AirBnB arbitrage isn’t strictly house hacking, in terms of what we’ve discussed so far, it’s another great strategy you can use to get started as an investor using the short-term rental business model.
With this strategy, you can locate properties for rent and then set up a sublease agreement with the owners so you’re able to post the properties onto short-term rental services like VRBO or AirBnB.
Arbitrage lets you create a new income stream without actually owning the properties by making sure the owner gets what they want — their unit being rented — while you get what you want, too.
#10: Reverse Wholesaling
Reverse wholesaling is another strategy that isn’t necessarily house hacking, in the traditional sense, but is another great strategy for investors who are looking to get started house hacking.
With this strategy, while you’re looking for your own property to purchase, you can network with investors who may be interested in buying the properties you’re not interested in.
You’ll get those properties under what’s known as an “assignment contract” that you can flip to other investors while collecting a finder’s fee at the same time.
Since you’ll already be searching for properties, reverse wholesaling is a great way to get your feet wet, network with other investors, and make some extra money while finding a property to house hack.
House Hacking Funding
Before you start looking for properties, though, you’ll want to secure financing to make sure you’re able to jump on your dream property as soon as you find it.
For first-time buyers, you’ll want to look into VA or FHA loans for their lower down payment requirements, even if you have a lower credit score. With a VA loan, you may be able to borrow up to 100% of the total cost of the property, making it even more affordable.
You also need to make sure you understand how to calculate the ROI on the property you’re thinking about buying so you can determine whether or not it’s a good deal before you move forward with the purchase.
Final Thoughts on House Hacking
House hacking is one of the best ways to get started as a real estate investor while finding your first (or next) dream home.
When you get your first deal finalized and start branching out into your second, third, fourth, and beyond, consider using a service like CallPorter to help stay on top of the incoming calls you’ll generate.
Being able to quickly respond to the prospects that are calling you back to make offers on their properties will help you quickly grow your portfolio, avoid letting great deals fall through the cracks, and save you a ton of time so you can keep your deals moving forward.
It’s one of the best secret weapons for today’s most successful real estate investors.