You may have stumbled across the term “house hacking” lately, a curious term that was supposedly invented by this guy. Well, he claims to have come up with the phrase, perhaps not the practice itself.
Anyway, in short, house hacking is the art of getting someone to pay off your mortgage for you via cohabitation. It differs from traditional real estate investing because you reside in the same place where you invest.
Put another way, you live rent free while also building wealth. What’s not to like, right?
Well, nothing is ever as easy as it seems, nor as cut and dry. Plans change quickly. But if things do work out, you could be sitting pretty.
Live for Free and Make Money
Here’s a classic example of house hacking. You buy a fourplex (four-unit property) and live in one of the units and rent out the other three to cover your mortgage.
The key here is that the property is seen as owner-occupied because you’re living in one of the four units. This means it’s easier to obtain mortgage financing, though the interest rate may be slightly higher to account for the risk of having a multi-unit property.
Anyway, assume your monthly housing payment is $2,000. If you can rent each of the three units for say $750 a month, that’s a total monthly rent of $2,250.
That means your entire investment is covered and then some…$150 to the good each month and you don’t pay a dime to live there. At least, that’s the theory.
In reality, you will pay for maintenance and upkeep, and definitely vacancy as tenants move in and out, or simply stay and don’t pay. And that’s the risk of house hacking…there’s no guarantee you’ll profit, let alone cover your mortgage each month.
But if it does work out, you can live for free and make money each month, and build wealth over time as your properties are paid off in full by other people! Oh, and hopefully appreciate too.
Here’s another example. Say you buy a single-family home and the total monthly payment is $1,500. Let’s assume it’s a 3-bedroom and you live in one of those rooms. It’s possible to rent out the other two rooms to random roommates (or friends of yours) and cover the entire monthly housing payment.
Over time, those randoms or friends pay down your mortgage, and in the meantime, you live for free.
The most extreme of house hackers will actually sleep on the couch and give up all their bedrooms in order to save money and maximize their mortgage payoff.
Pros and Cons of House Hacking
Now that you know more about how house hacking works, let’s explore the pros and cons to ensure you don’t get into a situation you’re not comfortable with.
The obvious advantage of house hacking is that you get someone to pay off your mortgage. Additionally, you reduce your out-of-pocket expenses each month because they are contributing to your bill(s) each month.
This can extend to utilities as well, such as cable, internet, phone, water, electric, gas, and so on. If you split these bills among several people the cost can go down, even if consumption is a bit higher.
The main disadvantage of house hacking is that the home is no longer just yours. If it’s a multi-unit property, you at least get some space between yourself and the tenant(s).
But if it’s a single-family home, your renters will live among you and that could get annoying/awkward at times. Aside from kind of being their “boss,” things could get murky if they fall behind on rent or need a “favor.”
You may find the whole thing a little too close to home, pardon the pun.
I actually know a gal who owns a home in Phoenix, Arizona and rents out two rooms to two completely random strangers she found on Craigslist.
So far it has been smooth sailing, and the renters are even pitching in around the house and keeping an eye on things when she’s away.
In that sense, a good renter can actually provide more than just monetary relief. And if they’re particularly skillful, they could even make improvements around the house.
- Someone else pays your mortgage
- You build wealth over time
- You live for free
- A good (handy) tenant can improve your property
- Possibly make new friends
- You must share your home or multi-unit property
- Could be annoying to live with your tenants (lack of privacy)
- Tenants may fall behind on rent and/or damage your units
- Vacancy costs and maintenance must be considered
Different Ways to House Hack
- Buy a multi-unit property and live in one of the units that isn’t rented
- Rent out a room in your single-family house
- Rent out your main home and live in the guesthouse
- Rent out all the rooms in your home and live on the couch or in the garage
- Rent out your place via Airbnb or HomeAway
- Buy a condo/house for your kid in a college town and let his/her roommates pay it off
(photo: Eirik Solheim)