Imagine owning a home and having someone else help pay your mortgage. Among younger generations, many of whom see homeownership as simply a pipe dream, this sounds almost too good to be true. Housing is the largest expense for most Americans, after all, and it’s become more expensive than ever.
But some resourceful buyers have been able to spend less and even live for free in their own home. Enter: “house hacking.”
What is house hacking?
House hacking is a strategy where homeowners rent out part of a single-family home – or units in a multifamily property – to offset or even eliminate housing costs. It’s a new name for an old practice, but still a great way for buyers who might otherwise be priced out to purchase a home.
In some cases, house hacking can even turn a residence into an income-generating asset, which may be appealing to those looking to break into real estate investing – especially as investor activity falls. House hacking differs from owning a traditional investment property because you’re not renting out the entire home; you’re living in it, too.
So, if you’re looking for a way to make homeownership more affordable or want to begin your investment journey, house hacking could be a good place to start.
Why is house hacking popular?
House hacking is popular because it offers an achievable path into homeownership without bearing the full financial burden alone. It’s seen as a way to “hack” the market by removing some of the cost. Many also use it as a first step into real estate investing.
Its popularity has steadily grown over the past few years as housing costs have ballooned. In many markets, buyers now need to earn six figures to afford a starter home – and far more in pricier cities.
While some house hackers earn a profit, many today are simply looking to reduce their living expenses. With record-high home prices and elevated mortgage rates, the cost of entry is steep – and extra income is not guaranteed.
House hacking strategies
House hacking usually involves renting out a room or unit in a home, but there are endless alternatives. You can rent out a pool, basement, and even parking spots. You’re only limited by your creativity, zoning laws, and a homeowners association (HOA) if applicable.
Here are some common strategies:
- Single-family home: Rent out a spare bedroom (short‑term or long‑term) or lease multiple rooms to different tenants. You can also rent out a finished basement or convert it into a separate living space.
- Multi-family home: Buy a duplex, triplex, or fourplex, live in one unit, and rent out the others.
- Accessory dwelling unit (ADU): Lease a detached ADU or “granny pod,” such as a backyard cottage, carriage house, or in‑law suite.
- Garage conversion: Transform a garage into a finished bedroom or studio apartment. Some people even rent out their garage as a parking space.
- Live‑in flip: Purchase a home in need of updates, live in it while renovating, and sell at a profit. You can potentially benefit from owner‑occupied tax benefits.
>> Read: Can I Rent Out My Primary Residence?
Benefits of house hacking
House hacking combines the benefits of homeownership with the income potential of a rental property. Here’s a breakdown:
- Generates income: Renting out spare rooms, multifamily units, or more can offset housing costs, cover the full mortgage, or even net you a profit.
- Easier to enter the housing market: House hacking gives you access to several low-down-payment loan types:
- FHA loans allow as little as 3.5% down for a 1-4 unit property, if it’s your primary residence (you must live there for at least 12 months).
- VA loans offer 0% down for eligible veterans.
- Freddie Mac’s Home Possible program allows qualified buyers to purchase with as little as 3% down.
- Lower investment bar: House hackers purchase both a primary residence and an income-producing property with a single down payment. This is far less cash upfront than buying an investment property alone. Investment loans for non-owner-occupied properties usually require 15–25% down, while house hacking may require just 0–3.5% down.
- Tax advantages: Homeowners can deduct mortgage interest and property taxes on their primary residence. You may also be eligible to deduct depreciation, repairs, and other rental-related expenses for the portion of the home you rent out.
What to consider before house hacking
House hacking is not free money; you need a goal, legal know-how, and good boundaries to succeed. Here are essential considerations before starting your hacking journey:
- Monthly budget: Determine how much home you can afford and the income you need to make the investment worthwhile. A key metric is PITI (Principle, Interest, Taxes, and Insurance) is key: It represents your monthly housing costs and varies depending on your home price, down payment amount, and location.
- Repairs and improvements: Budget for routine upkeep, unexpected repairs, and future improvements. A good rule of thumb is to budget 1-4% of the property’s purchase price annually, to 5-8% of gross rent income monthly.
- Tenants: You might share walls – or even bathrooms – with your renters so prepare to get comfortable with them. Set boundaries and expectations for your renters early on.
- Legal obligations: You must abide by all federal, state, and local zoning and landlord-tenant laws, including Fair Housing, lease requirements, and eviction rules. Screen tenants carefully to reduce vacancies and avoid legal issues. Short-term hacking may have additional restrictions under city ordinances (like in New York).
- Investment risk: There’s no guarantee that you will always have a renter(s), meaning you may not always collect rent to put towards your mortgage.
What is the future of house hacking?
House hacking can be a great way to generate supplemental or even profitable income. People generally use it to cover monthly housing expenses, get started in real estate investing, or both.
But no matter how seasoned you are, it’s essential to consider your monthly budget, return on investment, and potential downsides. This is especially true in today’s high-cost market, where success hinges on budgeting and planning for shifts in rental demand.
Looking ahead, as more pandemic-era apartment buildings are completed, it could become more difficult to attract tenants. You may have more success if you price reasonably, since a growing share of new apartments are catered to mid- to high-income renters. However, rental demand is expected to only increase, which may push prices up in the future – meaning you could net more monthly income.