What is house hacking? All you need to know
You heard of a life hack, now it’s time for a house hack! A lot of homeowners nowadays are using this to cover their housing expenses, so they can live for free! What’s more, this could turn your home into a source of passive income. This can also work as another way of real estate investing because this lets you sell that home for a profit in the long run!
Of course, you can’t just rush these money-making strategies because they need a lot of planning. Similar to buying a home, you will have to consider many factors before you try it. What’s more, you need to learn the various ways of doing this, so you can find one that suits you. That’s why we will talk all about it in this article!
First, I will explain where the term “house hacking” came from and how it works. We will tackle the original meaning as well as the other methods derived from it. Then, I will discuss the proper ways of house hacking. After that, I will talk about its benefits and risks, so you can see whether or not you should try this money-making venture.
How does house hacking work?
The term started when BiggerPockets podcast host Brandon Turner coined it in October 2019. In the same month, Colorado realtor Craig Curelop released a book.
House hacking originally involved purchasing a multi-unit property. Then, you live in one unit and rent out the others, so they provide you with mortgage payments.
This can be a great way to make money after the real estate boom during the COVID-19 pandemic. It might be even better if you already bought a home during that hype!
Eventually, house hacking meant more than just an owner occupying a unit and earning rental income from tenants. Now, it covers the following methods:
Offering extra rooms for short-term rentals
House hacking in the traditional sense can be too expensive for some people. If you have spare rooms at home, you might want to allow people to rent them for a short period.
If this rings a bell, it’s because this is how Airbnb and Vrbo work. These mobile apps connected renters and owners, making it easier to earn money.
Airbnb is more suitable for regular folks who want to earn from their extra room. On the other hand, Vrbo is often used to rent out entire vacation homes.
Getting some housemates
Another way to house hack is to get others to live with you as housemates. That way, you get to earn rent payments and split property management costs such as utility bills.
Be prepared to lose some privacy if you intend to do this. After all, you will be sharing space and amenities with your housemates. You’re the owner, so make sure to enforce house rules.
That’s why you should carefully talk to potential housemates before allowing them into your home. Make sure their personality and lifestyle match yours.
Read More: How To Achieve Financial Success In 2022
Create an accessory dwelling unit on your home
If your primary residence or investment property is large enough, it may have a detached basement or garage. You may turn it into an accessory dwelling unit or ADU.
It’s just a fancy term for a separate living unit in your primary home or rental property. For example, you could list it on Airbnb while you’re still at home.
That way, you can keep an eye on the tenant while they stay for a few days. On the other hand, you could let them stay for much longer if you can have someone else watch over the place.
Expect to spend a bit on refurbishing that spare garage or basement. Otherwise, potential renters on Airbnb might swipe past it.
Provide rental space
Home hacking doesn’t always mean letting people live in your house. You may also rent out extra space for other purposes to earn extra income. Let’s say there’s a nearby vacation spot in your neighborhood.
You could let someone park their mobile home in your garage for a while. Also, you could let people store their boats in your garage for a fee.
However, you have to check your local zoning regulations or homeowners association if they have restrictions on renting out property.
Do the BRRRR method
What is house hacking?
To put it simply, house hacking is buying a multi-unit property such as a duplex or triplex and living in one unit while renting out the other unit(s). Then you use the income that you get from your tenants to pay your mortgage.
It's a win-win! 🙌🏿 pic.twitter.com/Npb9csZSwZ
— Shauntee Blow (@shauntee_blow) July 23, 2021
The unusual acronym stands for “buy, rehab, rent, refinance, and repeat.” Let’s’ break down each step of the BRRRR method below:
- Buy a shabby-looking home that you could renovate.
- After that, rehabilitate the place to fix a few things and improve its aesthetic. This lasts for at least six months until you can apply for a cash-out refinance. It’s when you acquire a larger mortgage to pay off a smaller one, so you can borrow money from their difference.
- Meanwhile, rent it out to other people. Their monthly payments could help you earn more money even before the next step.
- Eventually, you can refinance the home with a larger long-term loan. This lets you spend less on the monthly payments of the new mortgage.
- After that, repeat steps one to four on other properties.
Cash-out refinancing isn’t just for real estate investors. For example, you can build equity and use cash-out refi to get money for paying other debts.
On the other hand, you could use rate-and-term refinancing to lower the interest rate of your home loan. This could help you meet monthly payments on time.
Is house hacking worth it?
It’s up to you to get the most out of this income-generating method. As I said, it takes a lot of planning. You start by checking your current finances and credit score.
Make sure you have enough spare funds to pay for a new property. You could get a home loan for an investment, but this could spell disaster for your credit rating.
Let’s say you bought a home and renovated it to boost its value. Unfortunately, no one was willing to purchase your home. As you’re waiting for buyers, you keep submitting monthly payments.
You may come to a point when the interest rate has bloated the monthly payments so much that they pay anymore. Eventually, your credit score will significantly drop. Worse, you may forfeit the property!
That’s why you should thoroughly plan when buying a home for investment. After that, perform the following steps if you’re sure about house hacking:
- Learn more about the state of the housing market. This means checking the average home values in your area and keeping up with the latest real estate news. That way, you can figure out if this is the right time to purchase a home.
- Speak with your lender about financing options. See the types of mortgages that are available in your area. Click here for a list of the best mortgage lenders for first-time buyers.
- Look for tenants for your investment property. As I mentioned, make sure that your personality and lifestyle are compatible with your potential housemates. Ensure that they are unlikely to cause trouble while living on the property.
House hacking pros and cons
House hacking is a great strategy to introduce to clients who are interested in purchasing an investment property but may not afford a stand-alone rental property. https://t.co/s0uM6kKHLV
— Inman (@Inman) June 18, 2021
If you’re still undecided about hacking your home, perhaps you should read about its potential benefits and risks. Let’s start by elaborating on the pros of house hacking:
- You could reduce your expenses by turning part of your home into a rental property.
- Home hacking lets you build equity, the difference of your paid mortgage amount with your home’s appraised value. As I said, you could refinance it afterward so that you can borrow from that difference.
- This will help you learn more about flipping homes for profit. Eventually, you will learn enough about the market to try riskier investment methods.
- House hacking can also be a new way of socializing. You meet new people and form new connections as you continue with it.
Unfortunately, you will have to expect a few issues as well. This doesn’t mean you shouldn’t try house hacking anymore. Instead, understand them so you can do it much better:
- You will have to be ready to cover upfront costs like renovation expenses.
- If you allow renters in your home, you’re responsible for maintaining the place. This means collecting rent and fixing anything that breaks.
- As I said, prepare to reduce your privacy. If you invite housemates, you will share your home with strangers.
- You have to follow local laws regarding rental properties. For example, some US cities like Los Angeles and Seattle have rental registries.
- You have to prepare for the possibility that nobody buys your refurbished home. Otherwise, you risk your credit rating and your property. Also, your tenants may default on rent, so you will have to pay mortgage payments yourself.
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Final thoughts
We just talked about all the basics of house hacking. That’s not the only way you can earn from properties. For example, you might want to try real estate crowdfunding.
This involves paying a portion of a building’s renovation or construction to earn extra money once it finishes. Another way is to invest in REITs or real estate investment trusts.
Note that this article is not meant to provide investment advice. Please plan carefully before doing so, and choose your assets based on your research.
