Articles, Buying Real Estate, FIRE, Generating Passive Income, House Hacking, Housing, Owning

House Hacking – 18 Ways Revealed For Success

Unlock Your Real Estate Potential: Master House Hacking with these Expert Strategies
Andy & Liz Kolodgie Written by: Andy & Liz Kolodgie
Mike Reyes Edited by: Mike Reyes
Last Updated January 22, 2024
Disclaimer

This content is not intended to provide financial advice; rather, it’s for information and entertainment purposes only.

Always consult a licensed advisor for investment decisions.

Some of the links in this article may be affiliate links. If you click on a link, the affiliate may provide compensation to this site at no cost to you, regardless if you decide to purchase something. You can read our affiliate disclosure in our privacy policy.

Finally, this article has been written, reviewed, and fact-checked. Portions of this article have been written using assistive AI tools to help with tasks like research, spell-checking, grammar, and translation. Please have a look at our editorial guidelines for more information about how we create content.

In this article, you’ll learn:

  1. Financial Planning and Market Analysis: The importance of crunching numbers and understanding market dynamics for successful house hacking is emphasized. This includes assessing property values, rental income potential, and local demand.
  2. Strategic Property Selection: The article highlights the significance of choosing the right location and property type, considering factors like neighborhood safety, proximity to demand-generating areas, and the property’s suitability for rental purposes.
  3. Operational Considerations: There is a focus on practical aspects like managing maintenance, tenant screening, and creating effective lease agreements. These operational details are crucial for maintaining profitability and ensuring a smooth house hacking experience.
feature image about house hacking

House hacking existed way before the phrase “house hacking” existed. House hacking is when someone buys a primary residence and rents it to tenants who cover a portion or all of the mortgage. So, instead of covering the entire mortgage payment to gain equity in the home, the tenants pay rent towards the mortgage while you gain “free” equity. By eliminating the most significant monthly expense, homeowners are taking the first big step towards financial freedom and retiring early.

House hacking sounds simple, but a successful house hack that leaves you cash-positive beyond the mortgage payment can be more challenging. We will explore how to cover the mortgage and find a house hack that produces income. Here are our 18 ways to never pay rent again via house hacking.

18. House Hacking 101 – Crunch the numbers

When looking at properties, a good rule of thumb is to get at least 1% of the home’s monthly value in rent. Those in a higher-priced market can dip below 1% and still make the numbers work (e.g., California, Northern Virginia, and New York City).

Running the numbers means understanding the fundamentals, such as vacancy rates, repairs, property taxes, and property management-related costs. House hackers will want to hedge their bets by assuming the property will not be 100% occupied and have no maintenance. Each market is different; some markets have faster turnover rates than others. Further, specific markets have more maintenance and ongoing costs than others (i.e., states in the north have additional snow removal costs).

Plan to set aside 10% of the revenue for maintenance or 1% of the home’s value each year, whichever is higher. The same 10% rule should be applied to account for vacancies and property management (even if you’re managing the property yourself)– this sets you up to scale out of this role eventually. In the meantime, homeowners can use this property management money as payment to themselves while managing.ย 

Homeowners must also budget for ongoing costs such as snow removal, lawn care, or pool maintenance unless these are tenant responsibilities in the lease. Use a rental income calculator to analyze your expected rental cash flow. Further, it provides a way to organize and see all the numbers. If the numbers don’t add up net positive at the end of the day, it’s onto the next house.

17. Find a location with demand

Choose a location with enough reliable demand to get sound roommates quickly. House hackers can gauge market sentiment by joining local Facebook roommate groups. Typically, areas with higher populations have more demand. However, donโ€™t forget to look near large businesses as many people search for short commutes. Other locations include college towns, young professional areas, neighborhoods near hospitals, military bases, or government jobs. These areas play into reliable demand, which is crucial for house hacking.

The faster you can fill the rooms, the quicker you can get contributions to your mortgage. Also, the more people you have to choose from, the higher quality roommates you can find. A location with demand cannot get underestimated when looking to house hack.

16. When house hacking, find a safe neighborhood 

A safe neighborhood will attract the right tenants while decreasing maintenance and repair costs. Cash flow is not worth sacrificing your safety. Avoid areas with homes that are boarded up or have lots of broken windows or burnt-out streetlights. Instead, search for family-friendly neighborhoods near a good school district.

Check out neighborhoods online using sites like Niche or Nextdoor. Once you’ve found some of the communities worth checking out, go to them in person and drive or walk around. Also, consider visiting them at night to see if the neighborhood quality changes.

Indeed, it’s a crucial step when house hacking because most great tenants conduct their due diligence when searching for a new neighborhood– failure to ensure you bought a house in a safe area could make it hard to fill the rooms with high-quality tenants.

15. Work with an investment-focused realtor

A property for house hacking is best done with the help of a real estate agent or a realtor. However, finding a realtor with experience with real estate investments is beneficial. Ideally, the realtor owns real estate investment properties in the area. Still, if nothing else, he/she understands the numbers for house hacking and isn’t solely focused on putting families in homes that fit their budget. Find a realtor who understands the local market, particularly rentals. Realtors who either place tenants or have rentals themself are even better.

The best way to find investment-focused agents is online through BiggerPockets or local REIA groups. You can read what advice agents are giving in the BiggerPockets forums and the types of properties they’re discussing. If an agent seems to know about investment properties, Google them to read their online bio or call them to discuss their specialty. And don’t be afraid to interview agents when you have specific criteria. 

14. Find house-hacking-friendly properties

Those wanting to house hack with a multi-unit, single-family home, or some other creative configuration should weigh the pros and cons. The type of home they select will require varying amounts of work regarding property management. It also comes down to personal preference: Do you want to live and interact with your tenants daily or be separated by individual units? Figure out what type of home fits your lifestyle but will still allow you to get your mortgage covered.

Multi-unit properties can be better for privacy– homeowners have their unit, so there’s no sharing a kitchen, bathroom, or living room (unless you choose to rent out an extra bedroom in your home). However, it’s more work to manage 2-4 units in the same building than one single-family home. Those interested in multi-unit homes could apply to become a Section 8 landlord– this would offer monthly income guaranteed by the government.

Single-family homes can get configured into multiple units (make sure to follow local laws), rented out per room, or a combination of both. Renting out per room is a great way to get the most money but can lead to the most work in managing leases and rent payments. Note that some localities restrict the number of unrelated individuals living in the house (not family members).

13. Analyze comparable rentals

Analyzing comparable rentals is crucial for filling the rooms or units as quickly as possible while ensuring no money is left on the table. If the rental price is too high, it will take longer to fill.  And, if rental prices are too low, homeowners will lose out on gains that could help their cash flow.

Visit real estate marketplaces such as Zillow or Redfin, Facebook Marketplace, and local housing Facebook groups. Search for properties similar to yours (bed/bath ratio, condition) and have been recently rented (within the past three months) or are currently listed. Aspiring house hackers can take the average rent price and use their local knowledge to account for location changes (closer to a grocery store, farther from the metro station, etc.). It offers an accurate idea of the property’s worth to the market. Many software tools are also built for finding comparable rentals (e.g., Rentometer), but not all of these are free.

12. Plan ahead for maintenance

10% of the rental revenue should be set aside for yearly property maintenance.  Indeed, it will go towards yearly care, such as maintaining the lawn, removing snow, or managing a pool, as well as long-term maintenance. If the lease does not include having the tenants maintain the property, make sure to account for all necessary care.

Regarding lawn care, homeowners may opt to pay another company to manage the lawn. It’s a seasonal task in most states, so deciding on this before the spring and summer seasons is essential. Those who choose to handle the lawn themselves will need to acquire the proper equipment.

Snow removal is similar to lawn care and depends on the state, and this can be a relatively minor task but necessary for safety. A snow shovel and salt (if you deal with ice) are appropriate. However, those with a long driveway may want a snowblower.

Pool care is typically best left to the professionals or someone experienced in pool care. A mismanaged pool system can cost thousands in the long run and is not something you usually want to leave to the tenants. Either do this yourself or hire another company specializing in pools to do this for you.

Further, there is generally long-term maintenance that will not be the tenant’s responsibility. Landlords must set money aside for major maintenance costs such as the HVAC going out, roof replacement, new siding, and replacement sump pumps.

11. Put down as little money as possible

While putting little money down may seem contradictory to the goal of house hacking (because this will increase your monthly expenses), it can be beneficial. The money not used as a down payment can be invested in other opportunities. Investors often obtain a higher return on their money than mortgage interest.  In other words, you might be making more money investing elsewhere than using it as a down on your house.

House hackers must work with multiple lenders (between 3 and 5) to put down as little money as possible. It will allow you to get the best of everything: rates, down payment %, and closing costs. When finding lenders, choose a multitude of different types.  For example, direct lenders, mortgage brokers, and credit unions exist.  Comparing various options and plans allows homeowners to find the best match for their house hack.

When house hacking, it’s not all about the interest rates. The size of the down payment matters, as well. Focus on getting as low of a down payment as possible. This way, additional funds are available for a future house hack or other investment.

Avoid paying closing costs upfront to put as little money down as possible. Savvy investors can do this by wrapping the closing costs into the mortgage’s original cost– make the seller a higher offer but request a seller subsidy (usually given in percentages). If you could not wrap closing costs into the mortgage cost via a seller subsidy, see how much it will cost for the mortgage company to pay your closing costs via a rate increase.

10. Find tenants online

The best way to find tenants/roommates today is by joining online housing Facebook groups for the local MSA (Metropolitan Specific Area). Doing so provides the broadest audience of geographically relevant tenants. It’s easy to post what you have available with photos and who you’re looking for in a roommate. These Facebook groups also serve as a platform to direct message potential tenants who are posting what type of place they’re looking for (rent budget, exact location, etc.). Not everyone is on Facebook, so Craigslist is another platform to search for potential tenants.

Consider using professional photos with proper lighting to stand out from the crowd. Also, include a captivating description that lists all pertinent information, such as rent price, utilities, availability dates, and general location.  And donโ€™t forget to be upfront about other roommates or the pet policy.

9. Seasonal house hacking

A large pool of tenants is key for finding high-quality tenants and filling your rooms or units as quickly as possible. Since most renters relocate in the spring and summer (specifically May through July), house hackers ideally want the leases to begin/end in the spring or summer. If tenants wish to have non-12-month leases, be aware of the cost to rent a place off-season– with less demand.ย  For example, you may drop the rent price to fill the room quickly. Another popular relocation time is in January (after the holidays), but this is a much shorter window.

It would help if you waited until spring or summer to fill the rooms. Advertise the rental, but try to extend the lease a few months or shorten the lease to get onto the spring/summer cycle.

8. Don’t wait to reduce the rent

Is no one responding to your available housing post? If the market is moving quickly, it could be that your rent price is too high. Homeowners should wait no longer than two weeks in a fast-moving market to drop the price (typically ~5% drop). If no one is biting because of low demand, lower the price within a month. Getting a room filled at a slightly lower price is better than sitting in a vacant room with no rent (vacant space = house hack fail).

Another reason to lower the rent is that finding a long-term tenant takes longer than initially planned. Don’t be afraid to decrease the rent price for a better tenant who makes less work for you.  Doing so will save on maintenance and repair costs.  So, the time it takes to find these tenants is worth some potential rent loss. Additionally, a tenant who can sign at least a year lease is better than having a high turnover. Doing so provides a reliable stream of money and less time spent finding replacement tenants. 

7. Decide how to split utilities

Splitting utilities by including them in the rent price saves you time and headaches. Whereas dividing utilities and charging your tenants monthly ensures house hackers are paid a fair amount (no more and no less).

It can be difficult and cumbersome to split utilities each month when house hacking a home built as one unit but converted into multiple units. If thereโ€™s one gas meter for all units, it’s easier to split the cost upfront and include this in the rent price. Further, not all utilities get billed monthly, such as water. So, by offering the tenants an all-in-one cost, homeowners can avoid the hassles of splitting the bills each month. Tenants may also find this attractive because there are no surprises for them each month– everyone knows how much they are paying, starting from the day they sign the lease. 

On the other hand, many renters strictly fixate on the rent price, whether it includes utilities or not. A lower rent price that does not include utilities could appeal to more potential tenants concerned about the monthly rent price. Not including utilities ensures you aren’t stuck paying for a tenant’s daily long, hot shower. There is no right or wrong way here, but don’t solely think about it in terms of money– your time is worth something, too.

6. Share the WiFi

Whether discussing a multi-unit property or a reconfigured single-family home, sharing the WiFi between the units is financially advantageous. Instead of paying an internet provider 2-4x monthly subscriptions, savvy investors can simplify it and pay less while not wreaking havoc on the internet speed.ย 

A WiFI mesh network such as the Google Nest router works well. Or, for a more commercial setup, check out Ubiquiti Networks’ mesh home network service. Even though these mesh networks can be expensive upfront, reducing internet subscriptions is a cost-saving that can go directly into your pocket. Further, your tenants get a discount for sharing the WiFi, and the equipment can be used long-term.

5. The perfect house hacking lease 

When crafting a lease, be sure to follow local laws and have the lease written in a way to protect your interests. Working with a local attorney effectively protects your interests as he/she will understand exactly how to write the contract. There are also online services with pre-written contracts; however, you get what you pay for, and an ineffective lease in court can cause many issues.

Beyond the fundamental components of a lease, such as rent term, the full name of who the lease belongs to, security deposit (if any) as well as any other necessary fees, the lease needs to clearly outline tenant and landlord responsibilities with regards to maintenance, repairs, and general upkeep. A typical tenant responsibility is essential to add is who is in charge of the plumbing if there is a backup due to paper towels.  Also, donโ€™t forget kitty litter or other things that should not get flushed down the toilet.

Other essential responsibilities to define in a lease include the following:

  • Lawn care, from mowing the grass to weeding the flower beds
  • Pool maintenance
  • Replacing HVAC filter 
  • Common area maintenance
  • Snow removal
  • Gutter cleaning
  • Cosmetic changes such as paint color
  • Broken appliances
  • Guest policy
  • Pet Policy

It’s essential to walk through the lease with future tenants to avoid misunderstandings.

4. Curate a roommate agreement

A roommate agreement can go a long way if renting out a room or multiple rooms in a home. House hacking shouldn’t lead to roommate conflicts. House hackers don’t want to get stuck in a situation where they, as the landlord, are mediating tenant disputes. Get ahead of this by having everyone sign the agreement upfront. If someone breaks it, the other tenants can point to this contract instead of requesting you to intervene. 

The roommate agreement is separate from the lease agreement. This document can dictate how common areas get handled and quiet hours. It can also specify who can use what materials in the kitchen (e.g., spices get shared while refrigerated items are per individual) and a cleaning schedule. It serves as a fallback for disagreements regarding what has gone wrong and makes your life as the house hacker/landlord easier.

3. Screen your tenants

Credit and background checks are worth the cost of finding reliable tenants. A credit check offers a rearview mirror approach (credit report) to financial trustworthiness. Background checks (i.e., evidence of evictions) display the tenants’ reliability.

An initial phone interview is crucial to verify the person is who they say they are (you don’t want a catfish situation). If you find a roommate and not just a tenant in a separate unit, make sure you are a good fit for one another by asking questions about work/sleep hours, cleanliness, significant others, nightlife habits, hobbies, etc. If they are a good person but lack a fundamental for you, this could be a deal-breaker.

Check the potential tenant’s online presence via Facebook, LinkedIn, and other social media platforms you use. Confirm that how they describe themselves during the phone interview is how they behave in real life. If you are working to avoid a party scene, check the images they post (or tag) for insight into his/her lifestyle. 

2. Require renters insurance

House hackers do not need renters insurance (only homeowners insurance). However, the tenants should have renters insurance. It’s essential because the homeownersโ€™ liability exposure increases dramatically without it. If tenants donโ€™t have renters insurance, you will have to increase the number of people claimed on your homeowner’s insurance.  As a result, the yearly premium will increase.

Renters’ insurance will protect the tenants’ goods and belongings from damage or theft, and it’s not expensive! Require the tenants to add you, the landlord, as “additional interest” on their renter’s insurance policy. This way, you will get notified if the renter cancels or lapses on their insurance. 

1. Take advantage during tax season

House hacking comes with all the advantages of being a homeowner instead of a renter during tax season (i.e., numerous tax deductions). However, it can become very complicated, as well. To take full advantage of all potential deductions, hire or consult a CPA to ensure all laws are followed. 

The very basic overview of tax deductions to know is as follows:

  • Divide the house’s square footage between what you use and everyone else’s.
  • Deduct part of the monthly mortgage interest and mortgage insurance.
  • Deduct many of the initial closing costs on the home.
  • Depreciate part of the cost basis of the home over 27.5 years. Doing so will decrease your tax liability.
  • Capitalize part of any construction costs or additions over 27.5 years.
  • Maintenance costs can be deducted if they occur in a tenant portion of the home.

Final Thoughts on House Hacking

House hacking can reduce your most significant monthly expense: your rent. It’s an excellent way to increase your net worth through monthly rental income, appreciation, and equity in the home. House hacking has drawbacks, such as managing tenants and potentially living with roommates. However, finding the right house and tenants is a challenge worth taking if the goal is to achieve financial freedom and retire early!

1 thought on “House Hacking – 18 Ways Revealed For Success”

  1. Great post. I love using house hacking to eliminate your biggest expense. I did my first one back in 2002 at the age of 20, and living in my fourth house hack today. Such a powerful tool.

    Reply

Leave a Comment

15585

Stay in Touch With Us

Get latest from The Financially Independent Millennial in our Friday Newsletter

15856