House Hacking is a term that has become all the rage among Millennial buyers, but is a concept that, at its core, has been around for quite some time. The concept offers buyers a pathway to live cheaply or rent free while building equity in an income producing property. Let’s take a look at what House Hacking is, what are the benefits, who it appeals to, and our five top tips.
What is House Hacking?
House hacking is when a homeowner leverages their property by renting out their home to help pay the mortgage and related expenses. At the core, House Hacking is a more fashionable way to communicate that someone is becoming a landlord – on a micro scale. There are three common examples of House Hacking:
- Single Family Home with Roommates: this is most common in college cities, rural areas or with young professionals in the suburbs. One individual purchases the house and then rents bedrooms to friends, family members or other roommates to help cover the cost. Variations of this exist that involve an in-law suite, furnished basement or coach house/guest house.
- Multi-family with tenants: this is most common in larger metropolitan areas, where the cost of living is high. Working professionals purchase a multi-unit and live in one of those units, while renting out the remaining units for income.
- AirBnb or Vacation Rentals: this is not the first image that comes to mind when House Hacking is mentioned, but it is very much a form of House Hacking. By renting out a primary home or vacation home when not fully used, the owner is able to make additional income and subsidize the cost of this property. It’s a less permanent, shorter term version of House Hacking.
What are the benefits of House Hacking?
Investment properties, which are defined as properties where the owner is not a resident, often require a 20% or larger down payment. Conversely, by living in the property, the owner is able to qualify for a traditional residential mortgage, which often requires as little as 3.5% down. That is extremely appealing for buyers who may not have built up significant savings, including younger buyers and those from traditionally less affluent backgrounds.
Mortgage brokers often will count a portion of the potential rental income when pre-approving a buyer. That allows the buyer to purchase a larger property than they would qualify for on their own.
As with any property, over time, the value of the real estate should increase. However, this also means that rents in the area should increase as well – allowing the buyer, over time, to collect increasing amounts of rental income. Conversely, the mortgage payment will stay the same – month after month, meaning that an increasing portion of the mortgage will be paid by the renters.
In some cases, buyers are able to cover all or most of their mortgage payment and expenses through rental income immediately after purchasing the property, or within the first few years. This allows the owner to live inexpensively in the unit, or alternatively, pay extra on the mortgage to pay it down more quickly.
House Hacking also offers flexibility – as should the owner decide to relocate to another city, take an extended vacation, or move into a larger, second property – the original property is already set up to be rented out. This provides the buyer with the long term flexibility and freedom to redefine their relationship with their housing situation while offering all the short term benefits of owning property.
Most importantly, House Hacking allows the buyer to generate equity in a property more quickly than if they were simply reliant on their own salary/income due to all the factors listed above.
House Hacking appeals to more than just Millennials.
Millennials may have popularized the term, but House Hacking is really more almost anyone who doesn’t mind sharing/living closer to other people. Some common groups of people that find House Hacking appealing include:
- High earning young professionals: this group often has buying power larger than their needs or stage of life. Because they are often single or without kids, this group often doesn’t need much space and is currently comfortable living with roommates or friends.
- Retirees, empty nesters or widowed individuals: this non-traditional group is a perfect use case for House Hacking. Often with purchasing power and net worth, their space needs are often smaller. House Hacking offers a constant income stream later in life, some sense of community among roommates or neighbors, and the ability to downsize their housing needs.
- Immigrants: often out of necessity, newly arrived immigrants pool their resources to purchase multi-family units which can be rented out to like minded individuals. This reduces the cost and helps create some wealth within these close knit communities.
- Cultures where multi-generational living is common: in many cultures, multi-generational living is more common than in the US. As such, these family units are often more comfortable having generations or extended family living under the same roof.
But what about the tips!
Most of all, here are our five tips on how to make the most of House Hacking.
- Don’t just buy any property. Not all properties are created equal – and you’ll want something that not only will you want to live in, but also others will want to live in. Hence, find a property with curb appeal. Is it cute? Could it be cute? Will people want to live there? My business advisor is House Hacking, and he is an avid gardener .. which gives him an advantage when renting out one of his units. People walk into the backyard and immediately fall in love with the wild flowers, butterflies, and birds that call the backyard home. Secondarly, the economics of more bedrooms or more units will make it more attractive long term than fewer units. For example, a two unit building means that each unit needs to generate rent to cover at least 50% of the mortgage. With three units, it’s likely that the rent will cover more than 1/3 of the mortgage, etc. Some buyers may not want to manage a five-unit home, and for other buyers, a two-unit home may not fit their ambitions for an investment property.
- Location, location, location. Location is a key component. Finding a home in the right area can make or break investment property. Other factors like public transportation, proximity to jobs, recreation, and restaurants are important depending on the type of resident the buyer plans to attract. Ideally, study the pre-existing hot spots in your area – and then find the neighborhoods right next to it. Often these are the developing areas that are up and coming. This will take research such as scouting different neighborhoods and identifying which areas will be appealing to investors and developers. And if you’re not sure how to find this information, talk to an agent.
- Price. Price is important, but it is all relative to the average rents in the area. For example, in Chicago, the most demanding areas are high – but prices are out of sight. For significantly less, a buyer can purchase in an up-and-coming neighborhood where rents are 2/3 of the most demanding spots. The price relative to the rents is much more conducive to building equity more quickly.
- House Hacking is not forever. For some people, House Hacking is a lifestyle choice. For others, it’s a period of time. Most individuals House Hack for some period of time, and then often due to stages of life (getting married, having kids, etc) – they opt to move on. That presents a couple of options, including keeping the original property as a true investment property and living somewhere else, or selling the property and using the equity to purchase a different house. Regardless of which a buyer chooses to do long term, it’s a win-win for all involved.
- Join the community. There are many communities online dedicated to the art of House Hacking. These communities are full of both new individuals just starting off, professional Realtors and mortgage brokers who are able and willing to help, and seasoned veterans who have several properties under their belt. I highly recommend Bigger Pockets as a starting point for starting to learn about House Hacking.
What’s the net-net?
House Hacking has made it trendy for many individuals to become micro-landlords, and in the process start accumulating wealth. It’s not for everyone, but everyone should consider it as it allows the buyer to accumulate wealth more quickly than otherwise.
Most of all, rely on trusted professionals and the experience of others to learn from, and guide, your process.
About Ami Bumia.
Ami Bumia’s real estate career spans over 15 years and her track record speaks for itself. From Chicago to Seattle, she specializes in residential and condo listings for her clients. She prides herself on assuring the client knows they’re not “just a deal” by creating genuine, long term relationships with them after the sale. She is currently the Sales Director of New Construction with Realogics Sotheby’s International Realty Seattle. Follow her on Instagram via @amibumia or visit amibumia.com.