How a Smart House Hacking Strategy Can Jump-Start Your Real Estate Journey
A savvy house hacking strategy can be lucrative in both the short and long terms.
Published:
May 15, 2023
May 15, 2023
Est. Read Time:
A smart house hacking strategy can earn you extra cash and help you along the road to homeownership. Renting out a room or space in your current property has the potential to be a lucrative side hustle you can use to save up for a down payment on a new home or investment property.
What is house hacking?
House hacking refers to renting out a portion of your house to earn extra income and decrease your housing costs.
You can house hack with a house, apartment, condo or other type of property, whether you own or rent it. For instance, if you have an extra bedroom, you might list it on a short-term rental site. You might also fix up an old workshop on your property into a guest cottage and rent it out to vacationers.
You can get creative with the types of spaces you hack. Treehouses, geodesic domes, tiny houses, yurts – these are all options for short-term rentals. Unique spaces can be particularly attractive in areas that draw tourists who are looking for novel experiences and may be excited to stay somewhere unconventional.
If you rent your home, you’ll need to ensure that house hacking is allowed under the terms of your lease. If you own the home, you’ll need to verify whether renting out rooms, basements or extra buildings is allowed by your homeowners association and local real estate laws. It’s also important to review your homeowners insurance policy to ensure that you’re not violating the terms.
How a house hacking strategy can help you achieve your financial goals
Owning property, whether it’s a primary residence or investment property, is fundamental to wealth creation in the U.S. The equity you build in a property can be leveraged into additional real estate purchases, debt payoffs, investments, higher education and a range of other wealth-generating pursuits.
If you currently rent your home, house hacking can help you save up for a down payment on your own house or condo. Saving for a down payment is the biggest hurdle many homebuyers face, so generating extra cash can shorten your home-buying timeline.
Let’s say you rent an entire house. Is there a spare bedroom you can list on a short-term rental site? Is there an office you can convert into a guest room? Maybe there’s a finished basement that doesn’t get much use? You may find a market for rooms for rent among folks passing through on vacation, traveling for business or visiting family in the area.
Even if you live in an apartment, you might rent out a spare room or list the entire apartment for rent while you’re doing some traveling of your own. The more listings you book, the quicker your home-buying savings will grow.
On the other hand, let’s say you own a home already. A smart house hacking strategy enables you to leverage the property to make money rather than simply paying down your mortgage. Because you own the home, you can make renovations to enhance your listing, such as painting the bedroom, putting in new carpet and an entertainment center in the basement suite, or remodeling a detached garage into a trendy tiny house-style getaway.
You can use the money you make to purchase a second property that you rent out for income. One savvy approach might be to put your house hacking earnings toward a multifamily property. If you buy a duplex, triplex or quadplex, you can rent out each of the units. The rent you take in may be enough to cover the mortgage payment. That way, your equity – and overall wealth – may grow without making an extra mortgage payment every month.
Of course, you will have costs associated with the property, including maintenance expenses and taxes. But the goal is to bring in more than you spend, and then have that additional income available for more real estate purchases or other financial priorities.
House hacking with your first home
If you’re already in a position to purchase a home, consider choosing a property that suits a future house hacking strategy. You can buy a multifamily property with up to four units with the following loans, as long as you’ll live in one of the units:
That means you can buy the property with a low down payment, or no down payment if you qualify for a VA loan, and start earning income on it right away. Ideally, the rent you bring in will cover your mortgage payment – and then some. But even if it only offsets a portion of your monthly payment, you’ll still have more money available for savings and future goals and investments.
Learn more: How to Buy Your First Investment Property With Little to No Money Down
What to consider in your house hacking strategy
House hacking can be a great path to wealth building, but it’s not without its challenges.
Once you start house hacking, you become a landlord. You’re responsible for tenants’ behaviors and for anything that goes wrong on the property. That means you’ll need to be on call at all hours of the night (unless you hire a property manager).
Plus, you’ll want to have some savings on hand specifically for emergency repairs, supplies and other costs that crop up related to the rental.
You may also need to purchase additional types of insurance to cover potential guest injuries and accidents or other liabilities.
Again, it’s essential that you understand local laws and ordinances around rentals, as well as the terms of your lease, homeowners association agreement and/or homeowners insurance policy.
The bottom line on building a house hacking strategy
House hacking can be a useful path toward buying your first home or your first investment property. The key is to get creative in how you might use your space and do your due diligence to ensure your listing is above board. You want to know that your house hacking strategy is solid and has the potential to bring in money, not legal and logistical headaches.
To learn more about your home-buying options, get started here.
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*A down payment is required if the borrower does not have full VA entitlement or when the loan amount exceeds the VA county limits. VA loans subject to individual VA Entitlement amounts and eligibility, qualifying factors such as income and credit guidelines, and property limits.
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