House Hacking: What Is It, How Can You Make Money From It, And Do You Need To Buy a Home First? (GUIDE)

Last Updated on July 12, 2021

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House hacking, a practice where someone buys a home and then pays the mortgage by finding tenants, has become increasingly popular as housing prices have soared in the United States. On the face of it, it sounds brilliant. Get a fabulous house and let other people pay the rent, right? Well, it’s not that simple.

Here we break it down, explaining how to make the most money from your house hacking investment.

What Is House Hacking?

The first thing to know when it comes to house hacking — a phrase coined by BiggerPockets podcast host Brandon Turner — is that the term is extremely broad. It means buying a primary residence and then having tenants pay for it by offsetting the cost of your mortgage. No, the tenants don’t attend the house closing and write the checks. But, in many ways, they can help you recoup funds you spend on your down payment – and even make some extra money.

How to Generate Income by House Hacking

House hacking can occur in many different ways, depending on your comfort level and how much money you want to make. 

One way to generate income by house hacking is, quite simply, to live with a roommate. Renting portions of your house is a good starting point. If you buy an apartment or home and know there’s some extra space for someone to live, that could be instant income for you. And that monthly rent check can be directly applied to those daunting mortgage payments.

You can find roommates on sites like Craigslist, PadMapper, Roomster, and RoomieMatch. (If you are living in a co-op or other, more restrictive types of housing, do check to make sure this is allowed, to avoid getting into hot water.)

If the idea of a permanent roommate makes you nervous — or you just want to build up to it — another house hacking tip is renting out a spare bedroom on Airbnb. This takes a little more time and effort if you’re looking to have regular guests, as you’ll have to clean and prepare every time a guest leaves and a new one comes. But the potential to make money is great — especially if you’re renting during peak seasons or if you live in an area with popular events.

House Hacking: How to Get Started

House hacking can occur in many different ways, depending on your comfort level and how much money you want to make.

One way to generate income by house hacking is, quite simply, to live with a roommate. Photo credit: Shutterstock.comAgain, there are pros and cons. You need to check with your management and local ordinances if you’re considering Airbnb — but if you put in the effort to prepare a first-rate space, this could be a great way to generate income.

Read here for more on the good and bad points of renting vs Airbnb, and which might have the better return on investment and help you generate income most easily and efficiently. Whether it’s worth your time, or which is more worth it for you, depends on your own lifestyle and needs, but there’s a way to make money for virtually anyone interested in house hacking. It just takes a little time and effort, and some willingness to cut costs and use your space smartly.

House hacking doesn’t stop there. Another way to go is to buy an unconventional primary dwelling, such as a multi-family unit, and live in one of those units while renting out the others.

The pro here is that you’ll likely be living in a much smaller part of the space, proportionately, so you’ll be able to make money from the majority of the property, all while living in your own space with no roommates or nightly guests popping in your kitchen at 2 a.m. for a glass of Pinot Grigio.

How to Prepare For House Hacking

House hacking will ultimately make you money. But you have to make that down payment before seeing the benefits. In order to get a loan from a bank, you typically need to make at least a 20-percent down payment. There are some ways around this, though. 

If you are a veteran or active-duty military, you can put 0 percent down on a primary residence with a VA loan from the Veterans Benefits Association. A USDA loan (from the U.S. Department of Agriculture) is another option that requires no down payment, though initial fees can be high. And you must qualify based on income level and other criteria. 

House Hacking: Ways To Make Money
House hacking will ultimately make you money. But you have to make that down payment before seeing the benefits. Photo credit: Shutterstock.com

If you don’t qualify for either of the above loan options, another option is an FHA mortgage with a low down payment (as low as 3.5 percent). These loans are designed for lower- to middle-income borrowers, so you would need to qualify based on income. And, given funding fees and various other monthly and annual fees, they may not ultimately be worth it. It all depends on your specific financial situation. Each option offers specific tax incentives, as well. And, of course, having a good credit score helps when it comes to getting a favorable mortgage rate.

One good place to start is to use a rate calculator to compare mortgage rates in your area and based on your particular needs and requirements. NerdWallet is one good place to start your house hacking journey by doing just that. 

How To Calculate Costs 

While the concept of house hacking is not especially complicated, there is one financial calculation that will help you determine whether or not it’s worth it. After all, the key is not just to lower your living expenses, but also to build wealth and set yourself up for future financial success.

This is especially important if you buy a multi-family property, which can become a money pit fast if you don’t keep an eye on your ratio of income to expenditures. At the end of the day, you need to be able to make money when you’re living there, but also, continue to earn a solid rental income from your property if and when you decide to move. 

Ready for the calculation? It’s called the 1 percent rule. Very simply, the gross rent income you earn on your property should be equal to at least 1% of the property’s value every month. If your property is worth $300,000, that means you need to be earning $3,000 a month on either a roommate, full-time renter, or Airbnb bookings. If it is, you stand a good chance of making money — and making your house hacking situation work.

When doing this calculation, you need to take yourself out of it. It doesn’t quite have to achieve the 1 percent equation if you’re living in it, though it would be great if it were at least close. Instead make this calculation as though you’re going to rent out the entire property. 

The above calculation is mostly used for conventional homes. If you’re buying a multi-family rental property, it’s much easier to achieve the 1 percent rule given the sheer proportion of rental space to your own living space. Of course, a multi-family home is also a much bigger financial commitment, from monthly expenses to down payment outlay. So there are a number of decisions to weigh.

Happy hacking!