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Interested in investing in real estate but can’t find anything affordable in your market? Would you like to own a home close to your job but the mortgage would dominate your entire budget and leave you with nothing left to spend on transportation, entertainment, or savings? You’re not alone.
As homes become increasingly less affordable in many US cities, many Americans have elected to buy further away from work in hopes of saving money and helping to prepare for retirement. While this may look good on paper, the results are often much worse than expected. Higher gas costs, vehicle maintenance costs, and lost productivity sitting in long commutes have an often unforeseen adverse effect on people’s budgets.
Is there a way to live where you want and still hit your savings goals? The answer for many is to “wait for the next market crash” before they buy. Even if that’s a decent strategy, when is that going to be? What do you do about rising rents every year in the meantime? There is a secret savvy and creative people have used to live in the best areas and still save money-House Hacking.
House Hacking is a term used to describe the strategy of using parts of your primary residence to produce revenue that will offset your monthly housing expenses. When done well, it can greatly reduce, or even completely eliminate, housing costs. When you factor in greatly decreased transportation costs like gas, car insurance, vehicle wear and tear, and the stress of a grueling daily commute, you can see why House Hacking has become so popular.
What To Look For In A House Hack Opportunity
Before we discuss strategies, I’ll give you a quick run down of what types of features to look for that make a good House Hack. These features make it easier to generate revenue in a property while simultaneously making it easier to live with the tenants. Whenever you see one of these features in a property, hone in and focus on these properties first.
- Multi-family properties
Multi-family properties are two, three, and four unit properties. These properties can be purchased as a primary residence using low down payment loan options just like single family houses. Because they contain more than one residential unit, the other units can be rented out for income. This is the first type of property you should look for when deciding to House Hack as it is the easiest and most simple way to accomplish the goal.
- Finished basements (or other similar modifications)
Homes with finished basements or separate additions can also easily be split up and rented out. If the property has separate entrances, that’s even better. As long as the owner is living in one of the units, the property will be considered a primary residence by lending standards and income can be generated through the additional living space. Finding a finished basement or added on portion of the home is the simplest and easiest way I’ve found to accomplish renting out extra space in a single family home.
- ADU’s
Additional Dwelling Units are structures erected on a property that are not connected to the original property itself. Commonly referred to as “guest houses” or “in-law units”, ADU’s provide options for generating additional rent revenue without having to share living areas. Whether the homeowner is living in the ADU and renting out the house, or vice versa, these useful additions provide easy ways to generate revenue out of a primary residence.
- Houses with Multiple bedrooms
Houses with multiple bedrooms make better House Hacks because bedrooms are what generate revenue. If a house has 4 or 5 bedrooms, there are more opportunities to generate rent than if it has 2 or 3. While bigger homes with more bedrooms are conventionally considered more expensive, that’s not the case if you’re House Hacking! More bedrooms=more rent=less money out of pocket each month.
- Areas that can easily be converted to bedrooms
If a property doesn’t have more bedrooms, look for ways to make more bedrooms. Houses with lofts, dining rooms, living rooms, or dens often have spaces that can easily be converted into a bedroom. The bonus when you find something like this is you often end up paying a much lower price for the house and getting the additional revenue once the bedrooms are converted. In order to convert an area into a bedroom, it usually just takes drywall, a closet, and possibly a door frame and door.
- Houses near public transportation
If you’re going to be renting to tenants that work in large inner cities or expensive markets, odds are they will value being close to public transportation. Target homes near train stations, bus stops, or other local transportation hubs. If you can find an area within walking or biking distance where your tenants can tie into public transportation, you can charge more for rent and won’t have to worry nearly as as much about parking restrictions or logistical headaches that come with having multiple vehicles in one home.
- Houses in areas without restrictions
Homes in HOA’s or with other living restrictions can make House Hacking difficult. If you buy a home in an area with additional restrictions, your rental options may be limited. Some areas do not allow tenants at all, and other do not allow short term tenancy (AirBnb). If this is the case, you may have a great property but no ability to capitalize on it. Try to avoid areas of town, or towns themselves, that limit your ability to rent out portions of your property.
- Adequate living space
The final thing we look for is adequate living space. If you find a home with multiple bedrooms but only one family room, your tenants will all be crowded into one space, with one tv, and limited furniture. Look for homes that have a living room and a family room or an upstairs loft or outdoor sitting area (like a deck or patio). Your tenants will be able to lounge outside the comfort of their rooms and are more likely to stay in place long term.
House Hacking Strategies
Now that you understand what to look for in a House to Hack, let’s discuss various ways to combine these strategies and stack them on top of each other to take full advantage of a properties income producing potential. Good investors are always looking for synergy in their projects, and finding ways to combine these techniques is what allows you to live completely house payment free!
Combining Multi-family With Renting Out Bedrooms
This is the easiest way to rack up big rental income. Find a 2, 3, or 4 unit property with more than one bedroom per unit, then rent out the units you aren’t living in on monthly leases to other families. Then, in the unit you are living in, rent out the bedroom you are not using. You can combine the original purpose of a multi-family property to decrease your expenses (the cake) with the strategy of renting out the additional room (icing on your cake) to maximize earning potential.
Short Term Rental (AirBnb)
If you buy in an area that’s desirable enough, you can generate much more rental income through short term rentals than traditional monthly leases. Make sure this is legal in your city, because if it is, it’s a huge revenue booster. If you can rent out any part of your property as a short term rental, you’re almost guaranteed to make more money doing so than using traditional methods.
Look for ways to rent out the space you aren’t living in to short term tenants. Areas like ADU’s, units in a multi-family, finished basements, or walled off parts of the property. It’s much easier to live day to day with people you are used and accustomed to than short term tenants you don’t know. Rent the bedrooms in the space you live to people you know and let the strangers pay more to live in the isolated areas.
Find TIC’s Instead of Condo’s
TIC stands for “Tenancy in Common” and is a way of holding title to a property. While not every city has them, many big cities (such as San Francisco) do. Without getting into too much detail, TIC’s are considered less desirable because it is harder to obtain financing, harder to pass your ownership interests to others, and harder to get changes made in the ownership agreements.
While there are drawbacks in many areas related to the title, there aren’t drawbacks related to the income these properties can generate or the experience of those living in them. If the TICA (Tenancy in Common Agreement) allows for tenants (which most do) you can find yourself a much cheaper property that will earn the same rent revenue and afford you the same benefits of living in the area you prefer.
Find Homes With Lots of Square Footage and Adapt It For Your Purposes
When you find a home that is bigger than the number of bedrooms it has, you find the potential for a great deal. The easiest way to add House Hack value is to add bedrooms, but it’s not the only way. You can also wall off part of the home and create completely separate living spaces that can be rented out to individuals or families-allowing you to live in one area and have zero interaction with your tenants.
If the home has an unfinished basement, or unused attic space, this area can also be converted and rented out. Keep an eye out for a home with more square footage than the norm for the area. You just may find yourself a diamond in the rough.
Opportunities to Scale
This strategy isn’t so much about what to look for in a house, but more on how to repeat the process over and over until you own many houses. When you buy a home as a primary residence, you can take advantage of the opportunity to put a very low down payment into the property while still taking ownership. Many homeowners repeat this process every year!
They buy a property to House Hack then live in it for a year, saving the money they would have spent on housing costs. After 12 months, they buy another house with that money and repeat the process. This allows them to rent out the space they were occupying in the first property and increase that properties cash flow, then start a new House Hack in a bigger, better, or nicer home. This strategy can be repeated yearly!
Want to own a home but don’t want to take on the full mortgage payment? Consider hacking your house. Real estate is a powerful wave. There are ways to harness that wave and let it carry you to places you never could have swam on your own!