Looking for a way to build wealth faster? Consider renting out part of your home. Also known as house hacking, this financial strategy can create a passive income stream that can help cover your monthly expenses, pay off your mortgage faster, and increase your overall equity.
This guide provides everything you need to get started, from the basics of house hacking to advanced home improvements that increase your property value.
Table of Contents
What Is House Hacking? Pros & Cons to Consider
House hacking is a term used to describe living in a property you own while also renting out rooms or units in the same property.
House hacking can be an effective way to offset ownership costs and build wealth with real estate, as the rental income can help cover mortgage payments, taxes, and other expenses. In addition, house hacking can provide a unique opportunity to live in a highly desirable location that you might otherwise be unable to afford.
For example, if you purchase a duplex or triplex in an up-and-coming neighborhood, you could live in one unit and rent out the others. This would allow you to live in a prime location at below-market rates while generating rental income.
Of course, house hacking is not for everyone. It requires significant time and effort to screen tenants, collect rent, and handle maintenance issues. House hacking can reduce the owner’s privacy, as well. If you’re considering house hacking, it’s essential to weigh the pros and cons carefully before making a decision.
How to Buy a Home Without 20 % Down
The prospect of supplying a 20% or larger down payment on a home purchase can deter many people from getting started with house hacking. Fortunately, upfront fees vary from mortgage to mortgage, and several programs can help you buy a home with less money down.
The most well-known program is the Federal Housing Administration (FHA) loan, which allows buyers to put down as little as 3.5%. FHA loans are available at low down payments to all buyers who meet the specified criteria, not just first-time homebuyers. FHA loans can even be used for multi-family properties with fewer than four units.
Setting Rent Prices & Estimating Income
One of the most important questions when considering whether to house hack is how much rent to charge. You’ll want to set a price that will cover your mortgage and other expenses while also staying competitive with rental rates in your area. But how do you set rent prices?
And how do you know if your rental income will cover your mortgage payments? The answer lies in the 1% rule.
The 1% rule is a guideline that says your rental rate should be 1% of the property’s purchase price. So, if you purchase a house for $100,000, you could charge $1,000 per month in rent. This rule is a good starting point, but it’s not set in stone. You may need to adjust your rates up or down depending on the local market conditions and how many people are living in the home.
Once you’ve decided on a rental rate, you can use it to estimate your monthly income from renting. Simply multiply your rental rate by the number of rooms/units in the property. So, if you’re renting out two units at $1,000 per month, you can expect to bring in $2,000 per month in rental income or $24,000 per year.
Next, subtract your estimated expenses from your rental income to get your monthly cash flow. Your expenses will include your mortgage payment, taxes, insurance, and other regular bills associated with owning the property. If your monthly cash flow is positive, that means you’re making money each month after covering all of your expenses.
When you’re house hacking, a negative cash flow doesn’t mean you’re losing money; your overall expenses will still be lower than they would be if you lived alone.
Examples of House Hacking
There are many different models of house hacking.
The most popular way to get started is by renting out a room in the single-family house, condo, or townhome that you own. This strategy is often used by people who are looking for a roommate to help offset the cost of their mortgage.
Another common model is to purchase a duplex, triplex, or four-plex and live in one unit while renting out the others. This approach requires more effort than renting out a single room because you’ll be responsible for maintenance across all units. Additionally, multiple vacancies at once can be extremely costly.
Some homeowners choose to construct a guest house on their property. This can be a detached unit, like a small cottage, or an addition to the existing house. The overhead expenses of this option are higher, but the owner would enjoy more privacy and could potentially charge higher rental rates.
Build Real Estate Wealth Faster With House Hacking
House hacking can be a great way to build wealth quickly. By following the steps in this guide, you can rent out part of your home and create a passive income stream. There are some pros and cons to consider before getting started, but with a little planning, you can make house hacking work for you.