Wouldn’t it be great if you could build equity in a house while living rent free?
This isn’t a fantasy; there is a proven way to build equity in your home while someone else pays your mortgage.
It’s called house hacking.
What Is House Hacking?
House hacking is the practice of using a primary residence to generate income to offset the cost of that residence’s monthly mortgage.
Depending upon the amount of income, house hacking provides the unique opportunity for the owner of the property to live nearly rent-free or even completely rent-free.
Why House Hack?
House hacking has become increasingly popular in high-cost housing markets. As real estate prices in certain cities have skyrocketed, house hacking has allowed young homebuyers the opportunity to invest in real estate that they otherwise might not have been able to afford.
There are advantages and disadvantages associated with house hacking. We will look at both next.
House Hacking: Pros and Cons
House Hacking Advantages
The biggest advantage of house hacking is reducing or completely eliminating your mortgage expense each month.
Imagine not having a housing expense and having that money in your pocket every month.
With that money, you could:
House hacking allows you to build your wealth quicker and at a younger age. What an advantage that is!
House Hacking Disadvantages
House hacking isn't as simple as buying, for example, a duplex and collecting rent every month. There is more work involved than most think.
With house hacking, you are starting a small business and becoming a landlord.
House hacking requires:
- finding tenants
- collecting rent
- maintaining the property
- accommodating the requests of your tenants
- paying taxes on rental income
For some, these requirements may be seen as a disadvantage.
Another disadvantage is that, as with any real estate investment, there is risk involved, because you are relying on another party to pay your rent every month, so you can live rent free.
There is always the risk of:
- a tenant not paying rent
- a tenant causing damage to the property
- not having a tenant for a prolonged period of time
Financing Options for House Hacking
There are multiple ways of financing a house hacking property. This includes:
House Hacking with a Conventional Loan
Conventional loans are beneficial to house hackers because they provide low interest rates, which leads to lower mortgage payments, and makes it easier to live rent free.
House Hacking with a FHA Loan
Another option for financing is a Federal Housing Administration (FHA) loan.
FHA loans typically come with a smaller down payment, as little as 3.5% down, which can be attractive to home buyers who don’t have a large amount of savings.
A downside of a small down payment is that it will require mortgage insurance, which can lead to higher monthly costs.
House Hacking: Types of Properties
House hacking can be done many different ways.
There are many opportunities to reduce your mortgage expense and live rent free if you think creatively.
House Hacking with a Duplex
Typically, when most people think of house hacking, they think of a duplex.
A property that consists of two units, house hacking involves the owner living in one unit and renting out the other.
To generate more income, the owner can rent out an extra bedroom in their unit.
However, if you’re up for getting creative, you can house hack with many other property types.
Consider a three-family, referred to as a triplex. A triplex is one step up from a duplex, though sometimes harder to find, consists of three units.
Same as a duplex, an owner typically lives in one unit and rents out the other two units.
House Hacking with a Single Family Property
You can even house hack with a single-family home.
In some cases, property owners have even turned their garages, referred to as Carriage Houses, into livable spaces that they then rent out.
House Hacking Example
Let’s look at a house hacking example: a duplex located in Columbus, OH.
The purchase price of $350,000, and the real estate investor pays 20% down with an interest rate of 3.2%.
One unit is rented for $2,100.
Additionally, one-bedroom on the owner's side is rented for $500.
Here is the house hacking breakdown:
In the example above, not only would the real estate investor’s mortgage be covered every month and live rent free — an additional $544 would line their pocket.
House Hacking: How To Live Rent Free
Although house hacking has advantages and disadvantages, it is a proven way to build equity in a house while living rent free. If you’re looking to build wealth while saving money, we encourage you to learn more about the strategy before deciding if its right for you.