The Guide to House Hacking

House hacking has been around for years, but the term has only recently been coined by the Bigger Pockets podcast host and contributor Brandon Turner. House hacking involves what usually amounts to a multi-occupancy living situation in the same building, think of this as a multi-family home or a home with a basement apartment to start. However, there are many options for how to achieve a house hack that fall outside these traditional and well-known approaches. The goal of house hacking is ultimately to live for as little as possible, if not free or profitably, by using renters to cover your mortgage and utilities payments. Some of the house hacking strategies we’ll cover below are far more profitable than others, but there are many options to choose from, and undoubtedly one that you can find to fit your specific situation.

Traditional House Hacking with Multifamily Properties

When most people think of the concept of House Hacking they think of multi-family houses. Why? 2 to 4 unit multi-family houses are usually covered under most mortgages and through FHA loans, making those types of properties common and accessible to real estate investors. The traditional House Hack with a multi-family is to rent out each unit of the building and to live in one of the remaining units having the other tenants cover most of if not all of the mortgage. There are however variations of the House Hack that can generate more revenues using multifamilies, some of which we’ll cover in more detail later, but include:

  • Renting with long term leased renters
  • Airbnb’ing or vacation renters
  • Rent by the Room

One thing to note about the traditional house hacks rarely enable an investor to cover their full house cost and live for free in expensive real estate markets, largely due to demand in those markets. This is the most common type of house hacking mainly because these buildings are purpose-built for multi-occupancy.

Renting by the Room

While renting by the room is possible in whatever type of dwelling you live in with an extra bedroom, the concept is usually referred to for those who own or lease a single family home and have a spare bedroom(s) that can be sublet out. These types of arrangement can be significantly more profitable than traditional house hacks as you can charge more per room than you would otherwise get from the unit being fully rented out. For instance take a three bedroom which would normally rent out for $1800/mo, when you can charge $800/mo for each bedroom, reducing the cost of living in the third room to only $200/mo.

The benefits of this approach are that there are many financing options for single-family homes and they are generally easier to sell on the market. Additionally, appreciation of single-family homes has been shown to be higher than multifamily or other property types as demand for them is steadily higher. You’ll want to be diligent in this approach how you vet potential roommates, but on the bright side there are many places to list your rooms for rent.

Vacation Renters

One of the easiest approaches in any type of property (law abiding) to getting some rental income from a property you live in is to rent it out on vacation rental sites such as Airbnb, VRBO, etc. The per night rates are usually much higher than any other type of property, however you have to invest more time and effort into maintaining the property to high quality standards as well as not being able to offload things like utilities to your renters directly.

While this approach can be stand-alone, it can be employed with multiple living situations – take our 3BR house example from above. You can rent out one bedroom by the room and the other bedroom on Airbnb, or rent both bedrooms out on Airbnb, while living in the third. This can be a quick and effective way to quickly rent out your property and start making it income producing.

Other Rental Income

Before we go further, we must cover additional sources of income that can help you make your property a highly cash flowing investment. These sources of income can be mixed with existing renters or to new users for whatever the reason. The income sources include renting out:

  • Extra storage space (Craigslist, etc.)
  • Backyard space for events on Airbnb.com
  • Parking spaces on Pavemint.com or JustPark.com

These are the only extra sources we could think of for this post, but there are undoubtedly more that we don’t even know about yet.

While these seem like they can only get you small amounts each month, on an annualized basis the numbers can really make a dent in your housing costs. Note that in some high cost of living areas parking spots are coveted real estate and can rent out for upwards of $200 a month, which isn’t a small chunk of change if your living expenses are already covered by other House Hacking strategies.

Create New Living Spaces

So far we’ve only covered the strategies that most people employ to make their monthly rental income, however we haven’t tackled some of the creative approaches used to actually enhance your space to be more profitable.

Some of the well known approaches and ideas to this to this include:

  • Add a basement apartment
  • Add a bedroom
  • Create a make-shift bedroom
  • Create a garage apartment
  • Renting an ADU (Accessory Dwelling Unit)

We’ll cover each of these in detail and talk through the types of costs associated with each.

Add a Basement Apartment

This is a very common approach that can have its plusses and minuses. On the plus side, a basement apartment, when done legally, can add significant value to a property if converted from a single to multi-family property as the cashflow assumed from both units will very high.

On the negative side, the costs and legal questions around having a basement apartment (depending on your locality) can have drastic price ranges differences. When you’re thinking of getting setup for this approach, you need to realize that you’ll have a full bathroom, a full bedroom(s), and a full kitchen for this to be a legitimate approach to having a lease in place for someone to rent out. There must also be legal egress points for you to truly renovate your basement for another income option. That said, the next option may have much more for you if you want to avoid setting up a completely new apartment in your basement with a costly renovation.

Add an Additional Bedroom

Wherever you have the space, it may be possible for you to add an additional bedroom to your property with a small amount of planning permissions and a low budget. Adding bedrooms is generally not an overly expensive process compared with having a full ADU buildout or having to setup a kitchen and full bathroom for an add on apartment (garage, basement, etc.).

This is a common strategy to both help increase your rental income as well as add some value and appreciation to your property by adding a new bedroom to it. The new room can be rented out as an Airbnb or using the rent-by-room strategy outlined above to increase your cash flow.

Considering the cash flow implications, it’s also nice to see that adding a bedroom can increase the value of a home by between $30k to $50k depending on the market and alterations made, which is a significant gain for your long-term ability to leverage your homeownership.

Create a make-shift bedroom

On the more daring side of the house, creating a make-shift bedroom to live out of while renting your main bedrooms out is a quick way to start getting even more cash flow through your property. You can consider any free space up for grabs while opening up your current bedroom up to the vacation rental or rent-by-room rental strategies, which are again the most profitable strategies for renting your property out.

Create a Garage Apartment

Similar to building out a basement apartment, renovating a garage to be a full standalone apartment can be a large capital expense and can take some time to get a positive ROI on your project. That said, you can use a garage apartment renovation to your advantage if done right to more or less make your existing property into a multi-family. The new apartment can likely be rented out using multiple rental house hacking strategies (traditional, rent-by-room, vacation rental, etc.) for a fairly significant cash flow each month. However, you must consider the costs of the renovation along with the cash flow you’re making. Do the math on this before you get started with a build after getting some solid estimates from contractors or if you’re doing it yourself, make sure you price things out first before jumping into the project.

Rent an ADU (Accessory Dwelling Unit)

If you’re lucky enough to purchase a property with an ADU in place, you’re off to a great start, but if you’re like most of us having an ADU in place mean one thing – building. This can be an expensive prospect to build in or install a new building on your property for the sole purpose of renting it out and can have long-run ROI horizons on the entire project.

You can employ multiple strategies for the ADU approach, but before you get started building, you’ll need to check your local ordinances to see what is legal and what isn’t. For instance, in many places ADU’s are intended to be purely for in-law apartments meaning no cash can change hands, making them a worthless investment, unless you want mom and dad living nearby.

ADU’s can take many forms and in markets like San Diego, they’ve actually started allowing Tiny Houses as a form of ADU’s that can be rented out from a property owner.

Summary

House hacking strategies vary across rental generation and space management schemes as we’ve covered in this article that can optimize your housing costs to as low as possible given your specific scenario.

For more definitive and comprehensive guides to house hacking, check out the following books available on Amazon:

The House Hacking Strategy: How to Use Your Home to Achieve Financial Freedom

House Hacking: The Only Real Estate Investing Strategy You Need to Build Wealth, Live for Free (or Almost Free), and Make Money Through Homeownership