7 House Hacking Strategies Every Investor Should Know

In today’s rising interest rate environment it can be challenging to find, maintain, and profit from a real estate investment. When considering a potential investment the number one aspect any investor should look into is the cost to purchase, finance, and maintain the property.  

Given the recent surge in inflation, the government has taken the stance of constantly raising interest rates to combat the recent surge in home prices and the cost of goods. That action has caused a ripple effect in the marketplace and has made it exponentially more challenging for want-to-be homeowners and investors to purchase and finance properties.

So, what has happened? Well, in early 2022 individuals were purchasing homes with loans carrying a 2.75% interest rate. In 2023, those same loans are costing upwards of 6%. Although that might not seem like such a dramatic increase, when you are borrowing hundreds of thousands or millions of dollars, that could mean many thousands of dollars a month in extra interest.

So, what can you do to combat such challenging market environments? It’s time to consider house hacking.

House hacking is a tried and true technique used to navigate the rising cost of borrowing and the challenges posed to individuals in today’s market environment. In this article, we’ll go into seven different house hacking strategies you should consider on your journey to real estate investing success.

• What Is House Hacking?
• How To House Hack Successfully?
• House Hacking Strategies (7 Tips)
• How Much Does It Cost To Hack A House?
• Is House Hacking Legal?
• Is House Hacking Worth It?
• House Hacking Pros & Cons
• Final Thoughts

What Is House Hacking?

House hacking is a strategy whereby an individual purchases a property, lives in it and leases out a portion of it to a renter in exchange for an income stream. Typically, since a house hacker is an investor actually living in the home, he or she will have access to financing options available to homeowners.

Other real estate investors generally have to put down 20% - 30% in equity when purchasing a property and only then are they able to access financing. House hackers, on the other hand, can access better - and generally cheaper - financing methods such as an FHA loan and a conventional loan.

Then, once they purchase and dwell in the property, they rent out a room, a unit, or an area of the property to subsidize the operating expenses and mortgage payments associated with the property.

House hacking is an attractive option for an investor that is willing to relocate to the newly purchased property and is comfortable leasing out a portion of their home to a tenant.

How To House Hack Successfully?

Before engaging in a house hacking transaction, you must go through the necessary steps to ensure you are making a sound financial decision. The first step should be determining if you’d enjoy living in the house you are hacking.

Remember, unlike traditional real estate investment strategies, with house hacking you have to actually live in the house you are renting out. Whether you intend to lease out a unit in a multi-family property you own, a bedroom in a house you are living in, or a storage space in your basement, you need to be in the property. And, since you are moving your life into this home, we recommend you enjoy the place and house you are moving into.

If you don’t like the community or you don’t have any interest in living in the house, you should consider looking elsewhere for a different house to hack. Qualitative factors like your social life, your ability to work remotely or find a job in that area, and your overall happiness in the house must be considered.

Next, if you’ve identified a house in a community that you wouldn’t mind living in, it's time to understand your financing options and crunch the numbers. As a first-time homeowner, you’ll get access to certain government-sponsored lending programs that investors and other homeowners might not have access to. One such example is an FHA loan. For this loan -  assuming you and your property qualify - you’ll only need to put down a minimum of 3% - 3.5% of the purchase price. That equates to just $5,000 on a $160,000 home or $15,000 on a $500,000 house!

However, the down payment is not the only important factor. When identifying a potential property, be sure to crunch the numbers and determine if the rental portion of the house can sustain the large loan amount you are assuming. In the cases above, you’ll have a $155,000 loan compared to $5,000 in equity and a $485,000 loan compared to $15,000 in equity. With that amount of leverage, you have to be extra sure the numbers work out and you can afford your debts.

Next, once you’ve identified a rentable property that you’d also be interested in living in, you’ll need to determine the right tenant and the right house hacking strategy for you.

Here are seven different house hacking strategies you should consider.

Read Also: How To Calculate ROI On Rental Property

House Hacking Strategies (7 Tips)

1. Multi-Family Properties

Multi-family properties are properties with multiple units in the building. These can include duplexes (two units), triplexes (three units), or even small four to five-unit buildings. These buildings are great investment opportunities for a house-hacking investor due to the owner’s ability to get attractive financing to purchase these properties.

Both Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) - two government-sponsored lending agencies - have very attractive loan products for 2-4 unit buildings.

Some eligible Freddie Mac loan products include:

• Fixed-rate mortgages
• Most standard ARMs
• Home Possible Mortgages
• Seller-owned Modified Mortgages
• Seller-owned Converted Mortgages
• Financed permanent buydown mortgages
• HUD Section 184 Native American mortgages
•  Super conforming mortgages

Some eligible Fannie Mae loan products include:

• HomeReady Mortgage
• 3% Down Payment Mortgage for First-time Homebuyers
• HFA Preferred
• HomeStyle Energy
• HomeStyle Renovation
• MH Advantage for Manufactured Homes
• Shared Equity Programs

These products treat small multi-family properties as residential homes if the buyer lives in the property. And, unlike other investments, a house hacker doesn’t have to pay a superintendent, porter, or property manager to help manage these day-to-day operations of the property. Since the owner lives close by, he or she can do all those daily tasks themselves - saving a tremendous amount of money along the way.

2. Short-Term Rentals For Single-Family Homes

Short-term rentals such as Airbnb or VRBO rentals are also another great property type to house hack.

These types of properties are unique in that although they are slightly riskier than standard single-family and multi-family rentals, they compensate for the risk by generating a lot of free cash flow. A house hacker can take advantage of this opportunity by purchasing a single-family home utilizing attractive financing options and renting out the house to vacationers during peak, seasonal opportunities.

For instance, Joshua Tree is an extremely popular vacation spot for people looking to hike and experience the beautiful west coast scenery. A house hacker can utilize an FHA loan and purchase a home in Joshua Tree, move to the West Coast to make that house their primary residence, and then leave the house during peak vacation season to turn it into a short-term rental.

It’s possible - given the sheer demand in the area - to make so much excess cash during those popular months that even if the house is only utilized as a short-term rental for 2 to 3 months out of the year, the house hacker will make enough money to compensate for the properties full year expenses. An investor can also reside in the house all year round and simply rent out a room or a basement as an Airbnb unit.

Short-term rentals can be challenging. However, as a house hacker with access to cheaper financing and a greater understanding of the local market, you can reduce a lot of the typical challenges short-term rental owners experience.

3. Rental Space

Another house hacking strategy could be renting out a subsection of your home as excess rental space. Today, people are always looking for additional storage. Whether it be to store their extra furniture, bicycles, or wedding gifts, the demand has grown tremendously over the years.

A young couple with a small space might not have the room to store all their gifts. Or, someone living in the city in a small one-bedroom apartment might want to pay for extra storage for another year or two until they manage to buy a house in the suburbs. These are all great options for tenants to rent space from you.

By buying a house and renovating the den, loft, attic, or garage to accommodate a clean and safe environment for storage, you could boost your income and make your yearly property expenses far more manageable.

4. Housemates For Multiple Bedroom Houses

One great strategy for young, aspiring investors, is to buy a house with multiple rooms and rent out the space in a co-living arrangement with friends or like-minded roommates. This strategy works very well for young professionals, college students, or investors with children in college.

For example, if you are a father or mother of a handful of children that are ready for college and have expressed interest in going to the same college, you could purchase a property, have your children live in the space, and have them rent out the surrounding rooms to their college friends. Or, as a young investor with some excess capital, you could purchase a home and share the space with some like-minded friends or roommates.

Areas such as Dallas, Texas, Jersey City, New Jersey, and Seattle, Washington are great markets for this strategy. Each of these places has a thriving young professional community with a wide range of tenants that would be willing to partake in a co-living environment.

Related: 7 Best Markets To Wholesale Real Estate

5. Accessory Dwelling Unit (ADU)

An Accessory Dwelling Unit (ADU) is an attached or detached residential dwelling unit that provides complete independent living facilities for one or more persons. These types of units are a great strategy for house hacking. An investor can purchase a residential home and turn the detached garage into a separate dwelling area with its own kitchen, living area, and bathroom.

This type of strategy is very common in beach towns such as the Jersey Shore, New Jersey,  Miami, Florida, Myrtle Beach, South Carolina, or along the west coast in California. Since most vacation communities are in high demand, many owners elect to build out an entirely separate living area to rent out. These house hackers are able to live in their homes during the summer months and rent these ADUs at a hefty premium to vacationers looking for an escape. The rents can sometimes be so lucrative that all the house’s annual expenses can be paid for with just a few months of summer rent.

There are roughly 1,500,000 ADUs in the United States and that number is growing by nearly 10% a year. As a potential house hacker, it might be worth tapping into this lucrative trend.

6. Live-In Flip

A live-in flip is another great house-hacking strategy to add to your repertoire.

Flipping houses is the act of purchasing a distressed property from a motivated seller or foreclosure auction either in an on or off-market transaction.

Then, once the property is purchased, the investor puts in high ROI (return on investment) renovations to increase the property’s ARV (after repair value). Next, the owner relists the property on the MLS (multiple listing service) in hopes of earning a profit on the sale.

A live-in flip is similar to a traditional flip except for a live-in flip actually resides in the house during the construction and re-stabilization of the property. There are a handful of benefits to a live-in flip transaction.

First, the owner can get attractive financing for the purchase of the property. As mentioned earlier, residential property owners get access to better interest rates and higher leverage than investment owners. By living inside the house you are flipping, you get access to these financing perks. Second, a live-in flip can flip the house slowly, over time. Since they are living in the house, they don’t need to rush the construction and bring the property back onto the market as fast as possible.

Generally, flippers want to relist the property as quickly as they can to minimize holding costs and property expenses. However, with a live-in flip, you are residing in the property and are treating it as your own home - giving yourself some leeway on timing.

7. Houses Near Public Transportation

Hacking a house near public transportation is another great strategy to consider. A lot of people tend to reside near public transportation for ease of transfer to work and social gatherings.

Purchasing and living in a home near a major train station, bus stop, or freeway can be a great investment strategy. Occupancy rates are typically higher as well because these areas tend to be in high demand due to the nearby social events, restaurants, city entry points, and amenities.

How Much Does It Cost To Hack A House?

There is no perfect assessment of the cost to hack a house because each particular strategy will have different financial requirements. For example, a live-in flip could cost you anywhere between $5,000 to $100,000 depending on the scope of work you’ll be doing. Are you replacing the cabinets and relisting the home or are you doing a complete rehab of each of the rooms in the house? Depending on the strategy, you’ll need to budget differently.

A short-term rental hacking strategy, on the other hand, will have a larger amount of cleaning fees as you turn over each tenant. Since you live in the house, you could likely do all the work yourself for free, or, since the work might be a bit tedious, you might want to outsource the management to a different company. Regardless, these expenses can add up and likely differ on a case-by-case basis.

In general, though, you’ll always need enough cash for a down payment on the house. Depending on the loan program, that amount can vary from 3% to 25% of the purchase price.

Read Also: What Is Transactional Funding? The (Ultimate) Guide

Is House Hacking Legal?

Yes, house hacking is legal. Though, it is very important to stay up to date on any short-term rental state laws and ADU legislature. On the federal level, there are no specific laws geared toward house hacking, however, on the state level, you’ll have to abide by zoning restrictions and allowances that might appear on a case-by-case basis.

For example, not every house can be switched from a single-family residence into a multi-family dwelling. Before you jump into that particular strategy and rent out a detached garage or basement unit, check in with a local general contractor or attorney - they’ll know the state-specific laws.

Is House Hacking Worth It?

Absolutely - house hacking is worth it. But, it is not without its challenges. As a house hacker, you have to be prepared to have a tenant live very close to - if not in - your house.

You’ll quite literally be bringing your work home with you every night so be sure you and your family are both mentally and physically prepared for that responsibility. 

Further, if you own your primary residence for over two years, then sell it for a profit, you may have tremendous tax benefits. If you file your taxes as an individual, you may realize up to $250,000 in capital gains without paying a dollar in federal income taxes on it! If you file as a married couple, then you may receive the first $500,000 in profit without paying any taxes on it.

This is arguably the biggest tip we can provide you - this is called the IRS Section 121 exclusion. When your home appreciates in value, due to the rising market or from forced appreciation, you may pocket a huge amount of income tax-free when you sell.

Do this successfully two to four times and you’ve just made a million dollars!

Real Estate Skills Tip: House hacking successfully two to four times can make you a millionaire in seven years or less. 

House Hacking Pros & Cons

There are many benefits of house hacking. A handful of pros include:

•  A great way to subsidize your homeownership living expenses and HOA housing costs
•  A great way to springboard your real estate investment career without doing it as a full-time job
•  A great way to make excess cash and build wealth
•  More accessible financing options and lower upfront costs

There are also many challenges with house hacking. A handful of cons include:

•  Less work-life balance given that your home is your investment property
•  Living in close proximity to your tenants
•  Harder to sell the house when it's occupied
•  Your house will incur more damages than the standard owner-occupied home

Final Thoughts

House hacking is a phenomenal real estate investing strategy every investor should know about. It is the process of turning a personal residence into an investment or rental property to generate passive income. In doing so, you’ll use the property’s rental income to subsidize your standard housing expenses like insurance, property taxes, electricity, and mortgage interest. It is also a great strategy because although you’ll be renting out a portion of your home, many lenders consider it to be a primary single-family residence - even if it is a multi-unit property.

Thus, when purchasing the home, you’ll get access to more favorable loans with lower credit scores and down payment requirements. For qualified veterans, some VA home loans even allow for 100% financing!

After a time, as a house hacker, you’ll build financial independence and substantial wealth. Also down the road, if you’ve increased the property value, you can even refinance and get some additional cash out of the property to deploy into more investments.