House hacking is a real estate investment strategy that homeowners can use to offset their mortgage payments—and it’s become widespread with the help of home-sharing platforms.

House hacking involves renting out spaces of an owner-occupied single-family or multi-unit property.
Under the right circumstances, house hacking can help reduce housing expenses and generate passive income.
As you develop your house-hacking strategy, you’ll need to understand your financing options and landlord-tenant laws that apply where you live.

What is house hacking?

House hacking is a real estate investing strategy involving buying a property and then renting out part of it to offset your mortgage and other homeownership expenses. As a house hacker, you could:

Buy a duplex and live in one half while renting out the other half

Purchase a single-family home and rent out a spare room

Rent out your basement as storage space

Allow people to park cars in their driveway for a fee

The cash flow generated from rental income can be used to pay down the home’s mortgage and build equity. When done correctly, it allows people to live in areas they may not otherwise be able to afford or even generate positive income.

Often, house hacking is used as a stepping stone into more serious real estate investing. By using the equity built up through the rental process, the homeowner can do a cash-out refinance and use the payout as a down payment on another investment property.

What are the benefits of house hacking?

House hacking has numerous benefits and has become quite popular in the wake of the Financial Independence (FI) movement:

Cuts down housing expenses significantly

Allows you to get an affordable mortgage through both

Fannie Mae

and

Freddie Mac

Reduces housing costs through extra income generated by renting out a portion of your property

Usually does not require a large down payment or high interest rate

Lowers taxable income by acquiring tax write-offs

Allows people without a lot of capital to start investing in real estate

Eases you into being a landlord as the tenant is right down the hall or next door

How to successfully house hack a property

There are a few basic steps you should follow to house hack a property, whether it’s a multifamily house or a single-family home:

1. Know your financing options

Since you’ll also be an occupant of the home, using it as your primary residence, financing a multifamily home isn’t any different from financing a single-family home.

There are numerous financing options to consider:

Conventional mortgage loans: The most common way for borrowers to finance a primary residence and typically require a down payment of at least 20% and a credit score of at least 620. In addition, you can count on closing costs totaling about 3% to 6% of the price of the home.

FHA and VA loans: Can be used to purchase properties with up to four units—with some caveats. While anyone can be eligible for an

FHA loan

, MIP (mortgage insurance premium) is required, and you must have a debt-to-income ratio that’s less than 43%. FHA loan down payments can be as low as 3.5%. To qualify for a

VA loan

, you must be an active duty or retired service member or the spouse of a service member—those who are eligible don’t need a down payment or mortgage insurance.

Rehabilitation loans (or 203K loans): Let you purchase a home and work the costs of rehabilitating the house into the mortgage if renovations are in order. You’ll need a credit score of at least 500 and a down payment of 3.5% to qualify for an FHA 203K loan, but other lenders may have more stringent requirements.

2. Find the right property to house hack

Finding a property to house hack doesn’t necessarily mean looking for your dream home. Many homeowners will turn their primary residence into a rental property at some point—so it makes sense to look for a property that will make a good rental rather than one you’d like to live in year after year.

Here are some factors to consider:

Neighborhood: The area where you buy will (at least partially) determine the type of tenant and your vacancy rate. For example, if you buy near a university, you’ll likely rent to students and your property may be vacant during the summer months. Keep in mind that zoning rules may prohibit rental properties in certain areas.

Schools: If you’re hoping to rent out to families, consider the quality of the schools in the neighborhood, as well as access to parks, movies, shopping, etc.

Property taxes: Rates and property values will likely vary across the area where you’re looking, and you’ll want to be aware of how much they’ll cost you every year.

Crime rate: It will be more challenging to find long-term tenants in a crime-ridden neighborhood and your property is more likely to suffer damage from vandalism or theft.

Average rents: Rent will be your bread and butter, so it’s essential to know the area’s average. Make sure whatever rent you can pull in will be enough to cover the mortgage, property taxes,

homeowners insurance

, and other expenses. Remember maintenance and repair costs, too!

Vacancy rate: If the neighborhood has a high rate of vacancies, it’s unlikely you’ll be able to find a tenant quickly.

Property type: A single-family home will likely have a lower upfront cost, while a duplex or triplex could cost more but generate more income from additional renters.

Pro Tip Working with a real estate agent who has experience with real estate investors and rental property management can help you navigate your local housing market.

3. Crunch the numbers

Before making an offer on a house: Take time to crunch the numbers and understand your potential income. After all, it doesn’t make sense to take on the responsibilities of a landlord if you’re going to end up in the hole.

For example:

Say you buy a single-family home for a purchase price of $350,000 with 20% down on a 3.5% 30-year fixed loan—your mortgage payment would be $1,275 a month

Assume the house has a finished basement that you can rent out for $1,500 a month

That rent would fully cover your mortgage, plus leave you an extra $225 a month to put towards other expenses

This investment would make sense, as it would help you move towards financial independence.

Another example:

You take out an FHA loan and can only afford to put down 5%, so your monthly mortgage payments would be $1,493 a month

While rent would fully cover the mortgage, you wouldn’t have any leftover money to pay for other expenses

4. Close escrow and ready the property

In addition to the down payment, closing costs on a conventional loan usually run between 3% and 5% of the loan amount. Closing costs include various fees buyers incur during real estate transactions and include:

Title insurance/search fees

Government recording fees

Appraisal

Home inspection

Survey

Attorney review

After closing on the property and moving in, you’ll need to get the rental unit ready for a tenant. the part that you plan on renting out will have to be made ready for a tenant.

Depending on what you’re renting (single room, basement, detached garage, etc.), tasks may include:

Cleaning and fumigating

Repairing or replacing appliances

Re-painting

Servicing the HVAC system

Repairing or replacing floors

Hiring a mold inspector

5. Find the right tenant

Before interviewing potential tenants, make sure you understand the

Fair Housing Act

and your state’s landlord/tenant laws to avoid breaking the rules.

Once you’re clear on regulations and the space is ready to be rented, these are the steps you should follow to screen tenants:

Determine minimum tenant criteria: Credit score, credit history, proof of employment, clean background check, and the ability to pay a security deposit/first month’s rent

Watch out for red flags: Bankruptcy history, gaps in employment, evictions, criminal record, and late or missing payments

Pre-screen tenants: Place your criteria in the rental listing—most people who don’t qualify won’t bother to apply in the first place

Collect and review applications: Check credit and criminal background and verify other tenant information

Decide on a tenant: Prepare and sign the lease