What is house hacking?
So much of my content, especially on Twitter, references house hacking making this by far my most frequently asked question.
House hacking is when you buy a property, live in one part of it and rent another part out.
Why would you want to house hack?
Whether you have a budget or not, you probably know what your top two or three expenditures are. For most Americans, it’s housing, transportation, and food. House hacking allows you to greatly decrease or eliminate your housing expense.
Duplex, Triplex, or Quadruplex: Buy a small multi-family, live in one of the units, and rent the others out. Financially, this can be a fantastic move for a couple of reasons: 1) These properties don’t appreciate as much as single family homes, so the price point can be good, and 2) In the US, you can use an FHA loan with as low as 3.5% down or a conventional loan (5-15% down) with low interest rates and 30-year terms.
Rent Out a Room: Yes, renting a room in your home counts as house hacking! This is the easiest way to start if you already own a home or if you can’t find a small multi-family property.
Accessory Dwelling Unit (ADU): The most classic form of this is when you live in a house and rent an above-garage apartment out. Pro points if you live in the apartment and rent out the house. Another example of this is renting a detached garage conversion.
Basement Apartment: I’m in Florida, so this isn’t really a thing here, but some places have finished basements with separate entrances you can rent out. Make sure you have the proper egress in place, as windows people can crawl through are often required.
Mother-in-Law Suite: Some homes have a part partitioned off that has its own bathroom and kitchen. They’re so named because people sometimes have these for their aging parents, and they’re great to rent out if that’s not a necessity. I highly suggest searching the MLS for this term if you can’t find any duplexes, triplexes, or quads.
CJ Smith, former NFL player and current real estate investor:
“House hacking completely changed the way I think about money and investing. Being able to significantly reduce my expenses then turning my property into an income producing asset changed the trajectory of my life.”
JT, DIY real estate investor and full-time engineer:
“The biggest visible financial impact has been that we were able to replace my wife’s job with rental income. She lost her job a couple years ago in the beginning of the pandemic and since our son had to do virtual school, we took advantage of that opportunity and she decided to stay home with him. Since we’re house hacking and the majority of our expenses are taken care of by our rental income, it was as if she had never lost her job. Our lifestyle didn’t have to change negatively. If anything we had more freedom. House hacking has also allowed us to scale a little faster since I can combine my 9-5 income with the rental income and quickly save up for the next house hack.”
FI Couple, a husband and wife team planning to retire in their 30s:
"As two people who barely earned $50,000/yr from our jobs and started out with over $100,000 of student loans, financial stability seemed almost impossible 4 years ago. Real estate changed that. By using the house hack strategy, we were able to lower our cost of living which helped us also pursue additional income opportunities. This helped us not only become student debt free in under 3 years, it now has us on track to have our jobs become optional in our 30’s!"
My House Hacking Story
My husband and I have been together since 2015, but we’ve only been married since 2019. That’s when we started taking a closer look at our combined financials and net worth. Me, being a personal finance nerd – and also cocky, frankly – started running some preliminary compounding calculations. We both were making really good money, so I just knew we’d be able to retire early.
And the numbers would have been promising to the average person. Projections indicated we could retire around age 55. At 29 years old, I did not find this promising! How could two people in their 20s who each make 6 figures and live off about half of what they make not be able to retire sooner than that?!
I planned to dive into our finances and figure out what the problem was, but all I had to do was dip my toe in. Our mortgage payments, which included principal, interest, taxes, insurance, and flood insurance added up to over $25,000 per year. That means we had to make $30,000 gross income to make those payments.
After getting over my shock about this number and my shock that it took me 3 years of paying this mortgage to do the real math, I figured we’d just have to work hard to pay the house off. I changed the numbers in my retirement calculator and that did shave some time off, but not enough. Once you pay a house off, you still have taxes at least, and if you’re the type to insure for disasters, which I am, you still have insurance too.
I concluded that one option was to pay off the home and use the cash flow from my rental to pay the other expenses. But how would I cover my other expenses? It wasn’t the best option.
The best option, by far, was to buy a place with at least two livable units, and only live in one. If we could eliminate our housing expenses NOW, then we could easily save for more rentals, stocks, or other investments to cover our other expenses and fast track us to retirement.
In January 2020, I sprung my idea on my husband at breakfast. He balked at first, but I ran the numbers by him, and he came around in about 15 minutes. Bless him. By February, we were looking at properties, and by March we were under contract on a Bed & Breakfast. Eliminating our housing expenses has directly allowed us to save and invest much more. It’s 2022, and we’re now technically work optional and working for extra security, lifestyle, and maybe even kids.
And we’re only 29 and 32.