House hacking is a method to live for free, or almost for free, by making small multi-unit rental properties your principal residence. By doing this, you are essentially getting your tenants to help you pay for your housing expenses.
The concept is very simple. You buy a duplex, a triplex, a fourplex, a single-family house, or any other creative property such as garage apartments or mobile homes. The income from the rental units can pay for all or most of your expenses while you live there. After you move out of this property, it can become a long-term rental investment.
House hacking can reduce or eliminate your housing costs, which are a large part of your personal budget. There are other benefits—for example, occupants get the best financing terms. Because you are an owner and occupy your own home, you are paying lower interest rates and have more attractive terms than with investment financing. You can make smaller down payments.
House hacking also teaches you how to invest in real estate—you live in a property while learning how to invest in it. This allows you to have a smooth transition to investing in rental properties so that by the time you become just a landlord and are no longer living on your property that you’re renting out, you know the type of tenant your property attracts and how to take care of that property to keep the value up.
What is Airbnb house hacking?
The internet is full of “life hacks.” I’m sure you’ve seen them, with clever tricks like storing your pancake mix in old ketchup bottles or dipping your Oreos through frosting with a fork. Sure, those are fun little tricks—but how much do they really improve your life?
House hacking, on the other hand, is epic, life-changing stuff. When properly implemented, this can dramatically affect your wallet and the financial destiny of your family.
I’m talking about hacking your housing and living for free. I’m talking about building wealth automatically and getting paid to do it. I’m talking about buying an owner-occupied multifamily property and having other people pay your mortgage.
You heard me—it’s often called an “owner-occupied multifamily property,” but you probably have heard other names for it, like “duplex,” “triplex,” or “fourplex.” These properties have more than one unit but don’t quite fit into the “apartment complex” category. There is a good chance you’ve even rented a unit in one of these places in the past or know someone who has.
They exist in every market, in every neighborhood, and at every price point—and by purchasing a small multifamily property, living in one unit, and renting the other units out, you can live for free and even make money on top of it.
For this conversation to make sense, we must identify certain key elements. The core of any house hacking endeavor is a desire to make money; that’s the essential truth. However, making money doesn’t happen in a vacuum. Making money in any enterprise is associated with some amount of risk and time commitment.
Therefore, it’s reasonable to conceive of any money-making opportunity as a synergy of income (or wealth) generation potential, risk level, and time commitment. In other words, there exists a golden mean whereby we can make the most financial gain with the least amount of risk and time commitment. This is also true for house hacking.
If I were to say (which I am) that it is a much better idea to use vacation rentals in your house hack, what I want you to read is this: Using vacation rentals in a house hack will generate the most financial gain with the least adjusted-to-gain risk and the lowest adjusted-to-gain time commitment. We won’t be able to explore the minutiae here, but let’s see if we can get a bird’s-eye view.
Not ready to make that long-term investment? In that case, you can do something similar to Airbnb house hacking. With Airbnb, you often rent out one or two rooms of your home, and the guests are paying you to stay there. The money from their payments can go toward your house’s mortgage.
More on short-term rentals from BiggerPockets
What makes Airbnb house hacking successful?
It is obviously paramount in a house hacking situation that the income is stable. Income stability, presumably, is the whole reason you are doing a house hack in the first place. And in this category, it would seem that long-term rentals win out. After all, you place a tenant on a 12-month lease and you can rest assured that the money will come in. However, while this scenario may or may not be the most stable, it certainly is not the one that makes the most money.
Have you ever heard of an economic principle called velocity of money (VOM)? To paint the picture very quickly, what happened in the Great Recession is that money stopped flowing through the economy. We live in a debt economy, where credit is akin to oil in your internal combustion engine. If the oil stops flowing, the engine seizes up. In much the same way, should credit stop flowing, the economy will freeze. Why? Because buyers can’t borrow money to buy stuff—and sellers, therefore, can’t find anyone to sell to.
VOM measures the transactional speed of money flowing through the economy. During the Great Recession, the VOM froze up. This is never a good thing. However, as it relates to your house hack, the reverse is true: The faster the velocity of money (think money flowing to and through you), the more money-making potential the strategy has.
Well, on a 12-month lease, you are going to get paid once per month. But in a vacation rental situation like I have, I am getting paid three to six times per month. This is why, instead of making $600 per month, I am making $1,000 to $1,800 per month, with an underwritten average of $1,300—which I am outperforming so far.
To truly understand what makes Airbnb house hacking successful, you need to decide what matters most. Do you care about making more money or making less money but having it on a predictable schedule? If you care about the latter, then Airbnb house hacking is for you.
Choosing a property for Airbnb house hacking
If getting paid more than once a month (diversifying your revenue) is your goal, you can have it. Luxury house hacking puts you in locations where you’ll not only want to live but also where many people will want to visit for both business and pleasure. Because of this, instead of having three tenants who pay once per month (on the months when they can afford to), you can host three short-term guests who pay you three times per month via an automated process executed by a third party.
In this setting, getting paid more than once per month not only makes you more money due to heightened VOM but also decreases the risk of loss of income. And now, you won’t be living in a crappy fourplex in a so-so location, but in a class-A area with upscale construction. Talk about killing three birds with one stone!
But we’re not done yet!
When choosing a property for Airbnb house hacking, you need to consider how many tenants you could reasonably house and maintain your own sanity. After all, you don’t want to be stuck with tenants on a long-term basis that you absolutely cannot stand. You also don’t want to have too many tenants for your space.
So typically, when picking up a house to do a house hack, especially as an Airbnb, you need to decide on a maximum amount of tenants, and usually, this will go according to how many bedrooms or beds you have in your home. You need to decide if your tenants can have pets and if one tenant can rent for a longer period of time or not. You should also decide how much you want to charge for room, and what kind of tenants you want to attract.
Now that you’ve thought about diversification of your income and VOM, the next question to ask yourself is, “How do I attract the most stable short-term rental income?”
This is an involved and multifaceted conversation, but in short, you want to deal with people who have money! You don’t want to rent to people who can only afford $20 per night for one night. You want to deal with people who are willing to pay $250 per night for a quality room but will happily take your equally nice place at a discounted rate. Why? Because these people care about their credit, which makes them easier to manage.
What type of property are these people attracted to? Think luxury! They can afford it. They expect it. And they will get it.
What type of people are easier to manage? Those who can afford an apartment in a so-so location (most months) or those who care about their credit and have money to spend on trips?
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The benefits of Airbnb house hacking
First, let me ask you: Have you ever evicted a tenant? I might suggest that until you’ve experienced all of the colorful behaviors tenants engage in when under stress, perhaps you shouldn’t jump to assume that having them next door to you and your family will be a great thing.
You see, if you’ve signed a lease and then don’t like them, or if they turn out to be bad tenants, you’ll have to go through the process of evicting them. And of course, you’d have used a lease if you thought, I want stable income, so I need a 12-month lease. But are you sure the best solution for a house hack is a circumstance where you might find yourself knocking on your neighbor’s door to tell them they have three days to get out? At this point, you’ve presumably lived next door to this person or family for months. You may have become friendly—or even friends. How much will you enjoy evicting them?
Airbnb house hacking is great for building equity, and it allows you flexibility as you get to choose the time you want to rent your property now and for what amount. Essentially you are choosing your own salary. If you have guests coming over or you need the house to yourself, you can deactivate the listing and evict your renters. Meanwhile, if you find a new job or have issues with your family, you can always move out and rent out the rest of the property and earn more money.
Renting out through Airbnb will guarantee you timely payments, and you won’t have to worry about a tenant failing to pay on time as you would with traditional renting. All transactions are done through Airbnb, which gives you financial stability. Short-term rental property also receives substantial tax breaks. You can write off guest fees and deduct 100% of the furniture and equipment used for the rented rooms. Airbnb house hacking can yield many benefits for years to come.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.