Landlording & Rental Properties

An Intro to House Hacking: Here’s How I Get Paid to Live for Free

Expertise: Landlording & Rental Properties, Personal Development, Real Estate News & Commentary, Business Management, Flipping Houses, Mortgages & Creative Financing, Real Estate Deal Analysis & Advice, Real Estate Wholesaling, Personal Finance, Real Estate Marketing, AskBP, Real Estate Investing Basics
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What is House Hacking?

House hacking is the idea of combining your investment property with your personal residence. Although it is possible to do with just a single family house (by doing a "live-in flip"), the phrase is more often used to describe the practice of buying a small multifamily property (a duplex, triplex, or fourplex), living in one unit, and renting the other units out.

My first rental property was a small duplex that I bought for $89,000. The property needed some "sweat equity," which my wife and I spent a few weeks doing. Then we rented the property out. Although we had stumbled across this "house hacking" strategy accidentally, we quickly realized the power of this method when the mortgage payment of approximately $630 per month was fully paid by the tenants in the other unit who were paying $650 for rent. In other words, the tenants were allowing my wife and I to live for free, before operating expenses.

House hacking has several distinct benefits that make it an especially terrific investment for first-time investors

• Low (or No) Down Payment Financing: When you plan to live in a property for at least one year, financing becomes much more friendly for the borrower. For example, an FHA loan allows for just a 3.5% down payment and the USDA (United States Department of Agriculture) loan allows for $0 down if you are buying in a rural area. Traditional 20% down loans also work in this pricing structure and can do even more for your wealth building plans.

• On-the-Job Training: House hacking is a great introduction to the world of landlording. You buy the property, and suddenly you are a landlord—so you'll learn very quickly what to do and what not to do!

• Close Monitoring of Your Investment: When you live in your investment property, keeping an eye on the property and making
sure it’s running at peak performance is easy. It’s unlikely that the lawn will get overgrown, the tenants will move in a pit bull, or maintenance will go unreported for months.

• Saved Expenses: Because you live at the property, you can manage the other tenants yourself very easily and don't have to worry about paying a property manager who will do substandard work!

The following plan that you and I are about to walk through follows a serial house hacker. We’ll pursue the house-hacking strategy for numerous properties to reach our goal. In this case, let’s set a goal of simply “living for free,” so we can save money and pursue other investments in the future.

Related: A New Way to Look at the Concept of “House Hacking”

The Plan

To start the first year, we will buy a triplex. We'll start small, because it's our first property, though we could start with a two or a four-unit property. Triplexes in this area run between $210,000 and $230,000, depending on the condition. However, we are smart shoppers and can get a great deal on a foreclosed triplex for $180,000, and each side will rent for $950 per month. (As before, pay more attention to the concept here than the actual numbers; every area is different.) To get this $180,000 mortgage, we'll put just 3.5 percent down through an FHA loan.

After the purchase, we’ll invest a few thousand dollars and a few hundred hours making it look fantastic. Think new paint, cleaning, etc.

At this point, if the property were 100 percent rented out to tenants, it would bring in a total of $2,850 per month. But because we’ll be living in one of the three units, we can only expect approximately $1,900 per month in income.

For expenses, we can expect a mortgage—including taxes, insurance, and mortgage insurance—of $1,200 per month. We also know the water bill, which the landlord is responsible for paying, runs roughly $130 per month. We’ll set aside 5 percent of the total gross rent ($2,850) for the vacancy, 5 percent for repairs, and 5 percent for future capital expenditures (CapEx, the big- ticket items that need to be replaced every so often) of about $142.50 each (because $2,850.00 x .05 = $142.50).

At this point, our expenses look like this:

Mortgage: $1,200
Utilities: $230
Vacancy: $142.50
Repairs: $142.50
CapEx: $142.50
Total Expenses: $1,857.50

If you’ll recall, our total monthly income on this property with the other two units rented out was $1,900.

So our cash flow is as follows:

$1,900.00 – $1,857.50 = $42.50

Now, we are not only living for free, but we are also making a small sum of money each month for doing so! Notice that in the expenses we just listed, we did not include property management. I generally advise that people include property management in their analysis, because they won’t always be able to manage their property themselves. But in the case of house hacking, including this figure is OK, because you will not be living in one of the units forever, either.

Related: How to “Hack” Your Housing and Get Paid to Live for Free

Eye on the End Game

Whenever you analyze a potential “house hacking” deal, you should analyze what will happen in two different situations: while in the process of house hacking and after you move out. After all, if the deal only makes sense because you’d be living there, then it really closes off your options for moving someday.

You must buy with the end in mind. So let’s run the numbers on this property as if you are no longer living there. To do this, I’ll double the cost of the vacancy and repairs (up to 10% each) and add in an 11% expense for property management.

Here’s what that looks like:

Total income: $2,850
Total expenses are as follows:
Mortgage: $1,200
Utilities: $230
Vacancy (10%): $285
Repairs (10%): $285
CapEx (5%): $142
Management (11%): $285

Total Expenses: $2,427.50
Total Income – Total Expenses = Total Cash Flow
$2,850 – $2,427.50 = $422.50

As we’ve discovered, even after moving out of this property, we could reasonably expect to get around $422.50 per month in cash flow. For putting just 3.5 percent down, that sounds like a pretty great deal to me.

Have you tried house hacking?

Share your experiences below!

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Brandon Turner is an active real estate investor, entrepreneur, writer, and co-host of the BiggerPockets Podcast. He is a nationally recognized leader in the real estate education space and has tau...
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    Scott Trench President of BiggerPockets from Denver, CO
    Replied over 2 years ago
    From the inventor of the concept of house-hacking himself! …Ok if not the concept at least the term “house-hacking” Legendary.
    Ben Leybovich Rental Property Investor from Chandler/Lima, Arizona/OH
    Replied over 2 years ago
    I still don’t get it 🙂
    Peggy Liu Specialist from Los Angeles, CA
    Replied over 2 years ago
    Riiiight…from Mr Luxury House Hacker himself 🙂
    Javier Torres Real Estate Professional from San Antonio, Texas
    Replied over 2 years ago
    Great Post!!! However, one must also include the cost of ownership, which includes the mortgage and the time required to get this tri-plex in habitable conditions and then the time to fill the vacancies. During all this time, the mortgage is due regardless. Keep in mind, you just dropped the 3.5 percent down on it as well as the required money to fix it. So, ensure there is enough money to cover you during the entire process.
    Account Closed from Clovis, California
    Replied over 2 years ago
    Great article.
    Ken Virzi from Long Beach, California
    Replied over 2 years ago
    Isn’t there an FHA type loan where you can include rehab costs?
    Replied over 2 years ago
    Yes! That’s called an FHA 203k loan. There are 2 types… Streamlined, which offers up to $35,000 for repairs & is a little easier for approval, and “regular,” which limits up to about 90/95%(?) of the ARV. Check with your lender for the specifics.
    Isaiah Payne from York Haven, Pennsylvania
    Replied over 2 years ago
    203k loan
    James McCreary Rental Property Investor from Diamond Bar, CA
    Replied over 2 years ago
    @KenVirzi, yes, from what I recall that is a 203(k) loan. Also, I’ve read several articles here on BP about house hacking (as I am considering it myself), but I really don’t know where all these super cheap plexes exist. I live in the DFW area and, besides the fact that plexes are virtually non-existent, even a single family runs at least $250K. I’m sure its more difficult to find tenants when they have a bedroom instead of their own unit. What are your thoughts on this Brandon? Also, it seems to me that of all the people I read about in the comments from all across the country , every single market is competitive. Which market isn’t? I feel like real estate is progressively becoming what I call “stock marketized”, supremely efficient and automated with no room for substantial investment gains. Running the numbers on single families here in DFW I barely break even when I take into account equity.
    Frank Macias Rental Property Investor from Bonita Springs, FL
    Replied over 2 years ago
    Yes, in my home town multi-families are costly. The majority of them will not cashflow at listing price. When I analyze multifamily units I work backwards to find out at what price the property would be a “deal”. When the time comes I will be putting in low ball offers on these units and seeing what sticks. All it takes is one…
    Joe Ballinger
    Replied almost 2 years ago
    This is called a FHA 203K loan, or renovation loan. This is still a 3.5% down payment loan, but you borrow the current cost of the home as well as the total cost to fix the home up to FHA standards. It’s a much more complex loan, and isn’t a blanketed solution to buying a home with needed repairs because you can potentially save more money as well as profit better off a home if you just buy as is and do the work yourself via “sweat equity”. Definitely worth talking to a realtor and a loan officer about if at all interested, but ideally a realtor who invests in property themselves.
    Lewis Christman Financial Advisor from Macungie, PA
    Replied over 2 years ago
    I would be curious to see the focus on the numbers (I understand the concept) especially in a high cost area. You may not live for free but your costs should be less than individual rent (I would hope). A worst case scenario – 100% of PP (ok maybe we can knock 5% off) and closing costs in full example. If you can find a deal and pay 80% and also get 6% sellers assist that is fantastic and makes it that much better.
    Richard Hensman from Snoqualmie Pass, Washington
    Replied over 2 years ago
    I echo the comments above about prices. It’s highly unusual to find property in my area for under 400k for a 4-plex, and that’s in some really awful areas that you don’t really want to own or live. I was looking at a triplex for 800 recently, for example. Still, given that a SFH in that area can be 650, that’s not a bad deal!
    Replied over 2 years ago
    Great article Brandon, but I was wondering if you have to pay tax on that $1900 a month rental income?
    Nehemiah Smith Rental Property Investor from Atlanta, GA
    Replied 11 months ago
    Great question...
    Frank Macias Rental Property Investor from Bonita Springs, FL
    Replied over 2 years ago
    Would you still pursue a house hacking property if cash flowed negative WHILE you lived there but cash flowed positively if you didn’t live there? Let’s say it cashflowed at least $200/door if you didn’t live there but negative $800 if you did live there?
    Sara Barb from Post Falls, ID
    Replied over 2 years ago
    Looking into a 4plex now as our first investment. It’s a pretty old place and needs a little work, but the numbers work and it has a lot of potential for growth. It already has tenants and one empty unit for us. What I would like to know is how to fix it up when there are tenants living there.
    John Teachout Rental Property Investor from Concord, GA
    Replied over 2 years ago
    Fix up the vacant unit before/during your stay. Fix up the outside structure and yard and then wait for someone to leave, fix up that unit, rent it out for more and then repeat…
    Terri Ring from Clovis, California
    Replied over 2 years ago
    Very interesting read as my husband and are are thinking about relocating when we retire. I was thinking about purchasing a condo or a single fixer but this has opened up more opportunities. Right now I deal in many foreclosure properties and have also thought about that as an option.
    Ken P. Rental Property Investor from Northville, MI
    Replied over 2 years ago
    It obviously depends on the market, but we’ve just purchased a house in Cincinnati and the numbers work there for house hacking. It’s actually for our daughter, a college student, and since we live 4 hours a way we didn’t feel up to buying a diamond in the rough and doing a complete rehab on it, so we paid just a bit under retail. 6 months before the start of the next school year we’ve already rented 3 of the 6 bedrooms, (our daughter gets one of the 6), and with the rents we’re signing leases for, our daughter will stay for free, plus we’ll have a few hundred in monthly cash flow. The house has an unfinished walkout basement that could be converted into a complete apartment, so potentially the house coud be used to house hack for any owner that didn’t want to share his or her or their living space with other renters. With all 6 bedrooms rented out to college students, an owner living in their own flat in the basement could have free housing and $1000 a month cash flow.
    Jami Lynn from Browns Mills, New Jersey
    Replied over 2 years ago
    That’s a great deal – I’m new to investing and attended a REIA meeting lately where a veteran investor who specializes in student housing (we have a lot of universities in NJ and nearby NY) said his practice is to buy only houses that accommodate 4+ bedrooms; he renovates them so each room has its own entrance (and access to the communal bathrooms and kitchen) and make sure there are no “group” areas like a living or game room where lots of kids could hang out and presumably get into trouble or at least flop. Did you do anything like that with your property?
    Kim Greenwell from Riverdale, Georgia
    Replied over 2 years ago
    That is a Very Smart Idea! (No trouble). Newbie to EVERYTHING!
    Beatriz De Jesus
    Replied over 2 years ago
    I guess my husband and I have been house-hacking for almost 10 years. Almost ready to move into a 1 family home in about a year or so. It’s a 4 family home. Literally almost finished fixing our unit so we can move on to our own. I can say its not for everyone. We have some tenants who we love and are low maintenance but we have 1 tenant who is high maintenance (needs us to supply light bulbs, pays late). Our home value has almost doubled in the time we have been here.
    Stephanie W. from Falls Church, Virginia
    Replied over 2 years ago
    House hacking doesn’t have to be all or nothing. I currently rent a studio apartment in my basement that pays 33% of my mortgage. I bought the house as my long-term residence but noted the space for a rental. After a few years I renovated the basement. My family lives upstair and renters live down with a separate entrance. I can deduct a portion of most household expenses. I am not living for free but am certainly making a lot extra. I live in a high cost area and small apartments in nice neighborhoods are hard to find. My place never empty. Its a short term rental 30 days to 1 year and not Airbnb. Once I retire and the kids are grown I plan to move to the basement apartment and live there part of the year and travel the rest. The upstairs tenant will then be paying the whole mortgage.
    Aleks Ulmer from Lenoir City, Tennessee
    Replied over 2 years ago
    I totally agree. It seems like many people overlook or dismiss properties which don’t allow you to live entirely for free… but who cares? Something is better than nothing at all, and I would certainly consider a property which paid even just a part of my mortgage if I was in a high-cost-of-living area or otherwise extremely competitive market. In your case saving 33% on your mortgage allows you to pocket more of your income, which is a benefit in itself.
    Edward Lewis from Houston, Texas
    Replied over 2 years ago
    This is a pretty cool article. I think the best sign you’ve found an awesome deal is when it cash flows both while you’re living there, and when you move out. That’s probably also incredibly difficult to find in today’s market. So I guess the only question left is, how can you be competitive enough to find those kind of deals?
    Buashie Yeshua from Los Angeles, California
    Replied over 2 years ago
    But what is wrong with moving a pit bull in Brandon? I had one for 14 plus years and he never destroyed anything other than sticks, old ? which was given to him, oh, Tennis?! God! did he love tennis balls. Thanks for the article.
    Blaine Johnson
    Replied over 2 years ago
    I just bought a 4-plex and will do this very thing, keeping 1 unit free for myself (permanent address, part time residence) and still net $120 per month with only a 65% occupancy rate, or about 10% vacancy projected on the remaining 3 units. They are all under contract housing and lease currently.