6 Different Ways to Hack Your Housing (Find One That Works for You!)

by | BiggerPockets.com

By now, most of us have heard of the term that Brandon Turner infamously coined called “house hacking.” For those of you who have not heard, it is when you purchase a property, live in part of it, and rent out the rest. That way, your roommates and/or tenants are paying a significant portion (or all) of your mortgage.

There is no question that house hacking is the single best way to generate wealth for those of you who are in the beginning stages of your journey towards financial independence. Here is why:

  1. It either dramatically reduces or eliminates one of your largest expenses—your living expense.
  2. You build equity for free as your tenants pay down your mortgage while the property (in many cases) appreciates.
  3. You save in taxes, as you are able to deduct a portion of your house expenses as well as account for depreciation.
  4. You can get into a house hack for as little as 1% down if you’re a first-time home buyer. With such little money down, it will be tough to find cash-on-cash returns higher on any other type of investment.

Now that you can see how powerful house hacking is—and before you start making excuses as to why you can’t do it—read this article.

I truly believe that one of these forms of house hacking can work for almost anyone—families, those who live in expensive areas, etc. You just need to get creative. I have, and so have many of my friends.

This article is going to outline the different types of house hacking that I have seen. I hope that a variation of one of these house hacking strategies can work for you.

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1. The Traditional House Hack

Definitely the most popular and the one that almost everyone has heard of is the traditional house hack. This is when you purchase a 2-4 unit property with a low down payment residential loan. The 3.5% down FHA is popular here, but there are others, especially if you are first time home buyer.

You live in one unit (perhaps with a roommate) and rent out the other unit(s). The rent from your roommate plus your other units should either cover the mortgage or come darn close to covering the mortgage. That way, when you move out, the property cash flows nicely.

This strategy works in most lower priced markets, but it is almost impossible to find a deal that works in the higher priced markets, where rents will usually not be enough to cover the mortgage.

2. Calling the Living Room Home & Renting Out the Rest (Seriously)

They call it a “living” room for a reason, right? This is my current strategy. I live in Denver, Colorado, a city where price points are relatively high. It is increasingly difficult to find a property where a traditional house hack works. So I had to get creative.

Related: Why I’m Not House Hacking (& the Strategy That Will Cover More of My Rent)

With this strategy, I rent out the upstairs unit like a traditional rental. However, this was not enough to fully cover my mortgage. So I decided I would put up a room divider and a curtain and section off a portion of the living room and call it my bedroom. That’s where I rest my head, and 95% of the time, I am good with it.

Since I am not occupying my bedroom, I can now rent it out on Airbnb. This works extremely nicely, allowing me to cash flow anywhere between $250 and $750 per month (after reserves), depending on the seasonality of Airbnb.

3. Renting by the Room

This is a strategy one of my good friends has deployed, and it is working magnificently. The idea is to purchase a large single family home that has at least 4 beds and 2 baths and live in one bedroom while renting out the others. You can typically get significantly more in rent when you rent by the room.

Purchasing a single family home (especially as a first-time home buyer) opens up a lot of potential financing options. At the time of this article, I know they have 1%, 3%, 3.5%, and 5% down loan options on single family homes. The low down payment with the increased rents really boosts your cash-on-cash returns.

We haven’t even gotten to appreciation yet. Single family homes are known to appreciate more quickly than multifamily ones. This is the case because both investors and non-investors are interested. With more demand comes higher prices, not to mention that non-investors will typically pay a premium given they are looking for a home, not a deal.

4. Living in a Trailer/RV & Renting Out Your Primary Residence

My friend, neighbor, and colleague has taken house hacking to the next level! He purchased a stationary RV for $1,500. He puts that in his parking space and lives in that while fully renting out his 1-bedroom apartment on Airbnb. This strategy is for the hustler who is clearly willing to do what it takes to achieve early financial independence.

In Denver, where the price point is relatively high, this makes a lot of sense for the young, single folks looking to eliminate their housing expense.

5. Renting Out an Additional Dwelling Unit

Ben Leybovich, an active user here on BiggerPockets and a good friend of Brandon Turner, calls this “luxurious house hacking.” This is on the opposite end of the spectrum as the trailer and works well if you have a family.

You either purchase a property with an additional dwelling unit or build one yourself. It’s helpful if the unit can have at least a small kitchenette, an operative bathroom, and a comfortable bed to sleep in.

Then, you guessed it—rent it out! You could rent it full time or on Airbnb.

This way, you and your family can have your own personal space in the main house while your guests enjoy their own space in the guest house.

6. The Live-in Flip

Queen of the forums Mindy Jensen is notorious for the live-in flip strategy. She has done this nine times! This is where you purchase a property that needs some TLC, ideally with a low percentage down loan. You live in the property for at least two years, and while living there, you fix it up. Once it is all fixed up and after the two-year timeline, you sell it and pay no capital gains on the first $250k of net proceeds ($500k if you’re married).

You may be wondering, why two years?! For every other strategy, it is just one. Well, to avoid paying a significant amount of capital gains tax, you are required to live there for two years.

The live-in flip strategy is nice because it could be combined with the other strategies (with exception to the trailer/RV) to create a compounding effect. When combined, you will significantly increase the value of the property while also garnering more rental income.

Related: 3 House Hacking Mistakes I Made (& How I Could’ve Prevented Them)

In a traditional house hack and the living room strategy, you can live in one unit and fix it up while renting the other. Then switch!

If you choose to rent by the room in a large single family home, maybe you add a couple extra bedrooms, redo the basement, etc. This is obviously easiest because you have access to the entire property all the time.

On the ADU, you can build your own ADU or turn the shed in the back into one. Either way, you’ll be able to rent it out, and this will increase the value of your property.

Conclusion

There are a lot of different investing strategies out there. I strongly believe that house hacking is the best possible strategy if you are looking to have the greatest odds at earning the highest possible return on your investment.

I talk to fellow house hackers regularly, and cash-on-cash returns are typically between 30% and 60%. This doesn’t even include the equity build up or tax savings!

The question then becomes not whether you should house hack but what strategy you should deploy. Well, it obviously depends on your situation, what you can afford, and how you are willing to live. There’s typically a tradeoff with luxury and returns. If I had to order these from best to worst in terms of return, I would say trailer/RV, living room, rent by the room, traditional, then luxury (and the opposite in terms of luxury).

I don’t include the live-in flip because it’s a different beast.

So what strategy are you going to do?

Leave a comment below!

About Author

Craig Curelop

After developing a huge love for real estate investing and personal finance, Craig decided to join the BiggerPockets team as a financial analyst. Over the past few years, he has looked at hundreds of financial models of startup companies. His experience will help BiggerPockets reach the next level as a startup company. Craig has a passion for helping others get out of their “comfort zones” to get what they want and achieve the “impossible.” In his spare time, Craig enjoys traveling, hiking, exercising, and sports of all kinds.

26 Comments

  1. Rob Cook

    I am seriously ENVIOUS of young investors who are willing and able to house hack. It is the #1 method I discuss with very young want-to-be investors because it works. I am not eligible to do it, due to choice – age 59 and way past sharing walls or space with others myself. But, it is my choice, not a real limitation of the method.

    Especially exciting for a multi-family property, where you would still have private space yourself. I have known a woman who did this in her 30s and beyond and made many $Millions in the process, and never once had a regular income above $30K a year! And that was in Arlington, VA which is an extremely high-cost area, even back in the 90’s when I worked with her as her real estate agent.

    Young people – do this while it is “easier” while you are not set in your ways, and too “old” like me! LOL. It is a no-brainer.

  2. Brandon farley

    This was excelent insight. I was familiar with the “traditional” and multi family hack. But the idea of buying a property with and extra building or space to rent out is genius. Also glaringly obvious now that i know. My wife wants to buy a house and im trying to convince her to get a multi family and let me BRRR and hack it. Ill keep everyone updated as to how that goes.

    • Craig Curelop

      Hey Brandon,

      Glad you pulled something out of this article! Like I mentioned, House Hacking is a spectrum. I think everyone could do something along that spectrum that could work. Maybe do the luxurious house hacking. That’s not too invasive and you’d be surprised how much you can get from renting out an outhouse.

  3. Jinhee Park

    I’m buying a triplex near a major hospital with an FHA loan, will live in the small studio unit and rent out the other two bigger units as a medical airbnb to cover the entire PITI and have high positive cashflow as a primary residence. I’m house hacking my way to millions of dollars in 10+ years.

    • Rob Cook

      Outstanding Shelby! You have plenty of time, so just proceed cautiously and be extremely demanding of each deal you consider. Pass on MOST of them, and only buy if you cannot find a reason NOT to buy it!

    • Craig Curelop

      This is awesome, Shelby! I am sure that 99% of the members on BiggerPockets who are older than you wish they would have done exactly what you are doing.

      When people say “I wish I had done that at your age”, you know you’re on the right track!

  4. Rickard Färdig

    Don’t know if this works is the US, but over here in Sweden it is possible to to house hack by renting part of your property to your own company. I am renting a 14 square meters guest house to my company and it just about covers the mortgage of the whole property (mortgage is very low and no running costs are included, heat, electricity, etc.). It is not as straight forward as renting to another tenant of course (company expenses are 100 % tax deductible, still it is a “loss” compared to putting that money into my own pocket), but this particular tenant is very reliable and always pays the rent on time!

  5. Christian Cody

    This is a very insightful yet short article! My fiance and I are looking at properties starting tomorrow to get into our first REI. We will be house hacking to get started. Luckily we have three friends who are moving to the area and looking to rent units from us. This makes the live in flip a very easy option. I have my sights on one property that I hope to be structurally worth it. We have already ran the numbers and it looks great. One main house and a duplex on the property. This gives us the option for us and our son to live in the main house and improve upon it while also having close friends renting the duplex which gives us the opportunity to improve on those as well while they are occupied. Hopefully the initial inspection is promising! Wish us luck and please keep the awesome articles coming!

    • Laszlo S.

      Hi Christian,
      Great idea and whish you all the best with it. Just a word of caution, be careful renting to friends and family. If something goes wrong, you can lose a tenant and a close friend too. E.g. if they are late on rent for some reason, are you willing evict your good friend? Or will you just pay for their living expenses and possibly bankrupt yourself?
      I’m not saying not to do it, just think and talk it through beforehand.

    • Craig Curelop

      Thanks for the comment, Christian!

      Live in flipping is a great option! I hope it all works out for you. Laszlo’s comment below is a valid one. Renting to friends and family can be tricky and typically you need to give them the friends & family discount.

      • Steve Wilner on

        I love your spunk. Going to learn a lot of things and sharing is a good way. Covenants, codes and restrictions.(RULES) – that go with Condos and Homeowners Associations. There are also POSSIBLY clauses in the mortgage too………but — I have a condo in Northern CA and am looking to sell it. It needs a little TLC as I am managing it from a far while traveling. If someone is interested I am willing to discuss all the options here. Good luck and a long and financially and socially rewarding life from the old guy.

  6. Fred R Pallanti

    Fred R Pallanti on April 2, 2018 1:46 pm

    I might be in the wrong comment section, in which case I apologize. But, this comment is for the author of the article. It was a good article, but you do not mention anything about the drawbacks of house hacking. For example, having to deal with roommates that smoke (when you don’t), do drugs, have parties or stay up all night, just to name a few. Plus the inconvenience of having to share a kitchen (or bathroom).
    When you list only the good points, you do not show the full picture.

    • Steve Wilner on

      I am new too and I just posted, missed the boxes after the spammer one, so posting again – sorry. Fred makes a good point and then we can get into the PC and nice world versus the truth and perception and perspective. Yes life is very interesting and everyone gets to be who they are. Peace, love, happiness and understanding.

  7. Micah Shelton

    Craig,

    If I own a house and the basement is livable space already, with egress door, kitchen, bath, laundry, ect do I need to make it a true permitted ADU with the city? If I dont can I still have tenants get renters insurance, pay first and last, deposits ect? I would rather not pay the fees to permit an already finished space if I dont need to…is there benefits to permitting the space vs. not? Why would someone permit and completly convert to an official ADU vs just make space livable and rent it?

  8. Micah Shelton

    Craig,

    If I own a house and the basement is livable space already, with egress door, kitchen, bath, laundry, ect do I need to make it a true permitted ADU with the city? If I don’t, can I still have tenants get renters insurance, pay first and last, deposits ect? I would rather not pay the fees to permit an already finished space if I don’t need to…is there benefits to permitting the space vs. not? Why would someone permit and completely convert to an official ADU vs just make space livable and rent it?

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