3 Levels of House Hacking: How to Reduce—or Eliminate—Your Housing Expense

by | BiggerPockets.com

If you are at all familiar with the BiggerPockets podcast or BiggerPockets blog, I am sure you have heard of house hacking. But for those of you who haven’t, here’s the gist: house hacking is when you buy a single family home with a low down payment loan, live in a portion of it, and rent out the other part.

The goal of house hacking is to reduce—or even eliminate—your housing cost. By doing this, you can increase the amount of money you’re saving and create a solid financial foundation in order to tackle your other investment priorities.

So, now that you are no longer living under a rock (which might be the ultimate house hack), let’s delve a little deeper. Essentially, there are three levels to the house hacking concept: 

  • Level 1: Tenants’ rent covers a portion of your monthly payment
  • Level 2: Tenants’ rent covers all of your monthly payment 
  • Level 3: Tenants’ rent generates positive cash flow on top of covering your monthly payment

For your reference, here’s a quick definition of what’s meant by “monthly payment.”

Monthly Payment = Mortgage (Principal + Interest) + Insurance, Taxes, and Maintenance (meaning money set aside for repairs/upkeep)

Let’s take a closer look at each level, and talk about the ways in which they can be achieved. 

man and woman looking at each other

Level 1: Tenants’ Rent Covers a Portion of Your Monthly Payment

For most Americans who purchase property, having a mortgage payment due each month is just a way of life. Fewer and fewer people stay in a house long enough to pay it off.

It’s a lifestyle that’s all too similar to renting. Every month you’re writing a check, whether it’s to a landlord or a bank. 

But what if all of a sudden instead of shelling out $1,000/month for housing, only $500 of it was coming out of your pocket? Obviously, you’d be financially better off.  And that’s the main goal of house hacking: to reduce or eliminate your housing expense!

For some, it can be as simple as moving all those dusty weights and the treadmill you never use out of your spare bedroom and into storage. Then, rent out that bedroom to a friend or relative and boom! You’ve become a house hacker!

Even by decreasing your monthly housing payment by 25 to 50%, you would be doing so much better than most of your peers.

Related: House Hacking? Consider These Factors First

Level 2: Tenants’ Rent Covers All of Your Monthly Payment

Getting to Level 1 is pretty easy for most people. But Level 2 requires a little more intention and planning.

If your monthly payment is usually $1,000, you need to find a way to bring in $1,000 of rent to level up. 

One common way to do this is to buy a house with more than one extra bedroom. For example, you could purchase a three-bedroom home and rent out both of the extra bedrooms.

Or maybe you currently own a home with a finished basement. Do you even use it? Renting out your basement on Airbnb is a great way to make enough money to completely cover your housing cost.

I can attest to it! I have personally achieved this level. I bought a 2 bed/2.5 bath townhouse in Denver. By adding a third bedroom in the unfinished basement, in addition to renting out the extra bedroom upstairs, my tenants’ rent is completely covering the cost of my housing payment.

If I can do it in Denver—a very expensive market—it can theoretically be done anywhere! You just have to be intentional and willing to make a few sacrifices when it comes to your living situation.

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

for rent tag and cardboard cutout of house

Level 3: Tenants’ Rent Generates Positive Cash Flow on Top of Covering Your Monthly Payment

You may be thinking, “There’s no way it’s possible to eliminate my housing cost and generate cash flow from my house. Mortgage payments are way too much!”

Well, guess what? I’m here to tell you, you are wrong and I have proof!

By using a low down payment conventional loan to purchase a duplex, triplex, or quadplex; living in one of the units; and renting out the other units, it is completely possible to generate enough income to cover your mortgage, insurance, taxes, and maintenance—plus a few hundred dollars extra each month.

BiggerPockets’ own Scott Trench and Craig Curelop are two house hackers who have achieved as much. Scott bought a duplex, lived in half with a roommate, and rented out the other half. Craig purchased a five-bedroom house and rented out the four additional rooms.

There are a number of ways to reach Level 3, but all require an increased level of creativity and sacrifice.

House hacking is a very powerful tool, and I encourage everyone to try it on some level. It can positively impact your financial situation in ways you might’ve never known were possible.

Do you have experience house hacking? To what degree? Do you aspire to achieve a higher level?

Leave a comment below. 

About Author

Connor Anderson

Connor fell in love with the idea of investing in real estate in college and in a matter of 4 months listened to at the time all 250+ episodes of the BiggerPockets Podcast. After college Connor worked a job in the corporate world but quickly realized it was in a field that he was not passionate about. Luckily because of some networking and his passion for BiggerPockets Connor was able to land a job at BiggerPockets in a Business Development role. His areas of interest are personal finance, real estate investing, and house hacking. Connor also has a passion for spending time in the mountains and skiing.

22 Comments

  1. Shelby Ek

    Love this! I am on my second house hack. My first one I did, the rent covered my mortgage payments (with taxes an insurance). Ive always “paid myself rent” for the half I was living in, which was a much cheaper amount than I would be paying to live anywhere else. Now I’m in my second one, and have a tenant lined up to move in March 1st. Once I pay off the renovation debt I believe I’ll be able to stop paying “rent” to myself and I will be living completely for free. My first house hack I purchased at the height in 2006 at retail value. At some point I thought I made a mistake, but now looking back I am much farther along had I not bought it and now its a great cash flowing property. I suggest house hacking to anyone who tells me they are in the market to buy, especially their first house. Thanks for the article.

  2. Brianna Ware

    Great read, all this time I knew what house hacking was lol, but I didn’t know the name of it. At first, I thought it was a complex method so I never bothered to look into it much. But you explained it in such a beginner friendly way, thanks!

  3. Nate Crowe

    I love the idea of just buying a SFH and using a finished basement as an Airbnb rental. It could be rented less than 1/3 of the month and cover the mortgage payment. This seems less intrusive than having to purchase a duplex and live next to long term tenants. Each has its pros and cons though.

  4. Carl Vasquez

    What I don’t understand is why there isn’t any mention of the type of loan that’s available to cover such a purchase? It’s called an owner occupied loan. That gives more structure to the story and meat to sink you’re teeth into.

    • Connor Anderson

      Thanks for the comment, Carl! Since there are a number of different loans that can be used to purchase a house hack, and since all of them have their pros and cons, I decided not to get into the weeds on that subject and save it for a more in-depth article in the future.

  5. Nick Schmid

    Great article. I was house hacking a room in a SFH I was renting, with Airbnb in Charleston, SC long before I had any idea what house hacking was. After seeing how powerful renting out just one room was I was hooked to learn as much as possible about real estate and find out how to best become an investor who owns. I’m currently seeking a 1-4 unit multifamily in Philadelphia to Lancaster region of PA. I have been analyzing available properties regularly as well as attending meetups & speaking with agents & lenders. I would love to hear some creative finance options that worked out successfully for others. It seems as though a FHA loan possibly utilizing 203k for renovations is my best option, however the PMI really cuts into profits. feedback & suggestions welcomed.

    • Connor Anderson

      Congrats Nick! Best of luck on your next deal. The FHA loan with 203k is a powerful combo but make sure you find a lender that is experienced with the process. My advice is to always avoid FHA loans whenever possible because of the PMI being there for the life of the loan. There are other low down payment loan options that allow you to drop PMI when you hit 20% equity in the property that you should look into as well.

      • Connor Anderson

        There are Fannie Mae and Freddie Mac backed loans such as Home Ready and Home Possible that offer 3% down payments and cancelable PMI once you hit 20% equity in the home. They do have income limits but they are rather high and accessible for the average income earner. A good lender should be able to provide more info on these and a few other loan options.

  6. Ruby Henson

    I keep forgetting about this term! My husband started house hacking for himself when he bought his first home at 21 right before the last bubble. He lost his job and went back to school. Rented out the 2 other bedrooms in his home and built an additional in the basement. Pulled in enough income to pay for all his expenses while getting his Bach. and MBA. Once meeting me I did the same with a new house I purchase off HUD. Rehabbed ourselves learning roofing, plumbing, elec., and framing along the way. Mind you all while having full time jobs. Rented out 4 rooms. Continued purchasing properties with each home’s profits!

  7. Mike White

    It’s a great way to have a tenant pay your mortgage, and people were doing it long before the term de jour of hacking started getting attached to everything. Just be sure you vet vet vet your tenants. There’s no separation between you (and your family) and them. They can and will pester you day and night with issues. And don’t rent to your friends that want to party all night and guilt you when you want it quiet. But you know the rule, don’t rent to anybody you wouldn’t want to evict! That said it’s a fine plan!

  8. Casey S.

    Does house hacking violate the rule of not being able to use your house as a rental for the first year? Does it affect how you report the rental income when doing taxes? Are you ok with just homeowners insurance or do you replace it with renters insurance?

    Thanks for the article!

    • Connor Anderson

      House hacking doesn’t violate the rule for not be able to use your house as a rental for the first year. You just have to live in the house for the 1st year. it will have some effect on how you do your taxes but I am not an expert there. Homeowners insurance is all you need, but you should increase your liability levels and require your tenants to have renters insurance to cover their personal property.

  9. Jeffrey Cox

    Thanks for the article!

    A good friend of mine mentioned the house hacking method to me several years ago, but I never followed up on the idea. I would have never guessed that I would be pursuing my own house-hack down the road. My girlfriend and I are planning to close on a deal by end of April in our area. We are shooting for the level 3 option in the article.

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