In this guest post, my friend Katie from Agape Investing shares her secrets for how to get free housing through house hacking.
A few weeks ago I was talking about why I wasn’t going to buy a bigger house even though I wanted one. However, after talking to Katie from Agape Investing it made me question my own assumptions and realize I could potentially use house hacking to have a big house and a low monthly payment! Talk about having your cake and eating it too!
I’m excited to have Katie guest post and share her wisdom on house hacking and how to get free housing with you all. Since this is a guest post I will let Katie take over in sharing some tips in her own words:
Have you noticed what your largest monthly expenses are? I bet it is your housing! Housing is typically the largest expense that we have. But what if it doesn’t have to be? What if we could house hacking to get free housing and ultimately increase our savings rate!?
What is House Hacking?
House hacking is a term that refers to owning a property and renting out part of it in order to eliminate living expenses or drastically reduce them.
This is most commonly done through owning a small multifamily property or a house with a few extra bedrooms. Either way, if you were to rent out the extra space, you could use the rental income to put towards your mortgage, insurance, and taxes.
House Hackinging
House hacking can happen in a few different ways. Not only does it depend on the type of property you have and the kind of tenants it will attract, but it also depends on how comfortable you are with the amount of time you want them there.
Long-term rental: This would be anything from a one-year lease or more. Tenants stick around longer. This works best when they have their own unit versus sharing spaces.
Short-term rental: Not ready to commit a year or more? Short-term is anything less than that, typically in monthly increments.
Vacation rental: This is a popular option today. It can be something like Airbnb or VRBO. Vacation rentals require more work on your end to keep the property in great shape between visitors.
What are the Benefits of House Hacking?
The most obvious benefit of house hacking would be to cut out your living expenses or reduce them. This is the primary reason people house hack.
When purchasing a primary residence, you have the ability to put very little down. With loans such as an FHA (Federal Housing Administration) loan, you can put down as low as 3.5% of the purchase price as a down payment.
Another great long-term benefit is that you have someone else paying down your mortgage. You get to benefit from the equity that develops when your mortgage gets paid down.
You can also meet and make new friends through house hacking! Whether it is a longer-term tenant or someone who is renting a room for the weekend. It can be a great way to meet people.
Properties That Create the Best House Hacking Situations
Small Multi-Family Properties
Did you know that any property that has 1 to 4 units is considered a residential property? Once you start getting into properties with 5 or more units they become commercial properties.
Why is this important to know?
Well, this means that a single-family residence can be purchased with the same type of loan as a fourplex! And if you buy one of these small multi-family properties as a primary residence you can put as low as 3.5% down on the property.
Multi-family properties are typically the most common types of properties to house hack because they have separate units. You can live in one unit and rent out the others. Everyone has their own space.
Properties with a Small Building or Guest House
There are lots of properties out there that have small buildings on the land or even a full guest house. These are known as accessory dwelling units.
Now don’t think of large, luxury guest houses. Think of small studio apartments in the backyard.
If you find a property that has a small building already on the land, you could renovate it to create a studio apartment. Then rent out that small unit. Obviously that would take time and money, so finding a property that already has a guest house would be ideal.
Walk-Out Basement Properties
Another type of property that works well for house hacking would be properties with a walk-out basement. That way your tenants have their own entrance.
If the basement has its own kitchen it can easily be used as a short-term or long-term rental. However, if there is no kitchen, it might be better used as a vacation rental.
Properties with Extra Bedrooms
Maybe you have a house with more bedrooms in it than you have people to fill those rooms! Instead of leaving them empty, why not rent them out?
If you don’t mind sharing a kitchen with someone, you could do a short-term or long-term rental. Renting out bedrooms typically works better as vacation rentals.
How Can I Start House Hack?
House hacking can be very simple to get into. Maybe you already have one of these types of properties listed above. Then what are you waiting for?!
Or maybe you don’t have one of these properties quite yet.
Meet with a lender to find out what you can afford. Then find a great real estate agent who can help you find the perfect house to hack.
Remember, the primary goal of house hacking is to reduce or eliminate your housing expenses. You want to find a property that has the ability to collect rent that covers (or comes close to covering) your mortgage, insurance, and taxes.
Though you want to be cautious to find a property that you are able to pay for even when your other units are vacant. During the transition of tenants, you want to be absolutely certain that you can still pay the mortgage payments even if you don’t have tenants paying rent.
The Challenges of House Hacking
House hacking can be a great way to reduce your expenses, increase your savings rate, and earn equity in your home.
However, this strategy is not for everyone. Before you jump into house hacking, make sure to think about the challenges you will face.
When you house hack you become a landlord. Landlords have to take care of their tenants and not every tenant will be perfect. You may run into some people that can be difficult to work with. Is this something you are ready to take on?
You might be sharing common spaces with them. Are you ready to see your tenant daily?
Also, be sure to follow the laws that govern this space. Especially when it comes to vacation rentals. Some cities do not favor short term rentals and people are not aware of the laws around it. So if you are considering this route, familiarize yourself with the laws and play by the rules.
Otherwise, house hacking can be a fantastic way to cut down on your expenses, increase your savings rate, and propel yourself forward towards financial independence!
