Whether you’re a new homeowner looking for help with your mortgage, or a seasoned owner who wants some extra income, House Hacking is an alluring way to help make ends meet. Having your mortgage or other household costs covered just by renting out your space seems like a great idea, but is House Hacking worth it?
House Hacking is worth it as long as:
- It’s legal in your area
- You have an appropriate space to rent out
- You have funds to cover the initial costs
While that’s the simple answer, there are plenty more things to take into consideration before choosing to rent out some of your space. We’ll guide you through the process and give you all sorts of things to consider beforehand, as well as tips and tricks on doing it successfully.
Considerations Before House Hacking
Before you begin your house hacking project, there are certain things you should ask yourself. We’ve broken them down into four basic questions below.
Do You Have Time for Landlording?
It can be easy to underestimate the amount of time and effort takes to be a landlord. Before you even find a tenant, you’ll need to:
- Prepare the space for a tenant
- Calculate how much you can charge
- Make sure your insurance and other legal affairs are in order
- Draft a rock-solid lease
- Advertise your space
- Screen tenants and process applications
In general, much of the work of a landlord is upfront. Once you have a good tenant, you’ll usually only be spending time on your tenant if there is maintenance or complaints.
Are You Prepared to Be a Landlord?
Landlording comes with more than just a time commitment, too. Being a landlord can often be stressful and intimidating.
Everyone hopes to find the perfect tenant who never complains or causes damages, but the truth is that there will likely be both things from any tenant. Even the best tenants may cause friction from time to time, especially if you are sharing a property with them.
Tenants expect professionalism and follow-through from their landlords, so be prepared to be communicative and follow through on your promises.
Do You Have Extra Funds to Cover Costs?
Unfortunately, it’s just a fact of life that more people equal more expences. Now, you’ll hopefully be able to pass most of that cost onto the tenant, but that doesn’t mean you won’t be on the hook for certain things, like:
- Extra insurance in case of injury or damage
- Larger maintenance bills, like an emergency plumbing repair for the unit
- Damage repairs that go beyond the security deposit
Thankfully, a lot of those extra bills can be eliminated by being smart when renting. Good tenant screening, for example, can eliminate any sort of major property damage from careless tenants.
Do You Want Tenants on Your Property?
Last but not least—is having strangers on your property something you are ok with? This is a question that you must answer before committing to House Hacking.
Plenty of landlords have great relationships with their tenants, and you don’t have to be any different! You may get lucky and even find a friend in them. However, be aware that having other people living on your property means you are probably going to lose some privacy.
Can You Even House Hack?
Once you’ve decided that you do want to rent out space on your property, the next question is: Can you? Unfortunately, there may be rules or regulations in your area that prevent it. We’ll cover this and other important factors below.
Can You Do It Legally?
There are some legal considerations you’ll need to research before you begin.
The most important one is to make sure that your area/property is zoned for multifamily housing. Some suburbs or other areas that have majority single family housing may have zoning regulations in place that prevent properties with more than one family living on them. If this is the case, then you are unfortunately unable to legally rent space to a separate person.
Make sure to obey the laws and regulations. If you illegally rent space, it could lead to:
- Fines being placed on you
- Negative actions being placed on your record
- Serious bills if your tenant gets injured, since you won’t have been able to legally buy insurance for the rented space
That’s just to name a few – make sure you stay within the law, or at least know the potential consequences if you don’t.
Will You Have to Share Space?
Another aspect to take into consideration is whether or not you will be forced to share space with your new tenant. This could be as small as sharing an entrance or as involved as sharing a kitchen or bathroom if you are only renting a room.
In order to think this problem through, it’s helpful to imagine future scenarios while renting, such as:
- What will it be like when I have company over, and will the tenant come into contact with them?
- What if the tenant has company over or wants to throw a party, will it interfere with my space?
- Will I need to coordinate any future work or landscaping with the tenant because it will affect their space?
In general, just think about your day-to-day life if you already had a tenant present. Imagining life with a tenant on your property can give you a great feel for whether it’s feasible for you.
Remember That You Are a Landlord
Many landlords, especially those house hacking, have great relationships with their tenants. They may even be friends. This is great when it happens, but it’s not always the case.
In fact, sometimes being a landlord means you must be willing to enforce the rules. Landlords can’t be “Mr./Mrs. Nice Guy” all the time. There are some situations where you have to be firm. A few examples include:
- If the tenant is disobeying property rules, like smoking in the unit
- If the tenant is causing lots of unnecessary damage
- The tenant may be late on rent, or not paying rent at all
In the case of the last scenario, that would typically lead to an eviction. Unfortunately, if you’re a landlord, you have to be prepared to be firm and serve eviction papers. Hopefully it won’t happen, but you should be prepared for it just in case.
This doesn’t mean you shouldn’t also be kind and understanding! Great landlords know how to give good tenants a break when they need it, such as an extra couple weeks to pay rent. Just don’t let yourself get walked over by an unruly tenant—it is your property and your money, after all!
What to Think About Before Buying a House to Hack
If you’re currently looking for a new house or property, and you know you want to hack it, then you’re in a unique position. Because you know ahead of time that you want to rent space out, you can shape your decisions around that fact.
On the other hand, it also brings up new challenges and considerations. We’ll cover them in detail below.
You’ll Need Extra Money to Buy
When looking at purchasing a property to hack, you have a couple options.
- You can buy a multifamily property right out of the gate
- You can buy a house or other property, then build a second living space afterwards
- You can buy a multi-level home with separate living spaces
If you choose to buy a multifamily property, be aware that the lender is usually going to charge a higher interest rate on the mortgage for it. They may also ask for a larger down payment, although housing loans like an FHA loan may be able to bypass this.
You can get a lower interest rate by letting the lender know that you will be living in the property too, since having the owner on-site means less liability for them.
Is it Legal to House Hacn in Your Potential Home?
As mentioned above, be sure to only be searching for properties that are zoned for multifamily living if you want to rent out part of it.
If the dwelling is already multi-family, like a condo or duplex, then you know it’s properly zoned. If you intend to buy a house in a suburb and build a smaller living space in the backyard, you may run into problems.
Remember to also check with the local HOA if you are buying in a neighborhood with one. They may have their own rules about turning your property into a multi-family house.
How Much Work Will It Need Beforehand?
You may be able to accept a few issues here and there within your own home, but if you intend to rent it out, you need to make sure the property is in tip-top shape. If not, you need to be ready to put in the money and time to get it there.
Things to look out for include:
- Make sure the heating and cooling works in every living space, if applicable
- Look for peeling paint and holes in the wall—those will need to be repaired
- If there is carpet, make sure it’s well maintained and not stained too badly. If it is, be prepared to replace it before renting.
- Make sure there isn’t any sort of pest infestation! These can be more common in multifamily homes, and they can easily cost a fortune to fix.
Do You Actually Like the House?
So, you’ve saved extra money, you’ve made sure it’s legal, and you know it’s in good shape—but there’s one more question you have to answer before buying.
Do you actually like it?
Remember that this will be your home too, so you need to actually like it. Questions to ask yourself include:
- Is it in a good neighborhood?
- Are there shops, restaurants, or other amenities nearby that I can enjoy?
- Am I sacrificing anything big to get it, like losing a backyard?
In the end, just make sure that you will enjoy living in the house. Extra income might not seem so awesome if you hate living there yourself!
Will It Actually Make You Money?
When it comes to the nuts and bolts, you should do a calculation of exactly how much extra income you expect to take home each month. There are several things that factor into this, including things you may not have thought of.
Prepare for Insurance Costs
Owning and renting a multifamily space brings extra insurance costs with it.
You’ll need landlord insurance, and that includes three main things:
- Property Protection, which protects against natural damages like hail and fire, just like a normal homeowner’s insurance policy
- Personal Property Protection, which covers anything you leave on the property such as maintenance equipment
- Liability Insurance, which protects you against any injuries that happen to anyone on your rented property. This is very important, as medical bills can drain your funds if a tenant chooses to sue over an injury.
Typically, you can plan to spend 15-20% more for landlord’s insurance than a standard homeowner’s policy.
It May Cost Money to Find a Tenant
A huge part of the time and effort that goes into being a landlord is centered around finding and screening tenants. Remember that your time as a landlord is worth money, so there is a time cost associated with finding a new tenant.
Aside from just the time needed, there are a few costs you might not think about when it comes to finding tenants, such as:
- Advertising fees, if you choose to advertise on rental sites
- Background check costs
- The lost income from not having a renter
If you are willing to be a little risky, you can get by without spending much money on finding tenants by only using free advertising and not running background checks on applicants. However, realize that this comes with a significant risk as you may very well end up with a terrible tenant.
Will You Be Hiring a Landlording Company?
Many people choose to offload the work of being a landlord onto a third party. They help you out by:
- Finding and screening tenants
- Fielding complaints, and
- Contacting maintenance when necessary
The downside? You’ll have to pay a fee that will eat into your rental income. They may charge a flat rate or a percentage of the rent, such as 10% plus expenses. They can be a great option if you want to House Hack without spending your time on landlord duties.
How Often Will You Be Fixing Things?
Another thing to take into consideration when calculating your house hacking income is the extra wear and tear on your property and how much repairs will cost.
If it’s an older property, expect repairs to come more frequently and potentially at a higher cost. If you aren’t careful, you could find an entire month of rent payments spent on things like:
- Water heater repairs
- Plumbing issues
- Replacing flooring
- Appliance replacements and repairs
Much of this depends on the age of the property and how well it has been maintained. If possible, ask the previous owners how much they spent annually on repairs. If that number is suspiciously low and the building is old, be wary—you could be buying a ticking money bomb.
Doing a Cost-Benefit Analysis
Once you have all of that in mind, it’s time to do a quick cost-benefit calculation. This isn’t about trying to figure out if the extra income will cover the extra bills—it probably will. It’s more about deciding if your actual take-home income would be worth the extra work and risk to you.
Here’s how to do a quick calculation:
- Grab a sheet of paper and draw a line down the center
- On the left side, list the extra income you expect to get. Remember to be realistic! Look for the amount of rent others are charging for a similar space in your area.
- On the right side, list the monthly expenses such as your landlord’s insurance, property management costs, taxes, utilities, and any other bills you expect to pay every month.
- It would be wise to include a small cost, maybe $50 a month or so, that you will put into savings. This helps you build and maintain a savings fund which you can use for repairs and other necessary work that will occur.
- Total the costs and subtract them from the rent. This leaves you with your monthly take-home pay.
Once you know how much you can expect to take home, you can use it to decide whether or not it will be worth it for you. Ask questions like:
- Is the amount I’d expect to earn enough to cover my own mortgage payments?
- Will I be putting myself at risk, or sacrificing my own personal savings to pay for repairs?
- Is the extra money worth the added work I’d be doing?
Those are questions only you can answer!
How to Plan for and Avoid Potential Trouble
Hopefully, you can find a great multi-unit dwelling and fill it with awesome tenants. With good financial sense and landlording practices, this is certainly possible. However, you should still always be prepared to deal with any issues that may come up.
Anticipating issues and having solutions ready to go before they even happen is a fantastic way to protect your investment. We’ll cover a few potential problem spots below.
Save Extra Money Beforehand
The best way to plan for future issues is just to put more money into your savings. Having more money in your savings can help cover unexpected costs, like:
- The lender requiring a larger down payment than you anticipated
- Hidden damages to the property that need repaired
- Extra screening costs for a very long tenant search
Those are just a few. House Hacking can be totally worth it, but having extra money saved means you can stress even less about any unexpected costs.
Hire a Property Management Company
When it comes to managing a property, often the best option is to contract the work out to someone more experienced. For a small monthly fee, property management companies will handle many aspects of landlording for you, as we talked about above.
They can help you avoid any problems in a few ways:
- They present an established, professional front that will make it easier to find good tenants
- They will be able to advise you on certain issues (this is especially useful if you’re a first-time landlord!)
- They can keep stress out of your life by handling complaints and repairs professionally for you
Property management companies offer a great solution to give your rental property a professional feel and keep unnecessary stress out of your life.
Draft a Solid Lease
A key component of a good tenant-landlord relationship is a solid, thorough lease. A good lease includes several important clauses, such as:
- How many people can live in the unit, and their names
- How long the lease will last
- Move-in costs, such as a security deposit
- The actual rent and when it is due, written very clearly
- When and why you can enter the property, and how much notice you will give beforehand
- Requirements for the tenant to keep the place clean and inform you about any maintenance issues
- Clearly stated guidelines for maintenance and upkeep on your end
- Whether or not you allow pets, and if you charge a pet deposit
- Rules about illegal activity and your rights to evict if they are found doing it
Those are a few of the most important items, but we strongly recommend you consult a lawyer or other professional to make sure your lease is airtight.
Keep Excellent Records
Once you’ve got the lease signed, and your tenant move in, keep records! Good and complete records will save you in many situations. Things to keep records of include:
- Maintenance incidents
- Records of past rent payments
- Communications with tenants, including any formal warnings given
Just like any other business, keeping good records acts as insurance against any potential issues.
Set Expectations and Office Hours
Once you start renting out space, you’re officially a landlord, and that means you are running a business. If you aren’t hiring a property management company then we’ll cover some tips to help you manage it successfully.
It can be tempting to be casual about it, but it’s better for you and your tenants if you run things professionally.
This means a few things:
- Set standard office hours where you can be reached. This keeps your evenings and weekends from being interrupted
- However, let tenants know they can contact you at any time in case of an emergency. This means keeping your phone by you, even at night, in case there is an immediate maintenance emergency
- Treat your tenants professionally. Use proper grammar and be clear and concise when communicating. It may feel stuffy, but in reality, it helps your tenant feel secure. It also helps protect you from making any mistakes, like getting angry or frustrated with a tenant
In general, just remember to act professionally and treat your landlording like a business—because it is.
Other Ways Can House Hacking Can Help You
House Hacking can not only help pay your monthly bills but can help you in a couple other ways, too!
It Can Be a Great First Step into Real Estate
Getting into real estate can be difficult, especially for those without the money to buy more than one property. By House Hacking, you can take your first step into real estate with much lower entry costs since it will be your home as well.
Once you save up enough, you can even chain your House Hacking by buying another multifamily property and doing the same thing, increasing your real estate portfolio!
You Build Real Estate Credit
There’s more that goes into purchasing real estate than just your credit score and income, especially when talking about multifamily dwellings. When you begin diversifying your real estate portfolio, lenders are going to look and see if you have any past landlording experience.
House Hacking is a perfect way to get your first home and build real estate experience at the same time! Lenders can see that you already have some experience successfully operating rental units. That will make them more likely to loan you money to purchase more in the future.
Is House Hacking Worth it to You?
House Hacking is a tempting way to increase your income and build your real estate portfolio at the same time. However, it isn’t the best choice for everyone and there are some considerations you should keep in mind.
House Hacking is worth doing as long as:
- It’s legal in your area
- You have a proper space to rent out
- You have extra funds set aside to cover initial costs
If you are looking to buy a house or multifamily unit specifically to hack in, remember to be prepared for:
- You’ll need a bit of extra money to buy a multifamily unit
- Make sure the area is zoned for multifamily living
- Make note of any repairs the place needs before renting
- Above all, it’s most important that you actually like the place!
In the end, House Hacking can generate you a lot of good income and be a great first step into real estate, just be prepared to handle the extra work it requires.