House hacking is an owner-occupied homebuying strategy where you live in the property and rent out part of it to help offset your housing costs. Depending on the property, that might mean living in one unit of a small multifamily home or renting out part of a single-family property.
It can be a practical way to lower your monthly out-of-pocket housing expense, but it does not automatically mean you will live mortgage-free. Financing, occupancy, and property-type rules all matter, and the rental income may or may not cover the full cost of ownership.
So, what is house hacking exactly?
House hacking has nothing to do with computers, although you may go on the internet to find candidates for real estate investments suitable for hacking. It’s a great way to get started investing in real estate.
The goal of house hacking is to acquire a multifamily rental property, live in one part of it, and rent out the other parts for enough rental income to cover most, if not all, of the expenses of owning the property. That means the tenants that are renting from you are essentially paying your mortgage on your behalf.
As the on-site manager of a property that you own, you do not have to pay any rent. If you are clever and the rental market is robust in the area that you choose for house hacking, then the rental income from the other units in the multifamily property will be sufficient to cover the property’s expenses. Then, you live rent-free.
Related: Rent vs Owning
Multifamily properties, up to four units, are the best candidates for house hacking. That’s because properties with many units have more tenants that help to cover the bills. But other properties like duplexes and triplexes can do well too.
House hacking is an excellent strategy for real estate investors who are looking for a place of their own while also investing their capital into something that will grow in value over time.
Some investors may also combine house hacking with fixing and flipping. In this case, they may look for a run-down home to fix up while living in it at the same time. Once the property has been brought up to par with a little TLC, the investor can then quickly flip it for a profit.
House hacking can take on several variations, but all with the same end result: the investor has a place to live while allowing renters to cover the operating costs of owning a property. In many cases, there may even be a positive cash flow after all the expenses have been paid.
Speaking of cash flow, how do you know if there is extra money in the pot after all expenses have been paid, including the mortgage? That’s where accurate calculations come into the picture.
You’ll need to calculate the cash flow from the portions of the property that rent to others. If the rent covers all the expenses, then the property is said to have a positive cash flow. That is the goal. Have some funds set aside to cover any downtime when a unit is vacant between renters.
You’ll want to understand your Net Operating Income (NOI) before you purchase a property, which represents the amount of money the property will make before you pay the mortgage and income taxes. This number is important for house hacking because it will tell you how much of your mortgage will be covered by your monthly rental income.
A seasoned real estate agent who is well-versed in properties in the area you are looking to buy in will be able to help you with these calculations.
But truthfully, even if there is no positive cash flow, that’s still OK, considering the fact that your mortgage is essentially being slashed. For example, if your mortgage is $1,200 per month, it could be cut in half thanks to the $600 in rental income coming in from the other units. That’s a much lower mortgage bill to have to pay every month.
Before you buy, think through whether the strategy fits the way you actually want to live. First, are you willing to live on-site and share at least some proximity with tenants? Second, does the property layout give you enough privacy and practical separation for day-to-day life? Third, can you comfortably handle vacancies, repairs, and other surprises without relying on every dollar of expected rent?
You should also confirm that local rules allow the way you plan to use the property, especially if your setup involves renting rooms, a basement, or an accessory dwelling unit. Finally, be honest about your main goal. If you want a primary residence first and a way to offset housing costs, house hacking may be a strong fit. If you mainly want a long-term investment first and do not want to live in the property, a different purchase strategy may make more sense.
Owner-occupied properties qualify for lower financing rates and lower down payments than non-owner-occupied properties, which are held purely for investment.
There are many great things about house hacking, but perhaps one of the best ones is that you can get some of the best financing terms on a mortgage. Because you live in the property, you may be able to take advantage of this.
Owner-occupant financing comes with better terms compared to financing for an investment property that is not being occupied by the owner. Owner-occupant financing tends to come with lower interest rates and better terms compared to investment financing. And if you hold onto the property long enough, you may be able to retain the owner-occupied mortgage even after you move out.
Further, you may also be able to get away with a smaller down payment amount. With home loan products like FHA loans and VA loans, smaller down payments of 0% to 3.5% are possible, while investment loans typically require much higher down payments of as much as 20% or more. As such, the barrier to entry for this type of investment is a lot lower than with a traditional real estate investment vehicle.
Please note that you do have to actually occupy the property for this to work. Purchasing a property as a primary residence that you do not occupy for at least the first year can open you up to potential occupancy fraud.
As the owner/landlord, you will deal directly with any tenant relations and problems. If a pipe breaks in the middle of the night, you are the one who will have to deal with the problem.
Be sure to screen tenants thoroughly and maintain the property. Some do not like dealing with tenants; however, if you are careful when selecting tenants and handle any problems professionally, this work provides an excellent experience for understanding further real estate investments to build up your portfolio.
And since you are directly on-site, you don’t have to go through the hassle of traveling to your investment property to deal with issues that may arise.
House hacking can make sense if you want to buy a primary residence and are comfortable with the tradeoff of living close to tenants in exchange for potential help with your monthly housing costs.
When the numbers work out on a particular property, you may have found an investment opportunity with house hacking. Work with qualified real estate agents and mortgage professionals who specialize in multifamily properties for the best results.
Sammamish Mortgage can help. We serve clients across Washington, Idaho, Colorado, Oregon, and California. Since 1992, we’ve been providing several mortgage programs and products with flexible qualification criteria to borrowers across the Pacific Northwest. Visit our website to get an instant rate quote or to use our online mortgage calculator. Or, reach out to us if you are ready to get pre-approved for a mortgage.
House hacking is an owner-occupied real estate strategy where you live in the property and rent out other space to help offset your housing costs. That could mean occupying one unit of a small multifamily property or renting out part of a single-family home, such as a spare bedroom, basement, or accessory dwelling unit.
It can be a practical way to start because you buy a primary residence and use rental income to reduce your monthly out-of-pocket housing expense. It may also give you access to owner-occupied financing terms that are often more favorable than financing for a non-owner-occupied investment property.
Yes. Common house hacking property types include duplexes, triplexes, fourplexes, spare bedrooms in a single-family home, basements, and accessory dwelling units. Small multifamily properties up to four units are often strong candidates because multiple tenants may help cover more of the ownership costs.
Yes, if you are using an owner-occupied house hacking strategy, you need to actually occupy the property as your primary residence. The article notes that buying as a primary residence without living there for at least the first year can create occupancy fraud concerns.
The property generally needs to be your primary residence, and the article specifically notes occupying it for at least the first year to avoid occupancy fraud concerns. Loan program requirements can vary, so it is important to confirm the occupancy rules with your lender.
Owner-occupied mortgage options may work well for house hacking, including conventional financing as well as programs such as FHA and VA loans when you qualify. The key is that the property must be owner-occupied, since investment property financing usually comes with higher rates and larger down payment requirements.
Rental income can help offset the cost of ownership and may be an important part of the overall numbers, but qualification depends on the lender, the property, and the loan program. It is important to review the income treatment and documentation requirements with a qualified mortgage professional before you buy.
The amount varies based on the purchase price, loan program, down payment, closing costs, and cash reserves you want to keep for repairs or vacancies. The article explains that owner-occupied financing may allow smaller down payments than a typical investment property loan, but you still need to budget for taxes, insurance, maintenance, utilities, and unexpected expenses.
The main risks include vacancies, repairs, maintenance costs, tenant issues, and the reality of living close to renters. You also need to verify that local rules allow your planned setup, especially if you want to rent out rooms, a basement, or an accessory dwelling unit.
No. House hacking is usually an owner-occupied purchase where you live in the property and rent out part of it, while a traditional investment property is purchased mainly to generate income and is not occupied by the owner. That difference matters because financing terms, down payment expectations, and occupancy rules can be very different.
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