House Hacking Your Way To A Bigger Retirement

House hacking can be crucial in building a retirement or subsidizing your current retirement. Discover how you can take advantage of this trend below. 

In the mid-20th century, your grandparents may have owned a two-family house in a city before moving to the brand-new suburbs. Or, you may have owned a single-family home all your life but are looking for ways to generate passive income through house hacking.

No matter how you pursue house hacking, you will gain extra income and experience what it is like to be a landlord.

What is house hacking?

By house hacking, we mean finding ways to generate income from our homes. The traditional method of house hacking involved:

  • Buying a multifamily property.
  • Living in one unit.
  • Renting out the rest, so the tenants pay the owner’s mortgage and the owner builds equity in the property.

An intelligent investor knows that buying multifamily properties allows them to gain property management experience while having tenants pay for their housing expenses.

Why house hack?

The purpose of house hacking is to reduce living expenses temporarily or to begin a career as a real estate investor. With housing costs increasing, it’s a method for using an asset you own to afford a lifestyle, invest in real estate, and build equity.

Develop a house hacking strategy.

Aside from your creativity and the zoning laws or HOA rules that the property is bound by, the only limitation is your ability to find someone who needs the type of housing you can provide.

Consider your lifestyle and your skills. Do you have many handy skills around the house and don’t care where you live? A live-in house flip might be the right choice for you. Is there a barn or garage on your property? You might be able to rent that out.

Ultimately, it’s all up to you, your cash flow requirements, and what you’d be comfortable with in your living space.

The financial case for house hacking.

Consider the case of buying a duplex for $400,000. Consider a 3.5% 30-year fixed mortgage with a 20% down payment. Using this example, your monthly mortgage payment would be $1,436.94 (principal and interest on a $320,000 mortgage).

A tenant pays $2,000 per month for one side or floor of the house, which pays 100% of the mortgage, and the excess of $563 monthly can be used for homeowners’ insurance, taxes, and repairs.

You would owe $287,030.63 on your mortgage after 5 years ($320,000 – $32,969.37 = $287,030.63).Thus you have built $32,969.37 in home equity. In addition, if the home appreciated the U.S. average of 3.8% through the same period, your duplex would be worth $481,999.69. As shown here, a seller’s market will likely result in a profit of $194,969.06.

  • After five years, you will owe $287,030.63 on your mortgage
  • After five years, the value of the duplex will be $481,999.69.

The difference above can help you reach financial independence, build your retirement, or even subsidize a retirement. 

Top House Hacking Ideas:

Invest in a multifamily property

Multifamily housing was prevalent before suburbs in city neighborhoods. A young person moving to a city may rent part of a house from the retired owner who lives next door or upstairs. Due to their desire to keep their children close after marriage, parents bought duplexes and triplexes.

Attached housing became less popular as families grew up in single-family homes or bought them. Real estate investors today often start their portfolios with multifamily properties.

Rent out rooms in your home on a short-term basis

If you don’t own a multifamily property or are unsure about committing to a long-term rental, consider renting out a spare room through a short-term rental platform like Airbnb or VRBO. For safety reasons, women who want to rent only to other women might be interested in Golightly, an invitation-only site that vets its members.

It is possible to obtain financing for buying a multifamily property for short-term rental purposes. You should check the short-term rental laws in the state and locality where the property is located and familiarize yourself with the rules of any homeowners’ associations. There are many HOAs that prohibit both short- and long-term rentals.

Find some housemates

The easiest way to hack a house is to share it with a housemate. Besides receiving a monthly rent payment, which may exceed your mortgage payment, you will also be able to split utility and maintenance costs.

Renting your home while you live in it undoubtedly means losing personal space and privacy. The financial advantages of sharing household expenses in addition to rent may outweigh privacy concerns. The layout of your house may allow you and your tenant to have plenty of privacy. When enforcing household rules, you have the upper hand as the owner.

It is important to find a housemate who is compatible with your lifestyle. If you share common spaces and responsibilities around the house, you should thoroughly vet anyone you consider renting to.

Make Your Property More Affordable by Adding an Accessory Dwelling Unit

Additionally, you can hack your house by building an accessory dwelling unit (ADU). These separate living units, sometimes called granny flats, teenager suites, or in-law apartments will sometimes come with certain homes, allowing you to rent them out.

Consider converting a detached garage or basement with a separate entrance into a rental unit geared toward short- or long-term rentals, or move into the unit yourself and rent the main house out.

In particular, parents whose children require a larger house may find this option appealing. Parents can build or refurbish an accessory dwelling and move into it while their child and family move into the primary residence. Retired parents can frequently travel without worrying about who will care for their home, and the child can rent out the ADU while the parents are away.

Rent out space on your property

It is possible to convert acreage into rental income if you have some. People who need a place to store their vintage cars or boats for the winter can rent a garage or barn space. Your property can be used to park RVs or mobile homes, or you may be able to rent out your home while living in an RV. Verify zoning regulations and HOA rules for restrictions on renting out your property.

Do A Live-In Flip

Hacking is widespread among house flippers. Based on comparables in the area, they buy older homes that need repairs but have a lot of upsides. A house in a particular neighborhood may sell for $250,000, but if it’s in disrepair, it can be bought for $180,000 and fixed up for $20,000. Let’s say your repairs will take six months. While the repairs are being made, you can live in the house. During that time, you’ll be paying the mortgage. Afterward, if everything goes according to plan, you’ll be able to walk away with $50,000, saving you six months of rent. 

How to buy a house to hack?

Multifamily homes are no more difficult to buy than single-family homes. Home mortgage rates are based on the primary residence as long as you live there. In general, residential mortgages are less risky than investment properties or loans for non-owner-occupied properties, so if you own your current house and have lived in it for over a year, renting it out and moving into your new multifamily home is possible.

Primary Mortgage Options

If you’re a veteran, buying multifamily homes with four units is possible with an FHA loan or a VA loan. The FHA offers low-interest loans even for multifamily dwellings. Additionally, the VA offers favorable loan terms to service members seeking to buy homes with up to four units. Both loans require the applicant to live on site.

New real estate investors are eager to do business with private lenders who evaluate conventional mortgage applications by looking at the applicant’s credit score and debt-to-income ratio (DTI). In addition to considering rental income, buyers will have to prove they can afford mortgage payments using a realistic vacancy rate as part of their application.

Rehabilitation Loans

Besides FHA and VA loans for multifamily properties, borrowers can also borrow money for renovations and repairs. Veterans can borrow the primary and renovation loans through the VA program, paying one monthly payment for both.

There are strict requirements for FHA 203(k) loans regarding when work must be completed and the types of work that can be done.

Alternatives to house hacking for those who do not own a house.

There are ways to reduce your rental expenses if you do not own a home. Look for jobs that offer no- or low-cost housing. For instance, a building manager or an on-site build superintendent may be of interest to you. The work is typically part-time and can be scheduled around your other obligations or work schedule.

A reputable house-sitting website may be able to help you find long- and short-term house-sitting gigs if you consider yourself a digital nomad. There may be a need for pet- or plant-sitting and some light household maintenance.

Do I Have to Pay Income Taxes on My House Hacking Income?

Any rental real estate income must be reported on IRS Schedule E. Renters may also have to pay self-employment taxes if they provide services beyond basic property maintenance, such as meals, tours, and concierge services.

Regarding house hacking, it’s crucial to consider the above and decide which option would be most effective. House Hacking could be a great tool in your retirement plans, helping generate the income or subsidizing your current retirement. Just make sure to factor in both IRS and Social Security ( if you are currently receiving it as they have strict rules regarding additional income and it varies based on your age).