House hacking is a real estate strategy that allows homeowners to reduce or eliminate their housing costs. The concept is simple: buy a property, live in part of it, and rent out the rest. The rental income covers the mortgage, and sometimes even generates profit.
This approach has gained serious traction among first-time buyers and real estate investors alike. Why? Housing is most people’s largest monthly expense. House hacking offers a practical way to cut that expense down, or wipe it out entirely.
Whether someone owns a duplex or rents out a spare bedroom, house hacking creates an opportunity to build equity while someone else pays the bills. This guide breaks down how house hacking works, popular strategies, the pros and cons, and how to get started.
Key Takeaways
- House hacking is a real estate strategy where you live in part of a property and rent out the rest to reduce or eliminate your housing costs.
- Owner-occupied financing makes house hacking accessible with down payments as low as 3.5% through FHA loans.
- Popular house hacking strategies include buying multifamily properties, renting spare rooms, adding accessory dwelling units, or using short-term rental platforms.
- House hacking builds wealth through equity growth, rental income, property appreciation, and valuable tax deductions.
- Getting started requires assessing your finances, researching rental markets, getting pre-approved, and analyzing deals to ensure positive cash flow.
- Be prepared for trade-offs like reduced privacy, landlord responsibilities, and vacancy risk when house hacking.
How House Hacking Works
House hacking works by turning a primary residence into an income-generating asset. The owner lives on-site while tenants pay rent that offsets (or exceeds) the monthly mortgage payment.
Here’s a basic example: A buyer purchases a duplex for $300,000. They live in one unit and rent the other for $1,500 per month. If their mortgage, taxes, and insurance total $2,000, the rental income covers 75% of their housing costs. In some markets, the rent covers the entire payment, plus a little extra.
The key advantage? Owner-occupied properties qualify for residential financing. That means lower down payments (as low as 3.5% with FHA loans) and better interest rates compared to traditional investment properties. This makes house hacking accessible even for buyers with limited capital.
House hacking also builds wealth in multiple ways. The owner gains equity as the mortgage gets paid down. Property values typically appreciate over time. And the rental income can be saved or reinvested into more properties.
It’s worth noting that house hacking requires some landlord responsibilities. The owner must screen tenants, handle maintenance, and comply with local rental laws. But for many, these trade-offs are minor compared to the financial benefits.
Common House Hacking Strategies
House hacking isn’t one-size-fits-all. Several strategies exist, and the right choice depends on budget, lifestyle, and risk tolerance.
Multifamily Properties
Buying a duplex, triplex, or fourplex is the most popular house hacking strategy. The owner lives in one unit and rents out the others. Properties with up to four units still qualify for residential loans, which keeps financing favorable. This approach often generates the highest income relative to the mortgage payment.
Single-Family Home With Roommates
Not ready to buy a multifamily? Renting out rooms in a single-family home works too. A homeowner with three extra bedrooms could bring in $1,500 to $2,500 per month, depending on the market. This strategy requires sharing common spaces, so it suits people comfortable with roommates.
Accessory Dwelling Units (ADUs)
Some homeowners convert garages, basements, or detached structures into rental units. ADUs provide rental income without sharing the main living space. Many cities have relaxed zoning laws to encourage ADU construction, making this option more accessible than before.
Short-Term Rentals
Platforms like Airbnb and Vrbo allow homeowners to rent out spare rooms or entire units on a nightly basis. Short-term rentals can generate higher income than traditional leases, especially in tourist-heavy areas. But, they require more active management and may face local regulations.
Live-In Flip
This hybrid strategy combines house hacking with property renovation. The owner buys a fixer-upper, lives in it while making improvements, and sells it for a profit after two years. Living in the home for at least two of the past five years allows sellers to exclude up to $250,000 in capital gains ($500,000 for married couples) from taxes.
Benefits and Drawbacks of House Hacking
House hacking offers real financial advantages, but it’s not without trade-offs. Here’s an honest look at both sides.
Benefits
Reduced housing costs. This is the main draw. Rental income can cover part or all of the mortgage, freeing up cash for savings, investments, or other goals.
Lower barrier to entry. Owner-occupied loans require smaller down payments than investment property loans. FHA loans allow down payments as low as 3.5%, and some conventional loans go as low as 3%.
Wealth building. House hacking builds equity, generates rental income, and provides potential appreciation, all at once. It’s a powerful way to grow net worth over time.
Tax advantages. Landlords can deduct expenses like mortgage interest, property taxes, insurance, repairs, and depreciation. These deductions reduce taxable income and improve cash flow.
Real estate education. House hacking teaches property management skills on a small scale. Investors learn how to screen tenants, handle repairs, and manage finances before scaling to larger portfolios.
Drawbacks
Reduced privacy. Living near tenants, or with roommates, means less personal space. This isn’t ideal for everyone, especially families or introverts.
Landlord responsibilities. Maintenance calls, tenant issues, and legal compliance come with the territory. Some house hackers underestimate the time and effort involved.
Property limitations. Multifamily homes aren’t available in every neighborhood. Buyers may need to compromise on location or property type.
Vacancy risk. If a tenant moves out, the owner must cover the full mortgage until the unit is rented again. A cash reserve helps manage this risk.
How to Get Started With House Hacking
Getting started with house hacking takes some planning, but it’s achievable for most buyers. Here’s a step-by-step approach.
1. Assess Finances
Start by checking credit scores, savings, and debt-to-income ratio. Most lenders want a credit score of at least 620 for conventional loans, though FHA loans may accept lower scores. Buyers should also save for a down payment (3% to 5% for most owner-occupied loans) plus closing costs and reserves.
2. Research Markets
Not every market supports house hacking. Look for areas where rental income can realistically cover the mortgage. Tools like Zillow, Rentometer, and local rental listings help estimate market rents. Strong job growth and population increases often signal good rental demand.
3. Get Pre-Approved
A mortgage pre-approval shows sellers that a buyer is serious and financially qualified. It also clarifies the budget. Shop around with multiple lenders to compare rates and terms.
4. Find the Right Property
Search for duplexes, triplexes, fourplexes, or single-family homes with rental potential. Work with a real estate agent experienced in investment properties. Run the numbers on each property to ensure the rental income makes sense.
5. Analyze the Deal
Before making an offer, calculate expected cash flow. Subtract the mortgage payment, taxes, insurance, maintenance, and vacancy allowance from projected rental income. A good house hack should at least break even, and ideally generate positive cash flow.
6. Close and Move In
Once the deal closes, move into the property and prepare the rental unit(s) for tenants. Screen applicants carefully, set clear lease terms, and maintain the property well. Good tenant relationships make house hacking much smoother.
