Why You Should Know About House Hacking, a Cheaper Path to Homeownership

The idea of homeownership might conjure images of a single-family house with a white picket fence. But the kind of home you purchase—and the way you go about purchasing it—doesn’t have to be so traditional. And if the age-old strategy of spending years saving up for a down payment feels daunting, that’s because it is. One seldom-discussed avenue to becoming a homeowner is buying a multifamily building. The idea is that you can live in one of the units while renting out the others. It’s a strategy that allows you to earn passive income from your renters to pay down your mortgage while building up equity and setting up the property as an investment that will pay off down the road. 

Indeed, coming up with enough cash for a down payment is a major obstacle to homeownership for many. When you purchase a multi-unit property, however, you qualify for the same types of loans that you would for a single-family home. This means you can take advantage of low-interest FHA loans, which require as little as 3.5 percent down.

In addition to lower interest rates, mortgages for owner-occupied properties also come with lower fees and lower down payment thresholds compared to loans for investor mortgages. Some lenders will also add projected rental income in calculating how much you can afford to borrow, meaning you’d be able to score a more desirable, higher-priced home.

Also known as “house hacking,” this strategy can not only make financial sense for some, but it can also be a way to get your feet wet in real estate investing and property management. Owners can certainly live in their multifamily buildings indefinitely, or they can stay for a year or two before renting out all of the units.

“Mortgage lenders require that you live in a property for at least one year before moving, so buyers can theoretically move in and house hack for a year, and then go buy another two- to- four-unit property to repeat the process,” says Brian Davis, cofounder of Spark Rental. 

Davis notes that most conventional, owner-occupied mortgage lenders typically allow no more than four mortgages reported on a borrower’s credit history, so at that point, investors need to find alternative ways to finance new investment properties, such as through portfolio lenders, private notes, or some other source. (The good news is that by that point, you might be able to pay off an older mortgage in cash from all the money you’ve saved on housing costs.)

If you’re ready to take the leap and buy an income property, here are some guidelines to make it a wise investment.

Just as in buying a single-family home, you want to make sure the property you choose is right for your needs. The old adage of “location, location, location,” applies here, and as founder of personal finance site Hack Your Wealth Andrew Chen notes, it’s the one thing you can’t change once you move in.

“Finding a suitable property is the hardest part,” says Chen, who currently lives in one unit of a four-unit income property in San Francisco. “Don’t cut corners on this. Make sure the ‘bones’ of the property are solid—good foundation, no termite infestation, no major water damage, good piping.” 

Even if you don’t plan on living there for more than a few years, you should take care to find a building that you love.

House hacking can be a great financial strategy, but you still want to run the numbers before embarking on it to make sure you come out on top. Davis recommends using a free house hacking calculator on a potential property before making an offer.

“Most people underestimate the expenses that landlords incur, between maintenance, repairs, vacancy rate, extra accounting costs, and more,” he says.

When it comes to spending on repairs and maintenance, play the long game. Be prepared to take some short-term losses in the beginning.

“For example, if your air conditioning dies in the first year, you should buy a high-quality replacement rather than a used or cheap unit that is going to die again and end up costing more in the long-term,” says Andrew Kolodgie, co-owner of Washington, D.C.-based The House Guys.

Real estate agent Kia Young house hacks a duplex in New Orleans by renting out one unit on Airbnb and living in the other. She says she saves about $1,500 per month in housing costs, in addition to gaining about $800 per month in equity, compared to when she was renting. 

“I love house hacking because it allows me the freedom to do what I want with the property,” Young says. “I can rent out the other side to a long-term tenant if I decide I don’t like Airbnb. I can paint and style the house however I want, and I have the option to move out one day and rent out both sides.”

There’s definitely a learning curve when it comes to becoming a landlord, so don’t skimp on any of your studies. You’ll want to be well-versed in all of the local laws and policies surrounding rental properties so that you’re prepared to address common issues.

“Before you start marketing a unit for rent, I would have a local attorney review your lease and give you a brief overview of the legal requirements,” says residential real estate investor Bill Samuel of Chicago-based Blue Ladder Development. “For example, in Chicago, we have the CLTO (Chicago Landlord Tenant Ordinance) that has many specific rules that, if not followed, you can be financially penalized for.”

Becoming isn’t a landlord isn’t for everyone, but trying to be an ethical landlord is important if you do choose to do it. Sure, passive income is great, but why not try to make things painless for renters while making money off their ability to put a roof over their heads?

Having a good relationship with the tenants in your building has its perks. You can look out for each other and exchange small favors.

Chen chose to buy and live in a multifamily property to significantly reduce his family’s housing costs in the notoriously expensive Bay Area market.

In addition to the major financial benefit, Chen enjoys the mutually beneficial relationship he shares with his tenants.

“We can help each other at times, such as holding Amazon packages if someone is traveling, or redirecting misdelivered food orders, which has been especially helpful during the pandemic,” says Chen.

While it’s great to be friendly with your tenants, don’t lose sight of the fact that your relationship is, at its core, of a professional nature. It’s important to enforce ground rules, like when rent is due and agreements about noise and cleanliness. If you let your personal relationship interfere, it defeats the purpose of your investment.

“Be friendly, but don’t be friends,” advises Chen. “They are valued customers and guests, but not friends or family. This mindset will help you manage the property with maximum effectiveness and make it desirable to live in for all tenants.” 

One way to ensure a positive working relationship with your tenants is to make sure they’re able to cover rent before they sign the lease—even if they’ve been recommended to you by friends or colleagues.

“Before renting to anyone, always get proof of income and check landlord tenancy records for past issues,” suggests Shorouq Z. Matari of ReMax Neighborhood Properties in New Jersey. “Qualify them before agreeing to lease to them to avoid potential future issues.”

Though it’s not always possible, Kolodgie recommends searching for long-term tenants. While short-term rentals will turn a higher profit more quickly, long-term rentals will pay off in the money you’ll save in repairs and costs of advertising and re-renting the unit. 

“Don’t be afraid to shrink your profit margin slightly short-term because it could save you money down the road,” Kolodgie says.