Half of Young Home Buyers Plan to House Hack— But Can They?
House hacking for rental income to offset a mortgage is popular in theory, but it’s not always as simple as it seems.
Julie and Tim Fornasero, who live in a tiny house and rent out the main house on their property in San Anselmo, California, are living a dream shared by many millennial and Gen Z home buyers: They’re house hacking.
“My husband and I own a 1,050-square-foot house with three bedrooms and two bathrooms, but when his two sons left for college and boarding school, we didn’t need all those rooms,” Julie says. “We decided to monetize the investment in our house, which has a big backyard, and build an ADU (Accessory Dwelling Unit) to live in.”
The Fornaseros spent about $150,000 to build the 500-square-foot tiny house designed by Studio Shed that they have lived in since 2019. They offset expenses with rental income from the main house.
More than half of millennial homebuyers (55%) and 51% of Gen Z homebuyers see house hacking – buying a house with the intention to rent some of it to a tenant to pay part of their mortgage – as a path to homeownership, according to a survey by Zillow. More than half of millennial and Gen Z buyers intend to rent out the entire house in the future when they’re ready to move on to their next home, compared to 43% of all buyers.
But not every homebuyer recognizes the potential challenges of house hacking, such as finding the right property, understanding the legal implications of renting out property, financing the purchase, vetting tenants and being a landlord.
“I’ve done house hacking successfully and unsuccessfully,” says Clint Jordan, a real estate agent with Keller Williams Freedom in Colorado Springs and founder of the Mil-Estate Network of veteran and military spouse real estate agents. “The most important thing to think about is what you’ll do if it doesn’t work. Make sure you can afford the house without a renter.”
Still, when it works, house hacking can assist buyers on a path to building wealth through real estate.
“When I was 20, my brother and I bought a four-bedroom house and rented out two of the bedrooms because it was cheaper to do that than to rent an apartment,” says Mark Mason, a real estate agent with Re/Max Professionals in Cottage Grove, Minnesota. “It worked out, but we were flying by the seat of our pants. We rented to our cousins first, then later to people we found online.”
The biggest takeaway for Mason is that you need to be comfortable sharing your space with other people.
First-time buyers may find the concept of house hacking appealing, but there are some caveats to explore before jumping into the market, especially if you’re considering buying a multi-unit building rather than just renting out a room.
“One of the main benefits of owning a multi-family property is the added income,” says Shelby McDaniels, national director of business development for home lending at Chase Home Lending. “You may also qualify for tax benefits, like being able to write off some business operating expenses. Owning a multi-family property also comes with added responsibility, such as addressing any necessary repairs, ensuring the building is up to code requirements, managing tenant needs, and more. Some owners may choose to hire a property manager to manage these, but it will come at an additional cost.”
Research House-Hacking Rules
If you’re considering house hacking, you need to know before you make an offer on a property if you’ll be allowed to rent it.
“I bought a property about 90 minutes away from my home with a house on it that I was going to use as an Airbnb, plus I planned to build a ‘barndominium’ [a metal building] on it for more guests,” Jordan says. “Even with my experience I didn’t think to do my due diligence to make sure I could build a barndominium there. After I bought the property and got the main house ready for renters, I found out that I couldn't build the second house and ended up selling the whole property.”
Many jurisdictions ban short-term rentals and others are considering bans, Jordan says.
“It’s important to know the local landlord-tenant laws before you buy a property that you intend to rent out,” Mason says. “The rules may be a little more lenient when you live in the property with a tenant, but you still need to understand your responsibilities.”
You’ll also need to know the rules if you buy property in a condominium or homeowner association. Many ban short-term rentals and limit the number of homeowners who can rent their property, which could impact your long-term plans.
Financing a House Hack
Typically, buying a place to house hack means you’re buying something larger than you need and that means it’s likely to be more expensive, too.
“Purchasing a larger property, like a multi-family home, may come at a higher price-point than a single-family residence, thus requiring a larger upfront investment for down payment and closing costs,” McDaniels says. “Work with a home lending advisor to determine what your needs are and how much you can afford, including both upfront costs and regular mortgage payments.”
A traditional mortgage loan is available for multi-family properties, up to four units, McDaniels says, but some larger properties may require a commercial loan.
“If you’re house hacking and living in the property, you can get into a house with an FHA loan with just 3.5% as a down payment,” Mason says. “But if you buy this as purely an investment property and don’t live there, the minimum down payment is usually at least 20%. That’s one reason house hacking is such a good option for first-time buyers who don’t always have the cash for a bigger down payment.”
In many cases rental income can be used to qualify for a loan, McDaniels says, but it depends on the lender, the loan program, the property, whether you have a signed lease in place and your specific qualifications.
“Members of the military and veterans who qualify for VA financing can usually use the prospective income from a tenant to help them qualify for a loan,” Jordan says.
As a landlord you need a budget for maintenance, repairs, unpaid or late rent, and the possibility of an empty unit for a month or longer, Mason says.
“The rule of thumb is to budget at least 1% of the home value for maintenance, so if you’re buying a $700,000 duplex, you’ll need to keep at least $7,000 in an emergency fund for things like a roof or heat pump repair,” Mason says. “It’s important to keep up with maintenance when you have tenants, because happy tenants are more likely to pay on time and stay longer.”
Most people who house hack don’t hire a property manager since they’re living in the house, but if you decide you want one now or in the future, it typically costs about 10% of the monthly rent, Jordan says.
House Hunting for House Hacking
Before you start shopping for property, it’s important to evaluate your long-term goal.
“If the idea is to rent it while you live in it and then rent the whole property in a few years, then make sure you run the numbers so it makes sense,” Mason says. “If you plan to live there for 10 years and just want a tenant at first to help with the mortgage, make sure you buy a place where you want to live and that will work for you in the future.”
Mason recommends working with a real estate agent with experience working with investors and a roster of contractors to recommend.
When you house hack, you need to evaluate the property for more than your own use. Ideally, a living space with its own entrance, such as a duplex or a building with three or four units, can provide you with the income you need and privacy.
“Make sure the extra space will appeal to a renter, such as a basement with some separation from the rest of the house or perhaps room on the lot to build an ADU,” Jordan says. “Check to make sure there’s enough parking for you and your tenants.”
The top places to house hack, Jordan says, are in college towns, near hospitals and near military bases, all of which generate more people who need to rent a home for a few months to a year.
Unless you’re renting to friends and family, you’ll need to protect yourself with a criminal background check and to verify the income and credit of a potential tenant, Mason says.
“You should check all references, especially on people from other states,” he says. “If you’re sharing living space with tenants, make sure you put locks on all the bedroom doors for security and privacy.”
Jordan suggests reviewing all public social media on prospective tenants to get a sense of what someone is like before you share a property with them.
“I think anyone who plans to house hack should hire a lawyer to help them spell out all the rules about when payment is due, utilities and more,” Jordan says. “You may also want a CPA to help with taxes.”
Jordan recommends discussing your insurance needs with an agent and requiring tenants to purchase renters’ insurance.
“The most important thing to know about house hacking is that you should only do it for extra income, not because you need the rent to make ends meet,” Jordan says. “You need to be certain that you can afford it even if the house hacking doesn’t work out.”
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