What Is House Hacking? Turn Property Into Profit

The word “hacking” has a pretty negative connotation, and for good reason. The act of gaining unauthorized access to a computer or system’s data isn’t quite as stylish as Hollywood has made it out to be in “The Matrix” or “Mr. Robot.”  

But what about “house hacking?” That new-age term that helps borrowers turn a profit with their greatest investment—their home. You don’t have to “download the mainframe” or “breach the firewall” to learn a little more about house hacking, its pros and cons, and how to get started. Keep on scrolling! 

What Is House Hacking? 

 House hacking is a creative real estate strategy for homeowners to generate income from their property. In the past, it involved buying a multifamily property and living in one unit while renting out the others. This way, tenants help pay the mortgage, and the owner builds equityThe difference between what your home is worth and what you owe on your mortgage.equityThe difference between what your home is worth and what you owe on your mortgage. over time. But house hacking isn't limited to multifamily homes these days.  

Shrewd investors have found other ways to make their primary residence generate income, like renting out a spare room. These approaches not only offset housing costs but also provide valuable landlord experience.

Think of it this way: traditionally, renting an apartment means lining someone else's pockets with your hard-earned cash. House hacking flips that script. You'll build equity in a property while potentially generating income from it. It's a win-win for aspiring homeowners and savvy investors alike. 

House Hacking Pros and Cons 

Like many things in life, house hacking isn't a one-size-fits-all approach. Before you dive in headfirst, weigh the pros and cons of this new-fangled, money-saving strategy to see if it aligns with your goals and lifestyle.

Pro #1: House Hacking Generates Income 

House hacking can significantly improve your financial situation, most notably as a passive source of income. Rent collected from tenants will contribute directly to your monthly housing expenses. The extra cash flow earned through house hacking gives you the option to pay down your mortgage faster and save up for another big purchase—like a second investment property, perhaps?

Pro #2: House Hacking Helps Pay Housing Expenses 

We can sum up house hacking in one word: flexibility. The funds you receive from those renting space in or on your property can be allocated towards your mortgage payment, significantly reducing your month-to-month financial burden.  

And even if the rent doesn't fully cover your mortgage every month, you're still winning big. House hacking can significantly reduce housing costs, such as your utilities, which are often the largest monthly expenses on our budget. Plus, you can likely deduct a portion of your housing expenses and depreciationAllows rental property owners to deduct a portion of the building's value from their taxes each year.depreciationAllows rental property owners to deduct a portion of the building's value from their taxes each year. on your taxes, saving you even more money.

Expert Tip

You can use the funds to cover property taxes, freeing up more of your own cash flow for other priorities.

Pro #3: House Hacking Helps Build Equity 

With each mortgage payment you make, you gradually gain more ownership of your property, AKA equity. All that accumulated equity can be tapped into later for various purposes, such as future investments, renovations, or even a down payment on another property.

Pro #4: House Hacking Has Tax Advantages 

Owning a “rental property” makes you a landlord, which offers several potential tax advantages. We recommend consulting with a tax professional to explore deductions you might be eligible for, such as repairs, depreciation, and mortgage interest. In a nutshell, these deductions can further improve your financial picture by reducing your taxable income. 

Pro #5: House Hacking Can Jumpstart Your Investment Portfolio 

House hacking provides a unique entry point into the real estate market. You're essentially acquiring an investment property that doubles as your place of residence. Over time, your net worth may also increase as the property value appreciatesThe increase of a home's value over time.appreciatesThe increase of a home's value over time.. This jumpstart allows you to build wealth through real estate ownership, even with a limited initial investment. 

Con #1: Not All Properties are “House Hackable”  

House hacking does not come without its challenges. Keep in mind, not all properties are suitable for house hacking. Your current multi-unit or single-family property may not have an ideal layout for separate living spaces. And outside factors like location, zoning regulations, and potential renovation needs should be carefully evaluated first before investing in a property or hacking your current abode.  

Con #2: House Hacking Means “Landlording” Duties 

House hacking comes with the responsibilities of being a landlord. Screening tenants if they’re not a friend or relative, managing all repairs, dealing with maintenance requests, and, in the worst cases, potential evictions are all part of the territory. So what does all that mean? Be prepared to invest time, energy, and potentially some financial resources into managing the rental unit(s) on your property.  

Con #3: House Hacking Could Spell Privacy Issues 

For most of us, our days of chumming it up with a few roommates in a cramped college dorm are over. Thankfully. But those cringy and awkward encounters we’re all remembering in our heads right now may return for some house hackers. 

Sharing a bathroom, kitchen, or even walls with tenants can require adjustments to your routine and noise tolerance. Consider how comfortable you are living near others and discuss clear expectations around noise levels, lights after dark, guest policies, and shared spaces. If you crave complete privacy, a house-hacking situation might not be the best fit for you. 

Con #4: House Hacking Delinquencies  

There's always a risk of tenants falling behind on rent payments. While a thorough screening and clear lease agreements can mitigate this problem, there’s always the chance. But having a financial buffer or emergency fund can help you weather unexpected vacancies or late payments in the meantime.  

House Hacking Strategies  

Here are some popular house hacking strategies to consider based on your property type and lifestyle preferences: 

Short-Term Rental Rooms 

House hacking by renting out a short-term space in your primary residence for tenants’ vacations can be a great way to get started, especially if you have a spare room available. It requires minimal upfront investment, and the income generated can help cover those housing costs mentioned above. 

But since you'll be sharing your intimate space with tenants, including common areas, setting clear boundaries and house rules is a must to avoid privacy concerns and potential conflicts. 

Before diving in, be sure to research short-term rental laws in your state and any restrictions your Homeowners Association might have on rentals. Then turn your attention to online marketplace platforms like Airbnb or Vrbo to see which offers more flexibility in rental periods and rates compared to traditional leases. 

Multi-Unit Properties 

While single-family homes dominate the market, many real estate investors favor starting with multi-unit properties like duplexes, triplexes, or fourplexes for house hacking. This strategy allows you to live in one unit and rent out the others, potentially generating income to offset your living expenses or even turn a profit. 

Although it’ll require a larger upfront investment and managing multiple tenants, you’ll sacrifice much less privacy compared to room rentals since each unit typically has its own entrance and living quarters. Additionally, the potential rental income is higher due to renting entire units. 

This approach is ideal for those seeking a more substantial investment and not simply looking to hack their current home. And you should be comfortable with the responsibilities of being a landlord to multiple tenants.  

Acessory Dwelling Units  

Acessory Dwelling Units, also known as ADUs, granny flats, or in-law suites, are small, self-contained units built on an existing property and offer a unique house hacking opportunity. 

These units are typically converted garages, basements, or even detached structures, creating a separate rental unit while maintaining a distinct living space for your family within the same property. They’re an excellent option if you have the space and are comfortable sharing a lot with a separate tenant. 

ADUs are particularly appealing in areas with limited space or zoning laws that favor such developments. Creating an ADU often involves a significant upfront investment and navigating local building codes. However, despite these initial challenges, ADUs can add considerable value to your property. If you're willing to invest time and resources upfront, ADUs can be a rewarding long-term house hacking strategy that balances earning rental income with maintaining that all-important personal privacy. 

Starting the House Hacking Process 

As we’ve learned, house hacking can be a powerful tool in a homeowner’s tool belt. And if you’re a renter interested in joining the “house hacker lifestyle,” an excellent place to start is getting pre-qualified. 

A pre-qualification is an estimate of how much you can borrow based on a preliminary review of your financial information. It helps you decide whether to apply for a mortgage loan or not. Pre-qualification is not a loan guarantee, but it will get you one step closer to hacking the real estate game.   

Kick off your journey with a pre-qualification from our team!