Have you ever heard of “house hacking“? Don’t worry, we hadn’t either, until just a few years ago.
House hacking is when you invest in a multifamily property (usually a duplex or a triplex), live in one unit, and rent out the other(s). You collect rental income from your tenants every month, which you then use to pay down your mortgage.
If the rental income is high enough, you might even be able to pull off living for free.
In this video, we go into all the details about what house hacking is, an example house hack with numbers, and how to get started with your first house hack.
House Hacking 101 – Video Transcript
Today, I’m in Washington, DC. Home to Capitol Hill, the Washington Monument, lots of free museums, and, yes. The first home I ever house hacked, which is right there behind me. My husband and I bought this home when we were 22, can you believe it?! We still own it today, and it continues to make us hundreds of dollars in passive income every month.
In this video, I’ll share with you exactly what house hacking is, how to determine whether a property is worth house hacking, and how to get started with house hacking so you can start living for free.
Over the years, I’ve house hacked 4 duplexes. The duplex in Oakland where we’re currently living has 4 bedrooms upstairs, which is where we live, and 4 bedrooms downstairs, which we rent out.
Because of the magic of house hacking, we are living essentially for free in the ridiculously expensive San Francisco Bay Area. Whether you live in a big city or a small town, the strategy I’m about to share with you will allow you to lower your living costs and start living for free.
Okay, ready to jump in? Let’s start with the basics. What exactly is house hacking? Well, let’s take a look at the home that I house hacked all those years ago.
As you can see, it looks like a typical DC row home, but if you look closely, you’ll see that it has two entrances.
And that’s because it’s actually a duplex. When we bought this home a little over 10 years ago, the basement in-law suite had previously been a brothel, so we had some work to do, but the upstairs unit was in decent shape.
So, we moved in, cleaned up the in-law suite, and rented it out. The rental income from that downstairs unit didn’t quite cover our entire mortgage at that time, but it came pretty close. Essentially, we were house hacking, though we didn’t know that that’s what the cool kids were calling it.
Okay, so house hacking. House hacking is when you buy a home and rent out part of the home to help pay down the mortgage.
You can do this with a duplex, triplex, or other multifamily property by living in one unit and renting out the others, just as we did with our duplex. Or, you can even do this with a single family home, by renting out some of the bedrooms.
Let’s take a look at a house hacking example.
Let’s say that you were to buy a duplex for $300,000. You put twenty percent down, or about $60,000. That means you would be taking out a loan for $240,000.
Based on an interest rate of, say, five percent, your monthly mortgage payment would be about $1,300. Add in property taxes and insurance, and let’s say that you’re looking at a $1,600 payment per month.
Now remember, you are living in one unit and renting out the other unit. So the goal here is to determine whether you can get the other unit to rent for at least $1,600 per month.
To do this, you’ll need to check out local rent comps. No need to do a complicated analysis. I usually just open up Craigslist and see what other apartments in the area are renting for.
If it looks like other apartments of a similar size are renting for at least $1,600, then there’s a good possibility that you could do the same with this fictional unit in your duplex and essentially live for free.
Even if you end up renting the unit out for $1,200 per month, that means that your monthly payment is just $400, which would likely be cheaper than renting a place. Plus, you would be building equity and also getting the tax benefits that come with depreciation, so there’s that too.
And of course, if you were able to rent it out for, say, $1,800, then you’d be living for free, AND making $200 per month.
Now, I will throw in a few caveats here. As a landlord, there will be some work required of you. Usually not a ton, but you will have to step up and do some things, even if you decide to use a property manager.
Thankfully, the internet makes most things pretty easy these days, including finding tenant applications, leasing forms, handymen, and more.
You should also factor in some reserves for surprise maintenance issues, like broken toilet seats, leaky faucets, stuff like that. I usually like to have a few thousand dollars in a reserve account to cover any unexpected costs.
Oh, and you should also factor in ongoing costs like landscaping and pest control, which would be things you would be doing for your house anyway, but just keep those in mind.
All in all, house hacking doesn’t have to be super complicated. When we house hacked our first duplex, we didn’t do any fancy analyses or run any financial models.
We just knew roughly what our monthly payments would be, and we knew what we could rent the unit out for. And really, that’s about as much as you need to know to get started. Don’t get stuck in analysis paralysis. Just jump in and try it.
If you’re looking to buy a home now, and you think you might want to try house hacking, consider expanding your search to include duplexes and triplexes. For each potential home, take a look at whether there’s a vacant unit that you could move into, and then look at what the other units currently rent for or could rent for.
And, why stop at one? Once you house hack one home, I guarantee you’ll be hooked.
As you’re house hacking, continue saving so that you can house hack another home and then another. Once you move out of that first duplex, you can rent out both units, which means you’ll likely be cash flow positive each month. In other words, your house will be paying YOU.
House hacking is an incredible source of passive income, and once you build up enough of those passive income streams, you can replace your income, quit your job, travel the world, and live life exactly as you’ve always wanted to live it.
But it all starts with that first stream of passive income and that mindset shift from paying your house to getting your house to pay YOU.
So, are you thinking about house hacking? Or perhaps you’re already doing it? Comment below and share your tips, strategies, and questions. I’d love to hear from you.
And if you’re looking for a way to create passive income, but you don’t want to share your living space or be a landlord, you might consider investing passively in something called real estate syndications, which are essentially group investments.
This is the strategy I focus on now, because frankly, it’s hard to keep moving from house to house and continue house hacking new properties when you’ve got two kids and tons of toys.
As a passive investor in a real estate syndication, I get all the benefits of investing in real estate, including monthly cash flow distributions and great tax advantages, without having to fix a single toilet or talk to a single tenant.
To learn more, sign up for our free 7-day email course, Passive Real Estate Investing 101.
And finally, if you liked this video, hit the like button below, share it with your friends, and be sure to subscribe. I’m Annie Dickerson with Goodegg Investments. Thank you so much for watching, and I hope you have a sunny-side-up day.
