House Hacking: Tackling Your Biggest Expense
Housing is almost everyone’s biggest expense, and it is largely viewed as an inflexible essential. For renters, the rental market is what it is. For owners, the cost of the mortgage is the price paid to own a home. Most folks only consider whether it is worth paying a little less to live a little farther away from where they want to live or choose a home that requires a little extra care. They never question housing rates beyond whether they can make compromises to afford a home.
Our acceptance of housing prices at face value impacts societal trends, including the increasing number of adult children living with their parents. If it is too expensive to rent or buy, moving back in and sharing space with a relative that already has a home makes sense. This is the primary “creative” solution adopted by individuals who feel they are priced out of the housing market.
For those that have this opportunity, living with family members for a short period of time can facilitate building foundational financial security. For example, living with parents or a parent while building a six-month emergency fund can create an enduring financial safety net for a young person.
But many individuals stay in this situation for years because they do not see an alternative. Staying in multi-generational homes makes sense for many people. But for those that just feel stuck, there may be another way. We can adjust what we need to pay for housing if we are willing to get creative and house hack, turning our largest expense into a smaller expense, or even a profit, to generate wealth.
Classic House Hack
Scott Trench, author of Set for Life: An All-Out Approach to Early Financial Freedom, built his wealth through a classic house hack. Trench put down a 5% down payment of $12,000 on a $240,000 duplex. That $12,000 was almost all the money he had at that time, but purchasing that duplex allowed him to live inexpensively and build wealth. Trench claimed one of the basement bedrooms in the lower apartment in the duplex, sharing that apartment with roommates who paid rent for their rooms. He also rented out the entire upstairs apartment to others. By taking the least desirable room in the duplex and renting other rooms and the other apartment to multiple individuals paying rent, he was able to not only cover the mortgage cost but receive a little cash flow beyond the mortgage. Trench removed his housing cost and began slowly saving until he could buy a larger multifamily property where he could replicate this process with a higher cash flow.
This path does entail some compromise initially. Living in the basement of a multifamily property is not my dream home, and it probably is not yours either. It was not Scott Trench’s dream living situation either, but he started in the apartment to build wealth quickly. Over time, he moved into an upstairs apartment, still enjoying free housing but accepting a little less cash flow since he had other streams of income at that point. When he got married and decided to start a family, he moved out of his multifamily property and into a home with just his family. By then, his house hacks made him enough money that he never had to work again, if he did not want to work.
Trench’s story shows that the classic house hack often means accepting a less-than-desirable housing situation initially, but it pays off in the long run. A house hack also is not forever. A house hacker can buy a multifamily property, live in it, and set a goal to move out of that property within a certain amount of time. That time can be a year or ten years, depending on wealth building goals.
We also could not precisely replicate Trench’s methodology in most locations with today’s housing market. However, putting down $20,000 or $25,000 instead of $12,000 can open up similar opportunities. If that still feels undoable, explore what opportunities exist specifically for you. Veterans or members of the military can often secure loans with even smaller down payments. First-time homebuyers with a Federal Housing Administration loan only need a down payment of 3.5%. Explore opportunities in your area that allow lower down payments to decrease the barrier of entry for your first house hack.
No Down Payment House Hack
If any money down is a barrier to entry, you can still start your house hacking journey without buying. Yes, renters can house hack! If this interests you, look into renting a home with multiple bedrooms or living spaces and rent out a part of the space for short-term rentals or long-term rentals. This requires a lot of planning on your part, so it is more difficult than a classic house hack, but it can be done!
Verify that there is nothing in your rental agreement, your HOA requirements, or any other local ordinance that would prevent you from renting out part of your space. Many rental agreements, buildings, and areas prevent short-term rentals or subleasing part of your space. Going against these regulations is a bad idea. Find a place that allows short-term rentals, like listing on Vrbo or Airbnb, and then get started.
Depending on where you live, you can manage short-term rentals all year, seasonally, or for specific events. If you are a student, you may want your space during the semester but do not mind visitors between semesters. If you live near a stadium or concert venue, you can list your space for the big game or concert to make a lot of money for very few nights. If you travel frequently and have a friend willing to manage the place for 20% of the earnings, you can rent out your entire place while you are out of town. Any creative renting out of your space is a form of house hacking.
You can use your proceeds to either offset your rent cost or save for a future down payment so you can move to a classic house hack in the future or even set up a bunch of short-term rentals if you find you enjoy them! You can also just use this as a way to save for a down payment on your own home so you can move from renting to owning more quickly. House hacking is flexible to accomplish your goals, and this method requires no down payment.
Fixer-Upper House Hack
Another way to avoid or reduce the down payment required to purchase a house hack is to find a fixer-upper property at a lower rate and use your preexisting skills to make the property livable. If you work in construction, are an electrician, or have some other pertinent skill set, you can fix up a house as you go. Fix up the spaces you plan to rent out to others first, and offer rents a bit below market rate to account for living in a construction zone at times. This allows you to offer affordable housing to others and make your own housing more affordable!
A fixer-upper house hack allows you to take one room yourself, rent the other rooms to others, and use the rent money for repairs and to cover the mortgage. As you fix up the place, you can pocket more of the rent money and even raise rents to account for the nicer accommodations. By the end, you can choose to live in the home you fixed up or even flip it and repeat the process to continue living for free and building wealth.
Fancy House Hack
House hacking is not just for those starting out their financial journeys. There are more house hacking opportunities for a young single individual willing to live in a room in the basement apartment, but there are still house hacking opportunities for those with families or slightly pickier housing situations.
A common fancy house hack is when a family buys a single-family home with a basement apartment, apartment over the garage, or small studio unit with a separate entrance. A family can live an independent life in their house while renting a small unit to a renter to supplement their income and help pay off their mortgage. Fancy house hacks do not lead to free housing, but having an extra $750 to pay towards a $3,000 mortgage can help offset costs substantially.
The easiest way to do a fancy house hack is to get a reliable long-term tenant in place and receive a relatively low sum in rent, but short-term rentals are also an option if that makes sense for the property and location. In this case, the house hacker may even allow access to some amenities, like a yard with a grill or pool, to short-term renters.
A fancy house hack can also be done without an entirely separate space, if a family is willing to rent out a room. This usually means sharing spaces like the kitchen, but it may mean offsetting the cost of a less expensive mortgage for more cost savings. Every fancy house hack is unique, but they all let house hackers with more particular housing needs reduce their housing expenses.
Simple House Hack
All of the previous examples are types of house hacks, but any situation where you creatively figure out how to live for less than others is a house hack. The simplest house hack is having roommates. I paid $250 in rent for a few months in Las Vegas thanks to having roommates because I was willing to share my space with many people. This made sense because I was barely ever home in the first place as a high school math teacher working towards a master’s degree, attending Teach For America meetings, and playing Division I rugby. It would be silly to pay a lot of money for a home that I rarely spent time in other than sleeping.
Other simple house hacks include renting a one-bedroom apartment with a huge living room, putting in a temporary wall, and having roommates share the space. The same concept can be used to turn one large bedroom into two if door access allows. The frugalest of us all may even decide to share a room with a roommate, but make sure it is someone with a similar sleep schedule so this does not backfire! Any creative use of space counts as a house hack.
House hacking is not for everyone, but thinking about house hacking is. By considering whether we need to pay the prices we assume we need to for the most expensive parts of our lives, we start to question other expenses and think more creatively about how to build the life we want without paying outrageous prices. There are many expenses we can hack—housing is just the largest.
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