Buying a home and investing in real estate may sound like two separate financial goals. But for some buyers, one property could help accomplish both.
It is called house hacking, and it is a strategy that involves living in one part of a property while renting out another. For buyers interested in becoming real estate investors, house hacking can offer a way to gain experience as a landlord while potentially offsetting some of the costs of homeownership.
Like any real estate strategy, though, it is important to understand how it works before deciding whether it is right for you.
What is house hacking?
House hacking generally means purchasing a property that allows you to live there while generating rental income.
A common example is buying a duplex, triplex or four-unit property. You live in one unit and rent out the others. The rental income may help offset your mortgage payment and other housing expenses.
But a multi-unit property is not the only way to house hack.
Depending on the property and local regulations, homeowners may also rent out:
- A spare bedroom
- A basement or converted living space
- An accessory dwelling unit, or ADU
- A separate guesthouse
The basic idea is simple: Instead of paying all of your housing costs yourself, you use income from part of the property to help cover them.
For some buyers, that can make homeownership feel more manageable while also providing an introduction to real estate investing.
How house hacking could work
Imagine you purchase a duplex and live in one unit.
Your monthly mortgage payment, property taxes and homeowners insurance total $3,500. You rent the second unit for $2,000 per month.
That rental income could help offset a significant portion of your monthly housing costs. You would still need to account for maintenance, vacancies, repairs and other expenses, but your out-of-pocket housing costs could be lower than if you were responsible for the entire property on your own.
Every situation is different, and rental income is never guaranteed. But this example illustrates why house hacking has become an appealing strategy for buyers looking to combine homeownership with investing.
Why buyers are interested in house hacking
One of the biggest advantages of house hacking is the potential to get started with real estate investing while purchasing a primary residence.
Investment properties often have different financing requirements than owner-occupied homes. Depending on the loan program and your qualifications, purchasing a property as your primary residence may provide access to financing options that would not be available for a traditional investment property.
Some loan programs also allow buyers to purchase properties with up to four units, provided they meet occupancy and eligibility requirements.
For example, the U.S. Department of Housing and Urban Development’s Federal Housing Administration insures loans for eligible owner-occupied properties with one to four units. Borrowers must meet program requirements, and at least one unit generally must serve as the borrower’s principal residence.
That means a buyer may be able to purchase a multi-unit property, live in one unit and rent out the others, potentially generating income from day one.
The benefits of starting small
House hacking can offer more than rental income. It can also provide valuable experience.
Being a landlord means learning how to screen tenants, manage leases, handle maintenance and budget for unexpected expenses. When you live on the same property, you may also have a closer view of how the property operates and what it takes to maintain it.
For buyers who eventually want to build a larger real estate portfolio, a house hack can serve as a first step.
It may also create flexibility for the future. Once you move out, you could potentially rent your former unit, subject to your financing terms, local regulations and market conditions. A property that once served as your home could eventually become a fully rented investment property.
Of course, that outcome is not guaranteed. Property values, rental demand, financing costs and personal circumstances can all change.
What to consider before buying
House hacking can sound appealing, but it is not as simple as collecting rent and watching the mortgage disappear.
Before purchasing a multi-unit property, take a close look at the numbers.
Consider the full cost of ownership, including:
- Your mortgage payment
- Property taxes and homeowners insurance
- Repairs and routine maintenance
- Utilities
- Vacancy periods
- Property management costs, if applicable
- HOA fees
- Potential landlord licensing or registration requirements
You should also research realistic rental rates. Look at comparable units in the area to understand what renters are actually paying rather than relying on a best-case estimate.
The Internal Revenue Service also has specific rules regarding rental income, expenses and the use of a property for both personal and rental purposes. A qualified tax professional can help you understand how those rules may apply to your situation.
Financing is an important part of the strategy
Before you start shopping for a duplex or fourplex, talk with a mortgage professional about your goals.
Loan requirements can vary based on the number of units, whether you plan to occupy the property and the type of financing you choose. In some cases, lenders may also consider expected rental income when evaluating your ability to qualify, depending on the loan program and documentation requirements.
The Consumer Financial Protection Bureau’s home loan resources can also help buyers understand the mortgage process and the questions to ask before choosing a loan.
A mortgage professional can help you explore your options, understand potential down payment requirements and determine what may fit your financial situation.
Is house hacking right for you?
House hacking may make sense for buyers who want to become homeowners while exploring real estate investing. But it also requires a willingness to take on the responsibilities that come with owning and potentially managing a rental property.
You may be sharing a wall, driveway or outdoor space with your tenants. You may receive a maintenance call when you are trying to enjoy your weekend. And you will need to plan for the possibility that a unit could sit vacant.
Still, for the right buyer, those tradeoffs may be worth considering.
House hacking offers a reminder that homeownership does not always have to follow one traditional path. By purchasing a property that meets both your personal and financial goals, you may be able to create a home for yourself while taking your first steps into real estate investing.
The key is to understand the responsibilities, run the numbers and build the right team around you before making your move.
