Necessity is the mother of invention, so they say. Gen Z, millennials, and many others have found a way to make housing more affordable with a concept called home hacking. How it works is you rent out part of your property to help pay the mortgage and generate additional income.
A rental can be as small as a spare bedroom for short-term contract workers like traveling nurses. You can use platforms like Vrbo and Airbnb to rent out part of your home for seasonal rentals to snow skiers and other vacationers or attendees for music festivals and other weekenders, and you can buy a multifamily property and rent out the other units while you live in the remaining unit.
According to this example, you can purchase a duplex for $350,000 using an FHA 30-year, fixed rate mortgage at 6.75% interest and with 3.5% as a down payment. The monthly mortgage payment on your $337,750 mortgage is $2,200. If you can rent the other unit for $1,500 to $2,300, you’ll go a long way toward building wealth. Homes are increasing by more than 4% annually, so you could sell the duplex in five years for $425,828, minus the $317,065 you still owe the lender, leaving you with a profit of $108,763 (not including capital gains taxes, home insurance, and maintenance costs).
There are several loan programs that are tailor-made for house hacking, with special advantages for buying a multi-family property of two to four units.
FHA loans are government-guaranteed, ideal for first-time or lower-income borrowers. They also allow you to buy a multi-family property up to four units with a 3.5% down payment and a credit score of at least 620 (580 for a single-family home), and you must live in one of the units as your primary residence for at least one year.
VA loans are only available to active-duty service members and eligible veterans and can also be used to be a multifamily property up to four units. They require no down payment and no private mortgage insurance as long as the borrower uses one unit as their primary home.
Conventional loans—those eligible for packaging into mortgage-backed securities through Fannie Mae and Freddie Mac—require higher credit scores of at least 700 (620 for single-family homes) and a larger down-payment of 15% to 25% for a multi-family home.
A plan for rental income will help you increase your borrowing power with lenders, who will likely ask for a property appraisal that includes a rental analysis to determine “fair market rent for each unit.” You may also help your case by having property management experience, taking a property management course or hiring a professional. Your lender will give you a loan estimate so you’ll know how much you can spend on a home and how much money you’ll be required to escrow upfront.
Once you’ve been pre-approved for a loan, you and your real estate professional can start looking for the right property to buy in a desirable area, preferably within walking distance or a short drive to attractions and conveniences that renters will enjoy. You’ll pay more for the property, but it will be worth it in terms of rentability. Are there restaurants, schools, businesses close by? Is public transportation available? Is the property near entertainment venues? What about medical care? You may be able to rent to someone who will be using outpatient facilities. The property must also meet the lending guidelines and loan limitations given to you by your lender.
When you find a property, your real estate professional will run purchase and rental comparables for you. Aim to charge enough rent to cover PITI—principal, interest, property taxes, and homeowners insurance. You can also account for HOA fees, second liens, and maintenance costs. Consult an accountant for advice on deductible items, and rely on your real estate professional for guidance on Fair Housing laws, purchase and rental contracts, and other essential aspects.
Your lender will help you navigate the numbers, from preparing for vacancies to estimating expenses.
Next, find ways to attract renters. Fortunately, advertising has evolved beyond newspaper classifieds, offering a variety of modern options to promote your rental:
- Depending on the property and your rental strategy—whether it's daily, seasonal, or long-term—you can list it on the MLS through your real estate agent.
- Short-term rental platforms like Vrbo and Airbnb are great options for flexible rentals.
- Consider setting up a business account on social media platforms, like Pinterest, to showcase vacancies, photos of your property, and available units.
- You can also advertise in local visitor magazines, through the Chamber of Commerce, student and teacher publications, or on city websites like BrokenBow.com.
It’s important to do your due diligence for renters, including credit scores and criminal background checks. You have every right to ask for a renter’s social security number, employment information, and perform checks by yourself, but using a professional tenant screening service is more than cost effective at $25 to $75, as well as tax deductible, as they may include all or most of the following:
- Credit reports.
- Rental history information, including evictions and lawsuits.
- Employment verification.
- Criminal history.
- Sex offender registries.
- National terrorist watchlist.
- A risk score for landlords.
Remember, this is the age of the entrepreneur. We get rides from car owners on Uber and receive food ordered for delivery through DoorDash, so it isn’t as far-fetched as it seems to rent out a room of your home or rent out the other half of your duplex. Just be sure you’re following local zoning laws, HOA rules and regulations, and that you’re renting rooms that are up to code. In most cases, you can’t rent out a garage for human occupancy, but you can rent out a room or suite with a closet and proper access to heat and air, a private bathroom, and perhaps a small food preparation area like a hot plate and mini-fridge.
Choose a home where you’ll be happy—after all, you’re buying the property as an owner-occupant, so your comfort matters, too.
