What is house hacking?
House hacking is the act of buying a house to live in and rent out the additional rooms or units in order to cover some or all of your monthly PITI expenses.
For example, let's say you buy a single family house with 4 bedrooms for $250,000. Before you buy, you use a mortgage calculator to understand your monthly principal, interest, taxes and insurance ("PITI") expense. With a 5% down payment of $12,500 (not including closing costs), your monthly expense is $1,500 and you budget another $250 per month for maintenance. So your cost of ownership is $1,750.
Prior to buying, you were renting a bedroom in a similar house in the neighborhood for $700 per month. You figure you can rent out 3 of the 4 bedrooms in your new house for $2,100. Every month, your 3 tenants pay you monthly rental income of $2,100. You use that money to pay your monthly PITI expense and you have $350 in free cash flow after setting aside $250 for maintenance. Your tenants are essentially buying your house for you and paying you to live there. This is house hacking.
After a year, you realize market rent has risen to $750 per bedroom, so you raise rent and your free cash flow increases to $500 per month.
When does it make sense to house hack?
House hacking can always be feasible. Even if you have a family and you want privacy, you can buy a duplex, triplex or quadplex and rent out separate units instead of living with strangers in a single family house.
Is house hacking worth it?
Cash on cash return is arguably the most important rental property investing metric. It is the truest sense of capital efficiency. House hacking produces some of the highest achievable cash on cash returns. Another benefit of house hacking is that you qualify for primary residence interest rates and down payment requirements as well as FHA 203k rehabilitation loans.
Build your rental property portfolio via house hacking
Many rental property investors start their real estate investing journey with a house hack. Then, when they have saved up enough money to buy a second property, they fill their room or apartment unit and move into the new house and do the same thing over again. If you have a stable source of income and you want to build generational wealth through real estate, house hacking is one of the most powerful tools that you should be aware of.