18 Ways to Retire Early by House Hacking

This article originally appeared on The Financially Independent Millennial and was republished with permission.

House hacking has been taking place way before the phrase “house hacking” existed. House hacking is when someone buys a primary residence and rents it to tenants who cover a portion or all of the mortgage. So, instead of covering the entire mortgage payment to gain equity in the home, the tenants pay rent towards the mortgage while you gain “free” equity. By eliminating the most significant monthly expense, homeowners are taking the first big step towards retiring early. Here are 18 ways to never pay rent again via house hacking.

18. Crunch the Numbers

Running the numbers means understanding the fundamentals such as vacancy rates, repairs, property taxes, and property management-related costs. House hackers might hedge their bets by assuming that the property will not be 100% occupied and have no maintenance. Each market is different in that respect–some markets have faster turnover rates than others. Also, specific markets have more maintenance and ongoing costs than others (i.e., states in the north have additional snow removal costs).

Plan to set aside 10% of the revenue for maintenance or 1% of the home’s value each year, whichever is higher. The same 10% rule should be applied to account for vacancies, as well as property management (even if you’re managing the property yourself)– this sets you up to scale out of this role eventually. In the meantime, homeowners can use this property management money as payment to themselves while they’re doing the managing. 

17. Find a Location with Demand

Choose a location with enough reliable demand to get sound roommates quickly. House hackers can gauge market sentiment by joining local Facebook roommate groups. Naturally, areas with higher populations have more demand. However, don’t forget to also look near large businesses as many people search for short commutes. Other locations to consider include college towns, young professional areas, neighborhoods near hospitals, military bases, or government jobs. These areas play into reliable demand, which is crucial for house hacking.

16. Seek out a Safe Neighborhood 

A safe neighborhood will attract the right tenants while keeping maintenance and repair costs down. Cash flowing is not worth sacrificing your safety. Avoid areas with homes that are boarded up or have lots of broken windows or burnt-out streetlights. Instead, search for family-friendly neighborhoods near a good school district.

Check out neighborhoods online using sites like Niche or Nextdoor. Once you’ve found some of the communities worth checking out, go to them in person and drive or walk around. Also, consider visiting them at night to see if the neighborhood quality changes.

15. Work with an Investment Focused Realtor

Purchasing a property for house hacking is best done with a real estate agent, aka realtor. However, it’s beneficial to find a realtor who has experience with real estate investments. Ideally, the realtor owns real estate investment properties in the area. But if nothing else, he/she understands the numbers for house hacking and isn’t solely focused on putting families in homes that fit their budget. Find a realtor who understands the local market, particularly in regards to rentals in the area. Realtors who either place tenants or have rentals themselves are even better.

14. Research Types of Properties

Multi-unit properties can be better for privacy–homeowners have their own unit. So, there’s no sharing a kitchen, bathroom, or living room (unless you choose to rent out an extra bedroom in your home). However, it’s more work to manage 2-4 units in the same building than one single-family home. Those interested in multi-unit homes could apply to become a section 8 landlord–this would offer monthly income guaranteed by the government.

Single-family homes can get configured into multiple units (make sure to follow local laws), rented out per room, or a combination of both. Renting out per room is a great way to get the most money but can lead to the most work in terms of managing leases and rent payments. Note that some localities have restrictions on the number of individuals living in the house that are unrelated (not family members).

13. Analyze Comparable Rentals

Begin by visiting real estate marketplaces such as Zillow or Redfin and Facebook Marketplace, and local housing Facebook groups. Search for properties similar to yours (bed/bath ratio, condition) and have been recently rented (within the past three months) or are currently listed. Aspiring house hackers can take the average rent price and use their local knowledge to account for any location changes (closer to a grocery store, farther from the metro station, etc.). It offers an accurate idea of what the property is worth to the market. There are also many software tools built for finding comparable rentals (e.g., Rentometer), but not all of these are free.

12. Plan Ahead for Maintenance

10% of the rental revenue should get set aside for property maintenance each year.  Indeed, it will go towards yearly care such as maintaining the lawn, removing snow, or managing a pool, as well as long-term maintenance. If the lease doesn’t include having the tenants maintain the property, make sure to account for all necessary care.

Furthermore, there’s generally long-term maintenance that won’t be the tenant’s responsibility. Landlords will need to set money aside for major maintenance costs such as the HVAC going out, roof replacement, new siding, and replacement sump pumps.

11. Put Down as Little Money as Possible

While putting little money down may seem contradictory to the goal of house hacking (because this will increase your monthly expenses), it can be beneficial. The money that wasn’t used as a down payment can get invested in other opportunities. Investors can often obtain a higher return on their money than the mortgage interest (between 2-3% in 2021). In other words, you might very well be making more money investing elsewhere than using it as a down on your house.

To put down as little money as possible, house hackers will need to work with multiple lenders (between 3 and 5). It’ll allow you to get the best of everything: rates, down payment percentage, and closing costs. When finding lenders, choose a multitude of different types. For example, there are direct lenders, mortgage brokers, and credit unions. Comparing a wide array of options and plans allows homeowners to find the best match for their house hack.

10. Search Online for Tenants

The best way to find tenants/roommates today is by joining online housing Facebook groups for the local MSA (Metropolitan Specific Area). Doing so provides the broadest audience of geographically relevant tenants. It’s easy to post what you have available with photos and who you’re looking for in a roommate. These Facebook groups also serve as a platform to direct message potential tenants who are also posting what type of place they’re looking for (rent budget, exact location, etc.). Not everyone is on Facebook, so Craigslist is another platform to search for potential tenants.

Consider using professional photos with proper lighting to stand out from the crowd. Also, include a captivating description that lists all pertinent information such as rent price, utilities, availability dates, general location. And, don’t forget to be upfront in terms of other roommates or the pet policy.

9. Rent Seasonally

Having a large pool of tenants to choose from is key for not only finding high-quality tenants but filling your rooms or units as quickly as possible. Since most renters relocate in the spring and summer seasons (specifically May through July), house hackers ideally want the leases to begin/end in the spring or summer.

If tenants wish to have non-12-month leases, be aware of the cost to rent a place off-season– with less demand. For example, you may have to drop the rent price to get the room filled quickly. Another popular relocation time is in January (directly after the holidays), but this is a much shorter window.

8. Don’t Wait to Drop the Rent

Is no one responding to your available housing post? If the market is moving quickly, it could be that your rent price is too high. Homeowners should wait no longer than two weeks in a fast-moving market to drop the price (typically ~5% drop). If no one is biting because the demand is low, lower the price within a month. Getting a room filled at a slightly lower price is better than sitting on a vacant room with no rent at all (vacant space = house hack fail).

Another reason to lower the rent is when finding a long-term tenant seems to be taking more time than originally planned. Don’t be afraid to decrease the rent price for a better tenant who makes less work for you. Doing so will save on maintenance and repair costs. So, the time it takes to find these tenants is worth some potential rent loss. Additionally, a tenant who can sign at least a year lease is better than having a high turnover. Doing so provides a reliable stream of money, and there’s less time spent finding replacement tenants. 

7. Decide How to Split Utilities

It can be difficult and cumbersome to split utilities each month when house hacking a home built as one unit but converted into multiple units. If there’s one gas meter for all units, it’s easier to split the cost upfront and include this in the rent price.

Further, not all utilities get billed monthly, such as water. So, by offering the tenants an all-in-one cost, homeowners can avoid the hassles of splitting the bills each month. Tenants may also find this attractive because there are no surprises for them each month–everyone knows how much they’re paying, starting from the day they sign the lease. 

6. Share the WiFi

Whether we’re talking about a multi-unit property or a reconfigured single-family home, it’s financially advantageous to share the WiFi between the units. Instead of paying an internet provider 2-4x subscriptions per month, savvy investors can simplify it and pay less while not wreaking havoc on the internet speed. 

A WiFI mesh network such as the Google Nest router works well. Or, for a more commercial setup, check out Ubiquiti Networks mesh home network service. Even though these mesh networks can be expensive upfront, reducing internet subscriptions is a cost-saving that can go directly into your pocket. Further, your tenants get a discount for sharing the WiFi, and the equipment can get used for the long term.

5. Craft a Thorough Lease 

When crafting a lease, be sure to follow local laws and have the lease written in a way to protect your interests. Working with a local attorney is an effective way to protect your interests as he/she will understand exactly how to write the contract. There are also online services with pre-written contracts; however, you get what you pay for, and an ineffective lease in court can cause many issues down the road.

Beyond the fundamental components of a lease such as rent term, the full name of who the lease belongs to, security deposit (if any) as well as any other necessary fees, the lease needs to clearly outline tenant and landlord responsibilities with regards to maintenance, repairs, and general upkeep. It’s essential to walk through the lease with any future tenants to avoid any misunderstandings.

4. Curate a Roommate Agreement

If renting out a room or multiple rooms in a home, a roommate agreement can go a long way. House hacking shouldn’t lead to roommate conflicts. House hackers don’t want to get stuck in the situation where they, as the landlord, are mediating tenant disputes. Get ahead of this by having everyone sign the agreement upfront. If someone breaks it, the other tenants can point to this contract instead of requesting you to intervene. 

The roommate agreement is separate from the lease agreement. This document can dictate how common area messes get handled as well as quiet hours. It can also specify who can use what materials in the kitchen (e.g., spices get shared while refrigerated items are per individual) and a cleaning schedule. It serves as a fallback for when there are disagreements regarding what has gone wrong and makes your life as the house hacker/landlord easier.

3. Screen Your Tenants

Credit and background checks are worth the cost to find reliable tenants. A credit check offers a rearview mirror approach (credit report) to financial trustworthiness. And background checks (i.e., evidence of evictions) display the tenants’ reliability.

An initial phone interview is crucial to verify the person is who they say they are (you don’t want a catfish situation). If you find a roommate and not just a tenant in a separate unit, make sure that you’re a good fit for one another by asking questions about work/sleep hours, cleanliness, significant others, nightlife habits, hobbies, etc. If they’re a good person but lack a fundamental for you, this could be a deal-breaker.

2. Require Renters Insurance

House hackers do not need renters insurance (only homeowners insurance). However, the tenants should have renters insurance. It’s essential because the homeowners’ liability exposure increases dramatically without it. If tenants don’t have renters insurance, you have to increase the number of people claimed on your homeowner’s insurance. As a result, the yearly premium will increase.

Renters insurance will protect the tenants’ goods and belongings from damage or theft, and it’s not expensive! Require the tenants to add you, the landlord, as “additional interest” on their renter’s insurance policy. This way, if the renter cancels or lapses on their insurance, you’ll get notified. 

1. Take Advantage During Tax Season

House hacking comes with all the advantages of being a homeowner instead of a renter during tax season (i.e., numerous tax deductions). However, it can become very complicated, as well. To take full advantage of all potential deductions and ensure hire or consult a CPA to ensure all laws are followed. 

The very basic overview of tax deductions to know are as follows:

• Divide the house’s square footage between what you use and what everyone else uses.
• Deduct part of the monthly mortgage interest and mortgage insurance.
• Deduct many of the initial closing costs on the home.
• Depreciate part of the cost basis of the home over 27.5 years. Doing so will decrease your tax liability.
• Capitalize part of any construction costs or additions over 27.5 years.
• Maintenance costs can get deducted if they take place in a tenant portion of the home.

Final Thoughts on House Hacking

House hacking can eliminate or significantly reduce your most significant monthly expense: your rent. It’s an excellent way to increase your net worth through both monthly rental income, appreciation, and equity in the home. House hacking does come with its drawbacks, such as managing tenants and potentially living with roommates. However, finding the right house and the right tenants is a challenge worth taking if the goal is to achieve retiring early!

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