House Hacking: When a homeowner rents out some portion of their house or land, or is in the process of a live-in flip (fixing it up while living in it, with plans to sell for profit later).

Generally, Americans spend about a third (33%) of their income on housing. In some high-cost-of-living cities, it can creep up to 50%! With that in mind, imagine the difference it makes when 33 – 50% becomes:

0%

Or less! That’s magic of house hacking. Your monthly mortgage can be paid for by your “roommates,” or, you can fix up and sell later, essentially wiping out any living costs you had up until that point.

Of course, this doesn’t work for all living situations, but see if you can get creative to make it yours! Do you have a nice basement? House hack it by making the investment to add a kitchen and bath and a separate entrance, and you could turn your largest expense into income! Perhaps you could rent a portion of your land to someone living in a tiny house. There’s options out there!

 

House hacking has many advantages. Allow me to highlight a few:

• Live for free, or close to it!
• Roommates will help pay for utilities.
• If you claim the rental income on your tax return, it will beef up your income (if you want to get approved for any kind of loan), but will also allow you to deduct a portion of the expenses of maintaining your home.
• More people coming and going from the home could provide extra security as the varying schedules make it harder for burglars.
• When you sell your live-in flip, as long as you’ve been there at least 2 years, the income is tax-free!

Let’s go a little deeper. Let’s talk numbers. What is the real difference, here? How do my finances really change by house hacking?

Suppose you can buy a $150,000 3-bedroom house. With down payment and closing costs, you might be invested at $12,000 or so. Your PITI payment may be roughly $1000/mo. In most metro areas, a single room in a similarly-priced house should rent for around $500/mo. Folks move in, and now you are only paying 1/3 of utilities to live there.

$1000/mo is $12,000 per year! That’s a 100% return on your money!

But here’s where the tables really start to turn and shape your financial future. Now, you have $12k each year that you didn’t have before. The snowball is now rolling down hill; time is in your favor! As you take that extra cash and park it in the stock market or even rental properties, $1000/mo becomes $10,000s! In time, you’ll build a nest egg to retire with, and hopefully some passive income to supplement your day job (or live on if you decide to retire early!) All this, because you challenged the status quo, and turned your biggest living expense of house into a way to increase your income.