House Hacking – The Ultimate Guide to Living for Free

House hacking is how I got started as a real estate investor waaaayyyyyy back in 2015 haha. I love this strategy because it is the easiest method to start, the easiest to avoid analysis paralysis with, and also one of the most lucrative strategies (if done correctly). I wrote this house hacking guide to help you slash your housing expenses and save/invest more of your hard-earned money!

I am convinced that the house hacking strategy remains the best way to begin your real estate investing journey!

What Is House Hacking?

Here is my house hacking definition: purchasing a property with the intent to rent rooms/units to tenants to cover a portion, or all, of your monthly mortgage payment.

I first house hacked a duplex in Missouri. I had been paying around $500/month to rent a two-bedroom, one-bathroom apartment for a couple of years. When I purchased my duplex the principal, interest, taxes, and insurance (PITI) were only $615/month. Both sides of this duplex were two-bedroom, one-bathroom units, and slightly larger than the apartment I had been living in. It even had a storage shed for each unit!

Now the fun part…I rent the other unit for $500/month!

This means I had gone from paying $500/month to live in an apartment; to effectively paying $115/month to OWN a duplex, with more space, and additional storage!

House Hacking Strategies

There are many house hacking strategies out there, and ultimately anyway you can earn money with your residence works!

Duplex, Triplex, Four-plex

This is the most common method of house hacking. The reason is that it is simple to do, and an easier transition for most. A lot of people don’t like the idea of having roommates or other people living in their unit. For that reason, a duplex, triplex, or four-plex (we will use the word “plex” going forward) is much easier to adjust to. This is no different than living in an apartment with neighbors sharing the wall…except you own the asset.

When you house hack a plex it is fairly easy to self-manage the property if you should choose. The biggest downside is that your neighbors will know you own the building and may try to get away with some things because they know you. This can be a little uncomfortable. I personally prefer to use a property manager and not let the other tenants know I own the building. That way I can still keep an eye on the building, but don’t have to be the “bad guy” haha.

Another great thing about the plex house hack is that it is super easy to rent your unit out if/when you move out of the property. With this additional income, the property will cash flow even more, and you can move on to house hacking another property!

This was the first house hack strategy I ever used, and the first real estate purchase I ever made. The beautiful thing about this strategy is that you could STILL rent bedrooms out of your unit to a roommate, or on Airbnb if you wanted to!

Roommates

I have friends that hack their single-family home with roommates! If you buy a three or four-bedroom home you can live in one room and rent the others out. This is an easy way to minimize (or erase) your monthly mortgage payment!

This is especially common with young, single Lieutenants when they arrive at their first duty station. Having 2-4 young service members under one roof is nothing new to the military. Most young enlisted service members have a roommate for their first duty station or two.

If you’re used to sharing a small room with somebody, sharing a house (but having your own room) is an easy transition. Imagine splitting the basic allowance for housing in half for everybody. You could live for free, and your buddies (roommates) still get to save half of their housing allowance…talk about a win-win!

You could even combine this with the plex-hack! Imagine buying a four-plex, renting the other three units, then renting out one or two of the bedrooms in your unit! A strategy like this could have you cash flowing like a king!

*UPDATE* in May of 2020, when Airbnb dried up for a little bit due to the pandemic. I rented my downstairs bedroom to a friend who was exiting the military. I am still renting the upstairs to a couple from Airbnb, and I wanted to showcase how seamlessly these two strategies can blend together!

Airbnb

Airbnb has revolutionized short-term renting! Airbnb’s can be rented for 1 night at a time (although a lot of people set 2-3 day minimums). People are often willing to pay more to stay in an Airbnb for a weekend than they are to stay in a hotel. For this reason, you can make a killing in the Airbnb market…often 2-4 times traditional monthly rent (gross income).

There is a lot more work involved with Airbnb because you need to be able to clean the unit after every vacancy. However, it is possible to hire a cleaner/manager to take care of this additional work for you!

A nice feature with Airbnb’s is that you can rent an entire unit/house, or rent individual rooms. This allows for some flexibility, and there are many ways to fit an Airbnb strategy into your portfolio.

You could Airbnb your house every time you go out of town to make some extra cash. Or, you could rent the rooms in your house out on Airbnb. This strategy is much like the roommate strategy, except you can choose to have the house to yourself periodically by blocking out time on the calendar when the unit is unavailable.

*UPDATE* I have been renting out a room in my house on Airbnb for several months. It went so well that I furnished ANOTHER room on Black Friday, 2019. In February 2020 I made $2600 renting these two bedrooms out, and my rent is only $3000! I am living for (almost) completely free in Oceanside, California…talk about a powerful investment strategy! Click here to register as an Airbnb host and earn $50 extra on your first hosting.

Just like the roommate strategy you could use this in conjunction with the plex-hack strategy discussed above!

Living in a smaller unit (sometimes the garage)

This is very similar to owning a duplex, but it is a method to maximize a single-family home. I know many people that have found a way to rent their primary residence while they live in a small room. I have known people turn their garage into a studio apartment, move in, and rent out the rest of the house.

Given that you can often rent out a single-family home for a solid price, and that they attract better quality tenants (often families), this can be an easy way to create monthly cash flow!

What I like about this strategy is that you can always rent the studio apartment, or use it as a guest house. That is a nice bonus when you no longer need the cash flow, or your family grows, and decide to move back into the main portion of the house!

ADU/in-law suite

An additional dwelling unit (ADU), sometimes referred to as an in-law suite, can be a great way to house hack. An ADU is a detached dwelling on the same patch of land as your home. These are extremely common in Hawaii because it is cheaper to build an ADU than it is to buy a home. For many Hawaiians, it makes more sense to live in an ADU that their family owns than it does to buy their own home.

These are fun because they can be relatively affordable, and you could rent them out as either a long-term rental or Airbnb! I have seen some really fun and creative ADU’s to include a company that specializes in building them out of 20-foot iso-containers!

I own 10-acres in Missouri, and have often thought it would be fun to build an ADU on the land, or maybe put one or two “tiny homes” on the land and Airbnb them.

Motorhome

There are a lot of ways to house hack with motorhomes! You could live in a motorhome on your land and rent the house (much like the garage strategy we discussed). You could also rent out your driveway to somebody that owns a motorhome! I have even heard of people renting out a motorhome they own and parked on their driveway…this could be done as an Airbnb, weekend RV rental, or as a long-term tenant.

The motorhome strategy is fun because it affords a lot of flexibility into your life!

I plan on living in a motorhome at my next duty station. This won’t be a true house hack, because I’ll be living in the motorhome in an RV park. However, I plan to rent the motorhome out to “weekend warriors” or hobby campers whenever I am out of town. This will help pay off my motorhome, and act as a part-time house hack too!

*update* I wasn't able to find the right motorhome for house hacking, in San Diego. I did, however, find a nice home to rent where the landlord has agreed to let me list some bedrooms on Airbnb for house hacking!

When developing a house hacking strategy, you must ask yourself what allows for the best return on investment, while still allowing you to be content with your living situation.

Benefits of Household Hacking

There are several benefits to the house hack that make this a great way to get started as a real estate investor.

1. Primary residence mortgage

Conventional loans usually require a 20% down payment. Most banks will require a 25% down payment for a property that is bought as an investment property.

There is a loophole available for house hackers though!

The Federal Housing Administration (FHA) loan and Veterans Affairs (VA) loan are both offered strictly for primary residences. These loans offer low, and no, money down opportunities for homebuyers. Both of these loans allow you to buy any property with 1-4 unit(s) provided that you occupy the home as your primary residence for a reasonable amount of time.

FHA loan

I used the FHA loan to purchase my duplex in 2015. The bank only required a 3.5% down payment for me to purchase this property. That means I only needed to come up with $2,835 out of pocket to get financing for the purchase of my $81,000 house hack. Granted, there were still some closing costs and fees, but I purchased the property, for less than $3,800 out of pocket!

The FHA loan is a great opportunity for new homebuyers, and it allows you to purchase a property to house hack without saving for years and years.

Upon purchase, you must plan to live in the home for a reasonable amount of time (one year) before moving out. Some stipulations apply, like if you sell the home, or have to move out of state for work…but don’t buy the home without intending to move in, because that could get you in hot water.

VA loan

The VA loan is one of the greatest benefits afforded to service members/veterans (if used correctly). This loan allows you to purchase a house with ZERO money down! That’s right, you could purchase a house for free…until you start making payments on the mortgage.

The VA-hack is a great strategy.

Another advantage the VA loan has over the FHA loan is that principle mortgage insurance (PMI) is waived for the VA loan. In the example of my duplex above I’m paying around $80/month in PMI because I used an FHA loan, so a VA loan payment would have actually been lower L …but I didn’t know that as a new investor and my lender didn’t know I could use the VA loan more than once (you absolutely can) so he talked me out of it.

Want help finding a VA-friendly realtor/lender in your market?

2. It is “safe”

Buying any investment properties involves risk. Sometimes this risk can seem insurmountable for new investors. We refer to this phenomenon as “analysis paralysis.” Analysis Paralysis is what happens when you are finding deals and analyzing them, and analyzing them some more…but never pull the trigger. This happens for several reasons, but most of them boil down to one word; fear.

Buying a primary residence, on the other hand, does not seem very scary. Maybe that is because we are raised with the idea that the American dream is homeownership. Go to school, get a good job, get married, buy a house, raise a family…that is what many of us grew up knowing as our “life’s plan.”

You can the house hack tactic to get over the analysis paralysis hurdle. If buying a home feels safer than buying an investment, but buying an investment feels like a good idea long term…why not get the best of both worlds and live for free by house hacking?

When I bought my duplex I went from a $500/month apartment to a $615/month mortgage. After my tenant paid their rent I only needed to pay $140/month to cover my mortgage. It was very easy to convince myself to move out of the apartment when I knew that in a worst-case scenario it would only cost me an extra $115/month, and I would at least be building equity.

I knew, however, that if the best case scenario played out I would bypass the phase of analysis paralysis, and be on my journey to financial freedom! Luckily, this worked out for me, and I have been purchasing real estate ever since!

3. Benefit from the four pillars of real estate investing

These are the four main wealth generators that buy and hold real estate investors benefit from.

Cash Flow – The residual income a property generates after all expenses have been removed from the gross monthly income of a property.

Depreciation – A method to write off how much a building is aging. This is one of several tax advantages to real estate investing.

Debt paydown – Your tenants are paying off your mortgage. This means you borrowed money from the bank to buy a home, and somebody else is repaying the bank for you!

Appreciation – Real estate serves as a hedge against inflation. As the dollar inflates, real estate prices rise. There are other factors, but appreciation is a great bonus!

You will benefit from all four of these wealth generators when you house hack.

You get an additional benefit when house hacking a buy-and-hold investment though, your cost of living goes down! In some cases, you may find yourself living for free, or even get paid to have a roof over your head!

4. Savings Gap

House hacking allows you to increase your savings gap! The term savings gap refers to the difference between your income, and your expenses…or the percentage of your paycheck that you save/invest. The larger your savings gap the faster you build up capital to buy more real estate.

When you hack your household correctly it will free up a large portion of your housing costs for additional savings. Imagine that you live in a market where the average monthly mortgage payment is $2,000/month and you can save 75% of that by house hacking. $1500/month adds up quickly as you would save an additional $18,000/year!

Depending on your market an extra $18,000 per year could become an additional rental property!

To recap, not only are you saving money by purchasing a house and letting somebody else pay it off…but they are allowing you to save money to purchase more houses too!

Downsides of House Hacking

There are pros and cons to everything; house hacking is no different. Luckily the cons (in my opinion) aren’t too bad in this situation!

You live next to your tenants.

For some, the idea of sharing a wall with people is not ideal. I know a lot of couples struggle with the idea of spending money to buy a building that, at times, may feel like an apartment complex. Understand, this doesn’t have to be your “forever home.” It is a stepping stone to financial freedom!

Tenants may know you own the building.

This is not ideal for me. I still hire a property manager when I house hack and, if possible, my tenants will never know I own the building.

The reason is that anytime the tenant has an issue they will try to talk to you about it. If they are late on rent, they will try and convince you to cut them some slack. If the property manager told them to clean up, mow the grass, or keep the volume down…the tenant will come to you. Tenants can be like children in that they like to play “mommy-daddy games.”

For these reasons, I will do everything in my power to sit back and play tenant too. The less information the other tenants have about my role with the house hack, the better!

The location may not be perfect.

You probably won’t find a four-plex for sale in a fancy gated neighborhood…and if you do it won’t cash flow.

This is not always ideal as a lot of families can’t stand the idea of living in a B or C class neighborhood. This is especially difficult if you look at houses in A class neighborhoods while house-hunting…once the emotions are involved logic can often go by the wayside.

It is important to discuss goals early and look at the numbers for a property before ever going to walk through it. The location of most house hack properties is not the best neighborhood in town…but it isn’t the worst, and the financial benefits are huge!

Won’t be your dream house.

A house hack is not going to be your dream house…well, maybe if you do the ADU or garage hack. Either way, manage your expectations going in, and be sure to buy for the numbers, not for the look/feel.

It can be hard to let the passive income; be passive.

I struggle with this. When I lived next door to my first tenant they had a habit of trashing the front yard. They built a makeshift, covered patio out front, and it looked terrible! At the end of the day they weren’t breaking their lease, weren’t trashing the house, and the neighbors couldn’t even see it…but it still bothered me.

Seeing everything my tenants did (or didn’t do) made it difficult for me. I had to constantly remind myself that if they were taking care of the house, and paying rent on time, I should be happy. The urge to check on your tenants takes away from the passivity of your income.

Now that I’ve moved away this is completely changed. I’ve decided that going forward I will let my property manager do their thing, and I will keep my nose out of things as much as humanly possible. I want passive income, and I don’t want to stress about petty things that don’t affect the property or the bottom line!

Should you House Hack?

There are several key variables to answering this question that I would like to discuss.

It should be noted that I LOVE this strategy! You get to learn how to landlord, while simultaneously cutting down your living expenses to save more money for investing in your next property!

1. Market research

Understanding your market is the key component in deciding whether to buy a house or rent. As wonderful as house hacking is, it makes no sense to spend $750,000 on a duplex if it will only rent for $2,500-$3,000/month (per side). This is the reality in a lot of markets like Hawaii, San Diego, Las Angeles, etc.

You must look at the population growth, economic growth, economic diversity, and cash flow possibility. If the market isn’t growing in population or economy, that is a red flag…but if it isn’t possible to purchase property that cash flows, rent!

Even in some of these expensive markets, it is possible to cash flow. I would caution you to analyze the cash on cash return though. This is the total net income received for the year, divided by the total amount of money you invested in the deal. For example, if I put $20,000 down to purchase a property, and the net income is $4,000 each year, I received a 20% cash on cash return.

This will help you evaluate if the monthly cash flow in an expensive market makes it a good deal. I wouldn’t invest $100,000 to only get a two or three thousand dollar return each year.

Always remember, there are some markets where renting is a good decision.

2. Goals

In the long term are you wanting to be a buy-and-hold real estate investor? Or are you just looking to save a few bucks from your housing expenses? Figuring out your long-term goals can help you decide if house hacking is a good fit for you.

3. Capital

Depending on your market a 3.5% down payment can still be daunting. If you aren’t able to make the down payment and still have a reasonable amount of money set aside as a reserve fund to cover unexpected expenses…do not buy.

You will need to have a safety net to ensure that you can weather an eviction or a 2-month vacancy.

Also, in some markets, the price of real estate exceeds the purchase price cap on the VA loan. You can still purchase real estate, but understand that once you exceed this cap (limit) you will need to provide a 20% down payment for every dollar over the limit.

4. Longevity

How long do you plan on living in this market? If you’re only here for a year, and never plan on coming back, it may make sense to rent somewhere cheap. You could still house hack, but maybe try to conduct more of a live-in flip strategy by purchasing a plex that needs work.

Is this market somewhere you want to own real estate long-term? This is a good question to weed out dying areas. It is not always a good investment to buy real estate and hold onto it forever. Think about Detroit, it was once the automotive king…until the automotive industry began changing, and there wasn’t much of an economy left in the city. Detroit has dwindled to a shadow of what it once was.

This is why market research is so important. You need to understand your current market, but you also want to get a feel for what the future holds.

Unique Opportunity for Military House Hacking

Now that we have discussed the ins and outs of house hacking, let’s look at a few opportunities service members have that make them uniquely qualified to benefit from house hacking.

1. VA loan

We have already touched on what the VA loan is, and how it operates in this article. Understand that one of the biggest reasons people don’t get started investing in real estate is the barrier to entry. It costs money to get into real estate, but military house hackers can get in the game for FREE!

Also, contrary to popular misconceptions, you can utilize the VA loan more than once! There are obviously some stipulations here, but being able to reuse this benefit is amazing!

Imagine, getting to buy a house without a penny out of pocket, AND then living for free!

2. Relocations

Every two or three years, service members relocate. This creates an opportunity to explore various markets. If you’re stationed somewhere like Hawaii where house hacking isn’t always feasible; it is comforting to know you will relocate in a couple of years to, potentially, an amazing market!

Relocating also meets the main criteria for being able to use the VA loan a second (or third) time. Provided you didn’t cap out your VA loan benefits, you can absolutely reuse it!

3. Military tenants

You will live next to a large military installation, except for a few duty assignments. This means you will have access to military tenants!

I like military tenants because they are (generally) clean, pay rent on time (or their command will take it straight from their pay), and have a job that isn’t going to fire them without notice. These features are nice because it allows you to set long term leases with confidence that they will be completed. You don’t have to worry too much about them trashing the unit and will most likely be a great tenant for you.

This is especially beneficial if you’re looking to add in some roommate hacking. Young, single officers, or Single SNCO’s, make the perfect candidate(s) for roommates!

4. Used to harsh living conditions

I say this jokingly, but it is absolutely true! After living in Afghanistan through the summer, virtually any living experience is an improvement.

That means house hacking, roommate hacking, or even living in a garage studio apartment is easy for me. For former barracks Marines, anything larger than the 90-square feet required for your living space is an improvement. Why not house hack and win big!

More information on military real estate investing.

How do I analyze a house hack?

You must understand how to analyze a property if you plan on moving forward. In the grand scheme of things, you just need to add up all of the actual income on the left side of a piece of paper. Then add up all of the possible expenses, and subtract them from the total income received. The number left will be your cash flow (or the amount you need to pay for your mortgage).

For those of us that are more analytical and like to view all of the numbers, and see how they will play out over time, there are several good calculators out there. I personally like to use the BiggerPockets calculator. This calculator is so useful that I would pay for the BiggerPockets pro membership just for it! (side note the link above is an affiliate link).

I love this calculator because it breaks down all of the information, and even shows you how it compares to the most common rules of thumb for real estate analysis. Another cool feature is that you can post the results in the forum and ask for other peoples’ opinions on the deal. You can even send the results as a PDF to your realtor, or a potential partner in the deal!

I have made a few videos about conducting analysis that you can watch if you would like more information.

BiggerPockets rental calculator

Household Hacker for Life

House hacking is a great concept all by itself, but what is cool is how this mentality manifests its way into your life. As you think about house hacking you will begin to see opportunities everywhere!

Going out of town for a month? Why not rent your car on Turo to hack your car payment? You could also Airbnb your home during this time!

Trying to get in shape, and hate spending money on gas…why not hack your commute with a bicycle?

Want to grab coffee and network with 2-3 people this weekend? You could instead go to a local coffee shop for 2 hours, and let them all know…this way you could visit with them all at once.

Don't forget that if you have a home office, you can use that as a tax write-off!

There is even a deployment hack!

There are so many opportunities for hacking your life to save money, time, and sanity. These life hacks can absolutely make your life more efficient, less stressful, and more fiscally responsible.

What other house hacking strategies can you think of? Can you think of any other cool life hacks? Please comment below, I would love to hear them! I may even add them to this article, and give you a shoutout!

Hidden Benefit for The House Hacker!

When you are purchasing a property for house hacking there is another additional benefit!

You can use 75% of the gross rental income from the other units toward your debt-to-income (DTI) ratio for purchasing!

Let's say that you're buying a 4-plex and that each unit rents for $1,000. That means the property will be bringing in $3,000 gross rental income once you move in. You can count $2,250/month towards as income to increase your DTI ratio when purchasing ($3,000 X 0.75 = $2,250).

Some lenders might require you to have two years of experience as a landlord before counting this income. If that is the case, the way around that is to hire a property manager with more than two years of experience managing properties, boom!

The increased DTI that house hacking makes possible means that you will qualify for a higher loan amount. Yes, that means you can (theoretically) purchase a multi-family property at a much higher price point than you would be able to purchase a single-family home with the same personal financials!

Frequently Asked Questions about House Hacking

I originally wrote this article over two years ago. In that time I have received a myriad of questions about various ways to hack your house. These are some of the questions with short, rapid-fire answers!

Is House Hacking Legal?

Yes, there is absolutely nothing wrong with renting extra bedrooms, or units, out of your home. The only exception that I can think of is if your homeowner's association (HOA) might have some rules against it.

However, if you're going to try to house hack with a property that you are renting, you must get your landlord's approval before subletting. When I used this strategy, I ensured it was in my lease agreement that I could sublet bedrooms while living in the home.

How Can I Hack House and Live for Free?

Simple, you can rent bedrooms out of your home, or create additional spaces/units, to rent our, and then let your tenants pay for your housing.

Is House Hacking A Good Fit for You?

If you are single, then yes, 100%! If you're married, you will need to make sure that your spouse is on board with house hacking, and may prefer to buy a 2-4 unit home, as opposed to having roommates.

If you have a family with kids, dogs, and the works this may be a little more complicated. That being said, you can still do it (I have), and it is worth doing when you think of the long-term implications of short-cutting your journey to financial freedom!

Can You House Hack with An FHA Loan?

I purchased my first house hack with an FHA loan! However, if you're in the military, I believe the VA loan is absolutely the better option–and I wish I had used it instead–but either loan will help you achieve your goals!

How Do I House Hack In An Expensive Market?

Living in an expensive market can make house hacking scary, but I think it can be even more awesome in these locations like California, Hawaii, New York, etc. to hack house.

You can use up to 75% of the gross monthly rent toward your debt-to-income ratio, which means you can qualify for a larger mortgage than you would with a single-family home. Also, the amount of principal you pay off every month is much larger in expensive markets, but the cost of replacing a roof, or basic maintenance around the home, doesn't increase too much. Overall, buying a million-dollar house hack isn't for the faint of heart, but it can certainly help you build wealth if done correctly!

Thanks for Reading My House Hacking Guide!

Now, get out there and find some great deals for house hacking!

Recommended reading: Becoming a Military Millionaire