“House Hacking” Might Be Your Ticket to Buying a Home in This Market (As Long as You Keep These Things in Mind)

Renting or buying a house is always one of life’s biggest expenses, but lately it’s been even more difficult than usual for many people to afford, which has led to a lot of young adults (and even some older ones) to move back in with their parents.

In the past, once you graduated from high school or college, it was common to get your own place to live and move out of your parents’ home. It was a natural sequence of events, and living at home beyond a certain age was often seen as “wrong” in some way. But according to this Yahoo Finance article, living at home — or moving back in after being on your own for a while — has become so common that it’s lost its stigma.

While it’s good that people who need to live with family for financial reasons aren’t being judged harshly, that doesn’t mean it’s ideal, or that most people don’t want a place of their own… if only they could afford to do so.

Which is probably why “house hacking” is so appealing to Millennials and Gen Z.

What Is “House Hacking,” and How Popular Is It?

CNBC recently reported that “house hacking” has become a strategy many Millennials and Gen Z use to become homeowners. Simply put, they rent out a portion of their home in order to generate some money to help make owning their home more affordable.

But it’s not just the younger generation who sees this as a useful strategy. While 51% of Gen Z, and 55% of Millennial buyers think it’s a good idea, 39% of recent buyers in all age groups thought it was a “very” or “extremely” important tactic.

Things to Keep In Mind if You’re Planning to Use the Strategy

With nearly half of all buyers considering this as a way to make homeownership more affordable and buy a house, there’s a good chance you may be considering doing it as well. If you are, here are a few things to keep in mind:

• You can’t rely on the potential rent to qualify for a mortgage. In order to have a portion of your house to rent out to somebody, you need to first own a house. And in order to own a house, you probably need a mortgage. Lenders won’t consider the potential rent you may be planning on receiving each month for renting out a bedroom or section of your house. You’ll need to be able to qualify for a mortgage, and afford it on a monthly basis, without that anticipated rent coming in.
• Try and line up a tenant ahead of time. Even though a lender may not consider the rent you’ll be bringing in, it still helps to know you have someone willing to rent, and how much they’re willing to pay you before you purchase a house, if you’re relying on that income to make ends meet.
• Be careful who you allow to live in your home. This probably sounds obvious, but it’s something you may be less careful about if you’re desperate or anxious to generate some extra money each month. Ideally you can find someone you know and trust to live in your home, but that’s not always possible. If you advertise your space for rent and are considering people you don’t know, make sure to do some research into the person. Ask for references, and truly get a feel for who they are before taking the leap into living with them. Make sure they’re not just someone you can trust and feel comfortable around, but also someone you’ll enjoy living with.
• Put things in writing. Create a lease with terms that delineate what they can and can’t use in the house. Perhaps create a schedule if there will be shared areas you may want some privacy in at certain times. Include rules that need to be followed, and remedies for any disagreements. To be on the safe (and legal) side, have a lawyer create a that protects both of your rights within the parameters of the local landlord / tenant laws.
• Make sure it’s allowed before you do it. Look into the local rules and ordinances before buying a place. For instance, if the house is part of a homeowners association (HOA), there may be rules that forbid you from having tenants. Or city and town zoning may not permit such usage in the area your house is located.

Also Consider Buying a Proper Multifamily Instead…

Many people are looking at “house hacking” as renting out a portion of a single-family home they live in, but the term has been used by investors for quite some time as a way to buy real estate and build equity and a portfolio of properties over time.

Investors use the tactic by buying a multi-unit property to live in one unit, and rent out the other units to defray the cost, or even live for free if the other rents can cover the entire mortgage. They use the money they are saving per month to build up another down payment to buy another property, and then either sell the first investment, or keep it as a rental property, and buy another one.

While you may not envision yourself as an “investor,” or living in an investment property as opposed to a single-family home, buying a multifamily property would make it easier to have your own space, while also benefiting from rent that helps make the monthly mortgage more manageable. It will also make the landlord / tenant relationship a bit more formal, and as long as the property is legally zoned for multifamily usage, there shouldn’t be any concerns like you may run into renting out a portion of a single-family home.

In addition, lenders will consider any rents that are on record or anticipated for a multifamily property, which will help you qualify for a mortgage. And if you plan on living in it, there’s a good chance you can qualify for a low down payment program!

The Takeaway:

Because housing costs have gone up, buying or renting a home has become difficult for many people, especially in the younger generations. This has made “house hacking” — which is basically renting out a portion of a home in order to generate some money to help make owning their home more affordable — an appealing way for nearly half of recent home buyers to buy a house.

If you’re considering this tactic as away to buy a home, make sure you:

• Can afford the home without the rental income you anticipate.
• Try and line up a tenant ahead of time.
• Only rent to someone you have vetted and feel comfortable with.
• Put all terms and conditions in writing, and consider having a lawyer draft a legal document for you.
• Make sure renting out a portion of your home is allowed in your area.

Also consider buying a proper multi-unit investment property. It will help you achieve the same benefits of incoming rent, while allowing you a separate place to call home by living in one unit and renting out the rest.