What is House Hacking?

You might be wondering what house hacking is and why everyone is talking about it. If you are in pursuit of financial independence, most often your #1 expense every month is housing. In many cities around the globe, housing costs (both for renting and purchasing) are on the rise. Paying too much for housing can really eat into your savings rate and push back your early retirement date if you aren't careful. This is where house hacking comes in.

Because of these rising costs, many people have started to wonder if there is a way to reduce the amount they spend on their rent or mortgage. Figuring out clever ways to reduce your housing costs is at the core of house hacking. You want to pay as little as possible, so you can retire as fast as possible . There are a few main ways that people house hack:

  • Purchase a home and rent out a room(s) or unit monthly
  • Rent or buy a home and Airbnb a room or a unit
  • Find long term house sitting opportunities or even couch surf

The first two ways are by far the most common. Renting a place and also putting it up on Airbnb is also not super common, but seems to be trending upwards as housing prices go up. We will jump into how all of these work below.

Benefits of House Hacking

I think the most obvious benefit of house hacking is that you spend less money. Spending less = being able to save more to do what you want. Let's take a quick example of how saving some money with your housing can quickly add up. Let's try a quick example. If you purchase a 3 bedroom house for $200,000 your (basic) monthly expenses could look something like this.

Mortgage $1100
Taxes $200
Insurance $50
General maintenance $200
Long term buffer (roof, hot water heater, etc.) $100
Total Cost $1,650 per month

Now lets see what our numbers look like if we house hack. Let's say that we want to only rent out one of the rooms of the house. To try an maximize rental revenue, we will rent out the master that has it's own bathroom. In this example let's say that we are able to get $700 a month for this type of room, what you can actually get for rent will obviously depend on where you are located.

Mortgage $1100
Taxes $200
Insurance $50
General maintenance $200
Long term buffer (roof, hot water heater, etc.) $100
Rental Income + $700
Total Cost $950 per month

This is a super basic example, but you can see how quickly with just a little bit of work you can begin to save some serious cash. $700 a month in savings comes to a total of $8,400 a year, or just about 1/2 of what you could put into a 401k per year. To do some more math, let's see how much extra we can save if we invest the $8,400 a year and house hack for the first 5 years we own a house.

Compound interest graph

Starting amount: $0 | Additional yearly: $8,400 | Growth Rate: 7.0%

Value after 5 years: $51,687.64

Just from this one simple house hack, after 5 years we have over $50,000 added to our investment accounts and nearly $10,000 in interest alone! You can see why people are so keen on trying to lower their costs as much as possible. If you wanted to get a bit more extreme, you could reduce your housing costs to nearly $0, which would be massive savings over the long term.

Purchasing a home or multi-unit property to house hack

Purchasing a piece of property is by far the most common way of house hacking.  A few options are:

  • Renting out a single room
  • Renting out a whole unit (if multi family)
  • Modifying your house to become multi-family and renting that space out

If you aren't familiar, multi-family means that it is a property that has at least two completely separate units in the same building. Most often when people say multi-family they are talking about duplexes or triplexes. There is a trend where people are modifying their basements or attics to change a single family home into a multi-family for extra income.

If you are in the market for purchasing a new property or own one already, this is a great option for even new home owners. At it's most basic, it's taking on another roommate and at it's most advanced your managing a portfolio of rentals that pay for your housing costs. We suggest running some realistic numbers on what you could feasibly get for rent. Then, decide if that extra income is worth it for you as you often have more work, less privacy (if sharing a space), and have to spend more time managing your investment.

Renting your place on Airbnb to house hack

Airbnb is surging in popularity for house hackers. If you live in the right location and don't mind cleaning (or hiring it out) between stays Airbnb can be an amazing source of income for your property. Instead of going the "traditional" route where you rent your room or unit by the month or year, you put it up on Airbnb and rent it for shorter term travelers. The benefit of this is that you can often charge a higher nightly rate than what you would get from traditional rent, but the drawback is that it can be more work and you might not be booked all the time.

Some people who are incredibly dedicated are actually putting up their entire place up on Airbnb and when they get a booking they crash with friends or find another place to stay. This is a bit extreme, but also an option for someone if they are so inclined. Let's run through an example of how renting your place on Airbnb to save on housing costs might work for the average person. In our scenario, a person with a 2 bedroom house is wanting to make extra cash on the side by renting out their extra room.

Average Nightly Rate $60
Average Number of Nights Rented 17
Total $1020

Having your place rented for just over half the time can bring in over $1,000 a month. There are people that can charge more than this and bring in more money as well. This is why this tactic seems to have a surge in popularity right now.

Finding house sitting or couch surfing opportunities to house hack

This option is probably the most "extreme" of all house hacking possibilities. In this scenario, you leverage website like Trusted House Sitters or Couch Surfing to line up places to stay full time. In this scenario your housing costs are effectively $0, but you do run more risk that you might not find a place.

Some people make this a lifestyle and house sit all over the world. There can be a ton of great opportunities, interesting places to stay at, and of course save some money along the way. If you are interested in checking out some of these opportunities, use the links above to see if anything peaks your interest. 

I don't think house hacking is going anywhere soon. Both people pursuing financial independence and those just looking to save some money are going to continue to try and reduce their housing spend as close to $0 as possible. If you are thinking about going down this path, do your research, run the numbers, and read your lease (if you are renting) to make sure everything will go smoothly for you.