If you’ve ever thought about buying a house and renting out one or two of the rooms to help cover the cost of the mortgage, then you know exactly what house hacking is! The concept itself is straightforward: buy a property and rent out a portion of it to recuperate some or all of the cost of ownership. There are two main ways that people go about doing this:
- Traditional approach: Buy a two, three, or fourplex and rent out the other units while living in one. This offers you financial support from tenants (in exchange for taking on risk) while getting your own living space. The catch is that typically multi-family homes (2+ units) require a larger down-payment than individual homes (15% for duplexes, 25% for 3-4 plexuses). Therefore, many house hackers tend to use the FHA loan for financing since it requires only 3.5% down for 1-4 units. Note that there are certain financial requirements that must be met when putting only 3.5% down. Talk to your lender for more information as these requirements vary slightly from bank to bank and over time.
- A more modern and less formal approach: Buy a single-family home or townhome and rent out some of the rooms to roommates. The accounting and tax implications are a bit more complicated than the traditional approach because you must decide what is part of the “real estate” cost versus what is “personal.” Nonetheless, it is a solid option and in practice much simpler because you have 1 unit to take care of vs 4 (think 1 boiler vs 4 boilers; 1 HVAC vs 4, etc.). This approach is generally less risky because you can manage your tenants better (you are essentially roommates). Huge bonus if you become friends with them over time!
Let’s get into the details of how to go about house hacking. The first step is to determine whether you want to be a landlord. House hacking will require all the responsibilities of being a landlord such as fixing home appliances, finding and screening tenants, collecting rent, plunging toilets, etc. with less risk since you are theoretically able to pay the mortgage on your own (otherwise the bank would not have approved your mortgage). After you’ve given some thought to being a landlord, you are ready to begin the house hacking process. Note that these steps focus primarily on the real estate investment portion. Read the Homebuying Process section in my book, Personal Finance for Young Professionals, for information on buying your personal home and making it work financially.
Step 1: Find a property that makes financial sense
This sounds easy, but in practice it’s much harder. Not only does it have to be a good real estate deal, it also has to check all of your personal boxes since you will be living there. You may elect to spend more on the home because a portion of it will be your primary residence, thereby giving you some[WB1] financial wiggle room. You can use standard real estate calculations for this (Appendix 2.2) by substituting your preferred contribution to the home as part of the rental income. For example, if you are willing to pay $1300/mo. and you plan on renting additional rooms for $1000 and $900 respectively, you will have a theoretical rental income of $3200/mo. On top of this, you must plan for the following major contingencies: you rent below market value, and you have vacancy. Allow a 5-10% vacancy rate depending on how hot the market is and allow for a 10% fluctuation in rent. Make sure you are willing to fork it over in the form of your personal contribution.
A quick note on the tax implications of renting a portion of your home. Note that you should not take into account the tax benefits of your home or renting your home as a factor. It is simply icing on the cake. Let’s say that you decide to rent out 50% of your home. 50% of your home will be on Schedule A (personal property) and 50% of your home will be on schedule E (rental property). The tax implications are different for each. For example, you are allowed to claim depreciation on the rental portion of your home but not the personal part. Additionally, if you plan on furnishing the common areas of the home, you may be able to deduct 50% of those furnishings since they are part of the business (i.e. including furnishing as a selling point in your rental listings). Another difference is that homeowner’s insurance is deductible on Schedule E but not Schedule A. Useful blogs can be found here and here on the tax methods for renting a portion of your home. If you are unsure of the rules, it is always best to consult a tax professional to help you out!
Step 2: Buy the house
See the steps in The Homebuying Process chapter of Personal Finance for Young Professionals. This is technically your primary residence anyways!
Step 3: Perform any repairs or upgrades prior to tenants moving in
The last thing a tenant wants is for a landlord to be doing repairs right after they’ve moved in. Aside from getting all the proper inspections done, it is wise to live in or have friends/family live in each of the rooms/units for a couple days to make sure there isn’t anything glaringly wrong that you wouldn’t catch in a walkthrough. For example, if the shower temperature fluctuates a lot or if the light flickers after it’s been on for more than 30 minutes or even a bad draft from the window at night. While small, not only can these things give your new tenant(s) a poor impression, it is generally more challenging to make repairs when their belongings are in the way! Most people who house hack are relatively handy or at least have an interest in attempting to fix things themselves. While there are many times in life when it may not be worth learning a new skill to save money on service charges, home maintenance is not one of them. Tradesmen’s services are easily hundreds if not thousands of dollars per call, even for easy ones. It’s definitely worth learning the basics of home maintenance yourself.
Step 4: Take pictures of your place
You probably learned when shopping for this home that professional photos look far more enticing than amateur photos. If you are not a great photographer, it is worth every penny to hire someone to help or ask a friend who has those skills. Additionally, have a video tour of your home made that incudes audio descriptions of the space. You can upload this to YouTube and make the link “unlisted” so nobody can search for it or watch it unless they have the exact link for the video. Do not include your address information in this video.
Step 5: Generate an ad for your rooms
There are many different ad formats, so it’s best to make a document with all of the photos you plan on using for each room along with the description of the home. Be sure to include the following information in your listing:
- General location and proximity to popular areas
- All general features of the home that might entice a buyer (e.g. a deck or patio with grill)
- Size of home and size of bedroom for rent
- Note whether it is furnished or unfurnished
- Date available
- Rent (be sure to specify if utilities are included)
- Specific features of the room itself (good soundproofing/privacy, etc.)
- A tidbit about yourself and other current roommates
- Parking situation
- Any other hard requirements such as pets, smoking, partying, etc.
The more specific your listing, the fewer people will end up ghosting you because it’s not right for them. Give everyone all of the information they need up front so they can decide if they want to reach out to you. If you omit information and you speak with them and provide the information, they may decide it’s not a fit for them and thus you’ve both wasted time.
Step 6: Get your ad on multiple different platforms
At this point, you should want to get your rooms filled ASAP. Keep in mind that vacancy costs you money every day (i.e. if rent is $900/mo., that’s $30/day the room is unrented). There are multiple platforms that folks use to find roommates/tenants, such as SpareRoom, Roomster, or even Facebook Groups/Marketplace. You have to do your due diligence in order not to include any sensitive information such as the exact address of your home.
Step 7: Preliminary screening of tenants
Doing this step properly is going to save you a lot of time. The essence is that you don’t need multiple tenants for one room. You need one tenant. By asking the right questions early on, you filter out many people who have low chances of being winners and it will save you a lot of time trying to chase leads or “keep people warm” (continuing to talk to them in case your current top choice falls through). Some of the questions can include:
- Is this rent within your budget and is there any reason why you might not be able to pay rent? (Hint: there should be absolutely 0 reason why someone shouldn’t be able to pay the rent. If they provide any reason, regardless of what it is, that is a huge red flag.)
- How often do you have people over?
- Do you have any pets?
- How clean are you on a scale from 1-5?
- What kind of hobbies do you have? (with this question you are searching for particularly noisy hobbies)
The book Managing Rental Properties by Brandon Turner covers the details of how to pre-screen tenants in greater detail, but the gist is that you want to ask the right questions and filter out the wrong people before offering the right one(s) a rental application.
Step 8: Send them a rental application
The rental application is where you’ll collect information on your potential tenant, including name, address, references, SSN, proof of income, etc. There are many templates you can follow online. Because this document contains sensitive information, you must be careful in handling it. If you are local, it may be best to interact in person and use a physical copy instead of sending via email. Some tenants prefer to give you their SSN over the phone so there is no paper trail. This is also when you collect the application fee. This is typically $30-50. I charge $35 and waive it if the tenant is referred by a friend. This fee covers the background check and credit check (I use RentPrep and BeenVerified) with a couple bucks for filing it away. Typically, it takes less than 1 business day to get the results of the background check. Some tenants will ask you not to run their credit (counts as a soft pull) and instead send you a copy of their free FICO credit report. Personally, I would only accept that in place of a credit pull if this person was referred to me by a trustworthy friend.
This step highlights the key to Step 7. If you pre-screen your tenants well, the actual rental application should be a formality. You really don’t want to be wasting time running background checks on everyone who reaches out to you. Note that if you decline a potential tenant, you must provide a reason that is within the Fair Housing Laws.
Step 9: Collect the deposit to hold
After you have notified the potential tenant that they have been accepted, you must now collect the deposit to hold. Typically, this is around $200 or about 1 week’s rent. This effectively removes the room from the market and reserves it for the new tenant. The reason that this amount is typically 1 week’s rent is that this is the typical amount of time it takes to draft, discuss, and agree on a lease. During this time, the room is off the market, therefore, this amount is nonrefundable. There is a form that designates the deposit-to-hold period should take 1 week at most to come to an agreement on the lease. Otherwise, the room goes back on the market.
Note that during this period, you can continue to talk to other prospective tenants if you feel that your current tenant might back out.
Step 10: Develop, discuss, and sign the lease agreement
Now it is time to settle on the lease. This should be fairly straightforward since the tenant should already have an expectation of the rent, utilities, etc. You can find a sample lease through a quick Google search.
Be sure to maintain open communication with your tenant about the lease. Be transparent and give them time to go over each detail. Once you come to an agreement, both parties sign (typically tenant first) and you send it back after you’ve signed so you each have a copy. The lease is now live and the security deposit is due within 24hrs of signing the lease (ideally it’s paid immediately).
Step 11: Prep the room with last minute items
There may be some requests that your new tenant makes, such as wall mounting a TV or installing smart lights. Although they may be fully capable of doing this themselves, it may be better for you to do this so you know it’s being done right. It’s your house after all!
Step 12: Collect the first month’s rent whenever it is due according to the lease
You can use whatever money transfer platform you prefer, as long as it has low fees. Don’t worry about some financial organizations forcing you to report the income on your taxes. You were going to report that income anyway, right?
Congratulations, you’re a landlord!
Personal Finance for Young Professionals 
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