House Hacking for Passive Income

If you are looking for easy passive income then you should consider house hacking.

Using your home as a means to make passive income will allow you to take a liability and turn it in an asset. House hacking can be done if you are a renter or an owner, so don’t let your status of ownership stop you.

If you have a place to live, you have an asset that can bring in passive income to help you on your road to financial independence.

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When I first heard about house hacking I didn’t realize there was a term for what I had currently been doing for years while living in NYC. I was a high-income earner but I was in a field that was very intense and I knew I didn’t want to stay on that career path when I started a family.

Here’s the deal, New York is an expensive city and it is very common for someone to have a roommate regardless of age.

However, the only roommates I have ever had have been my twin sister (1 year) and my boyfriend now husband. I am a very private person and having people live in my home wasn’t an option for me.

I lived below my means for years to save for a home to buy because I always wanted to own my own home.

We initially looked at single family homes because we knew we wanted to have a family. The problem was that if we bought a single family home in the areas we wanted to live in, it would require both of us to continue working. What’s more is that, if one of us lost our jobs, it would put our house in jeopardy.

That’s when we changed our search to buying a multi family. We saw that the price of most multi families made more sense if you divided the number of units by the cost. With some quick calculations, based on the rents charged in the area, we decided it would be safer for us to not buy a single family home at that time and instead purchase a multifamily home.

Buying a multifamily home was a way to solve our problems. My husband and I bought a 3 family home which was cheaper than most 1 bedroom apts and single family homes in NYC. We live in one apt and rent the other 2 apartments.

This has given us the flexibility to move to one income so that I can raise my family and provides enough passive income for us to live mortgage free.

Now I know what you are saying? How is it possible to afford a multifamily home in an expensive city?

Well, the truth is, in most areas multifamily properties are cheaper or the same prices as single-family properties or 1 bedroom apartments.

What is House Hacking

For most of us, housing is our biggest expense.

House hacking is when you use your home and turn it into an asset instead of a liability. In other words, instead of where you live costing you money, you make money from your home.

House hacking can be done in your own home or in a rental property that you own.

Better yet, YOU DO NOT need to own your home in order to start and benefit from house hacking.

House hacking can be done in any kind of living arrangement. You just have to be creative and flexible.

Once you discover a way to start house hacking, you can start earning passive income.

Is house hacking legal?

House hacking is legal and mutually beneficial for all of those involved. Unfortunately, because it is a relatively easy way to start making passive income, you will have those who abuse the process.

Unscrupulous landlords may overcrowd a rental property to maximize income potential. My hope is that if you are reading this article you are not looking for a way to break any laws – you won’t find that here anyway lol.

Why House Hack?

If you have a place to live in that you are responsible for and want to find ways to maximize your income, then hacking your home should be looked at as an option.

House hacking allows me to be a Stay at Home Mom and support my family financially. One of the quickest ways to get you comfortable with using your home to generate income is to read how others start. Here is a simple to read book that will familiarize you with common strategies that you can implement when you are ready to start house hacking.

Increases Financial Stability

When you develop and implement a house hacking strategy that works for you, you can begin to generate passive income.

In order to give yourself financial stability, you should find ways to have an income outside of your employer. Having a job is risky.

Your livelihood is in the hands of your employer. If they determine your role is no longer needed, you will be strained financially until you find another job.

With 3 out of 4 Americans living paycheck to paycheck, it is necessary to have other sources of income to help keep you afloat in hard times.

I don’t know about you but, I like being the one in control of my life. Having a company determine my financial situation never appealed to me.

Passive income gave me the opportunity to leave jobs that I was dissatisfied with and the confidence to go after jobs that paid more.

Supercharge your Debt Payoff

House hacking is great for those who have large student loan debt or debt in general.

The money that is created through house hacking can be used to pay off the debt quicker and prevent interest from building on your loan.

What’s more, you can use this money in addition to your own money to pay off the debt.

You will be surprised at how quickly you can make your debt disappear by putting as much money as you can to it on a monthly basis.

Every little bit helps and the sooner you are out of debt, the quicker you can move on financially.

Beware though, you may want to keep using house hacking to continue earning your passive income and using that towards your next financial goal.

Increased Savings

I know you have heard that you should have an emergency savings account. If you don’t have one, you need to have savings that cover at least 9 months of expenses.

There are plenty of high yield saving accounts.

If you already have an emergency savings nest egg, then you can use that money to put towards another financial goal.

Maybe you want to become financially independent, buy a home, or take a dream vacation.

At that point, the choice is up to you and your choices are endless.

Asset appreciation and Increased Equity

If you choose to own the property that you use for house hacking to increase the equity you have in your home.

What’s more, is that you will also now have an appreciating asset.

Here’s how, a mortgage is still debt and should be paid off quicker than 30 years.

You can choose to live mortgage free or use the passive income from hacking your home to create a debt snowball and double down the payments on your mortgage.

This graph shows the impact of what an extra payment of $500 a month can do to a 30 year FHA loan of $300,000 at a 4.69% APR. It’s amazing. You can take 10 years off of the loan!

If you choose to buy, you can put as little down as 3.5% down of the purchase price for 1-4 families if you obtain a FHA loan. See what the FHA limits are for your state here.

As you are paying off your home and maintaining it, your home becomes an appreciating asset. You can then choose to sell it or keep it and buy a new property to repeat the process.

The property I purchased for house hacking has appreciated to 5 times as much as paid for it and generates significant cash flow.

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Build Wealth to Retire Early

Financial Independence to Retire Early is a concept that is catching steam.

The only problem is that when the thought of retirement comes up, it conjures images of sitting around doing nothing.

In most instances this is not the case. If you make the decision to retire early, you are most likely not going to sit around doing nothing.

You will be busy because you are maximizing your time doing what is important to you.

When you reach financial independence you get to choose what you want to do with your time without letting a job determine what you do with most of your day.

Using house hacking to retire early has helped me and my family tremendously. I am able to spend more time with my children and pursue business ventures.

My husband chooses to work because he is very risk averse and wants to make sure we are financially stable in case there is a financial disaster.

However, we continue to build wealth by paying down our mortgage, and when the house is paid off, it will be kept in our family so that our children benefit from the cash flow.

How to Start House Hacking

The interesting thing about house hacking is that the type of property doesn’t matter. Heck, it doesn’t even have to be a home.

If you have a garage space you can rent that to a neighbor and make passive income.

Being Creative to Live Rent Free

High Income

If you are a high income earner you may be able to afford a property that is separate from your primary residence and use it to generate passive income.

House hacking does not mean that it has to be your primary home. It can be but it doesn’t have to be.

You can then use that property to add deductions to your taxes. I am not a tax accountant so if you want to take this route, you should speak to your accountant first and see what the tax implications are for you.

Using Your Credit Score

Young adults and people who move from other countries often don’t have the ability to be approved for an apt on their own.

Often if the person is from another country they will not have the credit history to get an apartment so they can’t meet much of the criteria that apartments require.

If you have a good or excellent credit score, you can use that to your advantage to secure an apt and then charge a premium for the space to a roommate with bad credit.

Since the choice of apartments or homes are very limited to people who have low credit scores, most wouldn’t mind paying a premium for a safe and clean space.

Leverage

If you are in a position to borrow cheap money (especially since rates are the lowest they have been in 50 years) you can buy a home that is slightly bigger than you need and use it for house hacking.

Additionally, there are many people who consider having a mortgage as “golden handcuffs” and want the flexibility to move around as they please.

By being the one who has the mortgage and owner of the home, you can benefit from their want of flexibility and set yourself up for the future at the same time.

Types of Homes for House Hacking

Here’s the deal, it doesn’t really matter what type of home you use for house hacking in order to make passive income.

You can house hack if you have an apt or a condo. You can use house hacking for passive income if you have a single-family home or a multifamily home.

You can even house hack with a duplex. The type of living arrangement doesn’t matter. The key thing is to make sure that you make the numbers work.

Bonus: Types of Properties and How you can use them for making passive income.

Below is a list of different types of properties that can be used if you want to live rent or even mortgage free.

I will assume that if you are able to house hack with a multi family, that you are the owner of the property.

I stopped the list at 4 family properties because anything over that, you would fall into a commercial loan and that is not for the average person.

1 bedroom apt

You can rent out your bedroom for temporary visits while you stay at a friend or family members place.

If you live in a popular and expensive city, using your apt this way can really pay for your rent after a few guests.

I have numerous friends that rent their apts on Airbnb and make $40,000 a year.

2 bedroom apt

With a 2 bedroom apt you can really maximize your home.

You can choose to have a roommate who will share the cost of the rent with you (saving you money) or you choose to use AirBnb or VRBO to rent out the spare bedroom.

Put a bunk bed in one of the rooms and double up the income.

Putting more than 3 people in a 2 bedroom apartment leads to overcrowding and a less pleasant stay for you and your guests.

3 bedroom apt

3 bedroom apts are not as common as 1 bedroom apartments in big cities but they can definitely save you money and generate passive income. If you are willing to give up a bit of privacy you can really come out on top in the house hacking game.

The key to using a 3 bedroom for house hacking is to make sure you are the person who holds the lease or are on the lease with 1 other person.

If you make enough income to cover the rent by yourself or with one roommate the extra bedroom can really help you out.

Duplex

If you happen to live in a duplex, the space can be easy to split and accommodate multiple people.

One floor can be kept for your use while the other floor could be used for multiple roommates, exchange students, or visitors to your city.

This could have little impact on your actual living space and could benefit your immensely.

Single Family Home

Single family homes can be used for house hacking but I personally do not feel very comfortable with others living in the same space with my family.

A great way to use a single family home to house hack would be to rent out a finished basement or a garage space.

Driving around in parts of New York, I have seen the upper level of garages turned into living spaces.

I am not sure if they are legal but it would be a worthwhile effort to check if your local zoning laws allow you to do the same.

2 Family Home

2 family homes are ideal for house hacking because many times they cost less per unit than a single family house or can be purchased cheaper than a single family home.

If you choose to house hack a two family home, you can live in one unit and charge enough rent for the second unit to pay your mortgage partly or in full.

If you can do this, it would be wise to also contribute what you can to the mortgage payment to pay off the home early.

The quicker your mortgage gets paid off, the quicker the money you make from your investment can go to funding other goals through the use of passive income.

3 Family Home and 4 Family Homes

The same principles apply to 3 and 4 family homes that apply to 2 family homes. More apartments equal more passive income without much more of the costs.

Since there are less of a demand of people willing to own 3 and 4 family homes there is less competition. Especially if you can find a fixer upper.

If the asking price is doable and you are willing to be flexible for a couple of years living in an apartment, you can find some really great deals.

If you don’t fancy being a landlord, you can always hire a management company that will handle the tenants for you.

Fortunately, I haven’t found it necessary to hire a management company but I may do so in the future.

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Benefits of House Hacking

House hacking can allow you to live rent-free or mortgage-free. We have personally used house hacking to help us reach financial freedom and pay off our mortgages quickly. But that’s not all, we are able to generate passive income which takes the strain off of needing a job.

Our husbands and ourselves, work because we want to, not because we have to. Having a choice to work for a living improves your outlook on life and helps give clarity to the decisions you make a daily basis on what to do with your time.

Creativity Rules House Hacking

House hacking doesn’t have to involve strangers living in your personal space. If you are creative, it can be a win-win for both parties.

Your expenses can be paid while you are living rent-free at the same time by providing short or long term housing for others in your community.

In the video above, we give examples of how our friends use house hacking to live rent-free and make passive income in Brooklyn New York City while attending grad school.

Mistakes to Avoid When House Hacking

Below is a list of mistakes that you want to avoid when you are starting to house hack

Not enough cash on hand

This applies to anyone considering house hacking using a 2 family property or above. Maintenance is key when it comes to house hacking.

You want to make sure you keep up your investment so that it can generate as much passive income as it can for you.

If there is a pipe that bursts, or a boiler that needs to be repaired, then you have to fix it right away.

My advice is to put aside a percentage of the income you are making on your property on a monthly basis.

This way you will have cash on hand to take care of emergency repairs and keep your house hack running smoothly.

Not knowing your numbers in the beginning

The last thing you want to do is put yourself in a position to lose the property you decided to use for house hacking.

Run your numbers before committing and see who you can make them work with the least impact to your daily life.

You don’t want to sign a lease or a mortgage that requires you to have to house hack.

You want house hacking to be the cherry on top. If something goes wrong like a tenant not paying or a long vacancy, you want to be able to pay what is required of you by yourself.

Conclusion

The pros of house hacking for passive income in our opinion outweigh the cons. Think about it, your living cost is your biggest expense.

It is in your benefit to transform your highest expense into something more manageable or better yet an asset that can generate passive income and cash flow.

We would love to know what your thoughts are about house hacking and using it for passive income. Have you thought about it and are close to moving forward? Drop us a comment below.

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