Some Americans are house hacking their way to homeownership and rent-free living

After calculating numbers on single-family homes, Christopher Lynch decided a $2,200 monthly mortgage payment wasn’t going to work, but he knew he wanted to own a home and build equity.

“I didn’t want to rent anymore and was looking to keep my bills as low as possible," the 29-year-old said.

That’s when Lynch discovered house hacking, a real estate strategy that loosely means finding ways to generate income from your home to offset your costs. It's a move that could become more popular as Americans contend with both runaway housing prices and rent.

“It's a real game changer because you get to be a homeowner and essentially live for free,” said Lynch, who, with the help of a specialized realtor, launched an extensive search that concluded with his buying a townhouse-style duplex in West Warwick, Rhode Island.

While house hacking could be anything as basic as renting out a room in your home, it traditionally involves buying a multi-family home, living in one of the units, and renting out the others. The mortgage on the property — and other associated housing costs — is covered by the tenants renting out the extra space.

Like most home hackers, Lynch took out an FHA loan, so he only had to put down 3.5% of the purchase price.

Lynch’s initial monthly payment was $2,090 a month, and he was collecting $1,100 in rent. That brought his monthly costs down to $990.

“With my gained equity, I refinanced, removed my [private mortgage insurance], and reduced my payments to $1,790. Then I was able to raise the tenants’ rent to $1,300," he said. "House hacking has brought my monthly costs down to only $490 a month out-of-pocket. In today’s market, the unit I’m in would rent for $1,800 a month.”

Lynch was so enamored with the wealth-building process that he’s since carved out a career as a real estate agent helping others become bonafide house hackers. That’s not to say that house hacking, which has boomed in popularity over the past few years, is for everyone.

“You have to have a plan,” said Melissa Forrest, who, along with her husband, Zev, founded Host Life to teach others how to make the process work successfully to generate steady income.

“If our clients want cash flow right away, we have them take a look at what they have and see what they can do with it — whether that’s renting out a room, or making small upgrades to their home such as converting a door into a wall if privacy is an issue,” said Forrest, who is currently monetizing a former garage that has been converted into a studio apartment. “These are entry-level ways to get into house hacking.”

More sophisticated hackers have more elaborate strategies.

One of the biggest challenges is finding the right home in the right location, said Logan Allec, a house hacker of a four-unit property in Santa Clarita, California.

“It’s not like you can do this in a hot market like downtown Seattle, but you could do it an hour or two east of Seattle, where there’s less competition and things aren’t as crazy from a price standpoint,” Allec said.

Allec, a CPA and founder of a tax relief company, said he worked from the outside in, collaborating with an experienced lender and agent.

“I used a spreadsheet to compare A) my estimated monthly payment — principal, interest, property taxes, insurance, mortgage insurance premium — to B) the estimated rental income for the property (if all units were rented out — including the one I would occupy) multiplied by an HUD vacancy factor," he said. "If the latter was greater than or equal to the former, the property made my short list; if not, I passed on it.”

Beyond the all-important number crunching, house hackers also need to be willing to take on landlord responsibilities, which includes finding model tenants, drawing up leases, and dealing with ongoing maintenance issues.

The timing, however, couldn’t be better, said Jeff Andrews, senior market analyst at Zumper, a national rental listing platform.

"The home sales and rental markets have gotten increasingly ruthless over the last two years, so house hacking is a way to bring a katana to a butter knife fight,” Andrews said, referring to a Japanese sword. “When you're seeing bidding wars over rental units in places like Dallas and families losing out on new homes to billion-dollar private equity groups, you're forced to get creative, because it's a bloodbath everywhere."

Personal Finance Journalist Vera Gibbons is a former staff writer for SmartMoney magazine and a former correspondent for Kiplinger's Personal Finance. Vera, who spent over a decade as an on air Financial Analyst for MSNBC, currently serves as co-host of the weekly nonpolitical news podcast she founded, NoPo. She lives in Palm Beach, Florida.

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