House hacking is a creative way to generate income through property. You can house hack most properties through a variety of strategies, from running an Airbnb to converting your basement into an independent apartment. This strategy allows individuals to turn their current home into a revenue stream.
The ultimate goal of house hacking is to generate income from the property that you live in, allowing you to cover the majority of your personal bills and expenses such as your mortgage payments.
Why should you consider house hacking?
House hacking is great for a number of things. The primary goal for most people who house hack is to generate income and cover personal expenses. This allows them to build equity in an appreciating asset, take advantage of the relevant tax benefits of being a landlord, and reduces their personal expenses – essentially they get to live in their home for free.
A secondary consideration for house hacking is that it allows you to get experience as a real estate investor. For example, if you rent out a room in your house, you would be able to experience firsthand some of the specific problems that come with being a landlord. You can gain experience in managing tenants, tracking income and expenses, and more while at the same time building confidence to move onto bigger more lucrative investments.
What do you need to know to house hack successfully?
- Decide on your strategy
The first thing you need to do is determine what house hacking means for you and develop a strategy that works for your property type and fits with your goals. There are numerous strategies that can be employed when house hacking. If you own a single-family home for example you could rent out your spare room. You could look for a permanent tenant, or you might rent it out as a short term rental through a platform like Airbnb.
Alternatively, you could spend some money to convert part of your property into an independent apartment. The strategy you choose will be highly dependent on the property in question and the space available.
- Be Professional
You are offering a service and if you want to house hack successfully you must be unquestionably professional in your dealings with prospective and current tenants. As part of this, you should have a detailed knowledge of the legal implications of renting out a part of your property, you should screen prospective tenants effectively, you should communicate with your tenants officially and keep detailed records of these communications, and you should have a legally binding lease agreement which both parties sign to protect both you and them from potential issues in the future.
- Set a fair market rate
Setting a fair market rate is important for two reasons, the first is so that you are able to attract good tenants and the second is to ensure you generate enough money to achieve your personal financial goals.
You will want to do a market analysis by examining the rates set by similar rental properties in the area. Once you’ve set the rent amount you will also need an efficient way to collect payments. Having an online rent payment system that allows your tenant to set up automated payments is the most professional, efficient, and tenant-friendly manner to operate.
- Know your tenant’s rights
As a basic rule of thumb, you should not discriminate against any of the protected classes as laid out by the Fair Housing Act.
However, the exact rights and legal processes for renting can vary depending on your state and city, and can also vary depending on the kind of rental you are operating. For example, owner-occupiers have more leniency as do Airbnb or short term rentals.
Whatever strategy you choose though you must make sure that you do not infringe on any of your tenant’s legal rights such as their right to privacy and quiet enjoyment. And that you follow legal processes to the letter, so as to avoid any uncomfortable or potentially expensive legal issues that could arise, should you infringe upon those tenants rights. Having a strong lease agreement here could be vital.
- Maximise Cash flow
Cash flow is king. As such, you need to take advantage of all of the tax benefits that come with running a rental business as a landlord and business owner. Landlords can deduct many of the operating expenses associated with running a rental from the income.
For example, you can deduct advertising costs, legal and professional services. You even may be able to take advantage of depreciation, home office expenses, and more. For this reason, it’s well worth talking with a financial planner or CPA, in order to formulate a plan. Additionally, you’ll want to employ software that will allow you to easily and accurately track your income and expenses throughout the year so that you don’t end up with a time-consuming admin task at the end of the year, and end up missing deductible expenses.
House hacking is a fantastic strategy to build wealth for the future and to help you cover your current living expenses. It’s a strategy that has been employed, time and time again by numerous investors who have taken advantage of tax benefits and cash flow to build equity in an appreciating asset.
There are a few things you need to know to house hack successfully though, for example, you need to employ the right software solutions to create a streamlined rental management process, and properly track your income and expenses. Doing this will allow you to minimise the time input needed and maximise the profits so you can scale your rental portfolio and launch you on a road to increased wealth and financial independence.
About the Author
“Ben has worked with real estate professionals all over the world during his role at Landlord Studio, and has distilled their knowledge into ebooks, guides, and articles which can be found on sites like Forbes and Mashvisor.”