I’ve built my career around personal finance, so I know how important investing is to achieving financial freedom. But when my husband and I bought our first property over twenty years ago, we had no idea it would unlock the blueprint for growing our wealth.
In 2003, we purchased a condo in the South Loop, a neighborhood just south of Chicago’s bustling downtown. It was a compact junior one-bedroom with a wonderful view of the city and only a 10-minute walk from Lake Michigan.
While living there, I was working as a financial coach and working to pay off over $100,000 in debt. After we became debt-free, we converted the condo into an investment property and started renting it out. The rent is helping us pay off the mortgage and covers a portion of the property expenses.
As a young couple, we were embarking on a new path that would help us increase our income and significantly reduce our living expenses: house hacking.
The four properties we currently own were all purchased using a house-hacking strategy that converted our primary residence to a rental. Though moving from one home to another is far from my favorite pastime -- especially now that we have two children in tow -- we’ve been able to add multiple properties to our real estate portfolio this way.
We’re now part of a circle of house-hacking enthusiasts moving toward our ambitious financial goals. Though every house hacker has a different approach, we have one thing in common: We look for ways to use our largest asset -- our homes -- to generate revenue or, in some cases, live for free.
What is house hacking?
For most homeowners, our primary residence is our most valuable possession. We depend on our homes appreciating in value and our equity growing over time. Yet our homes are also our largest expense. Paying for a mortgage, maintenance and repairs drains our resources each month.
The term house hacking sounds a bit like a criminal endeavor, but it’s a popular (and very legal) strategy. In a nutshell, house hacking is a way to transform your residential property into an income-generating asset to build wealth. House hacking differs from house flipping, when you purchase a fixer-upper with the intent to renovate and sell quickly for more than you bought it.
“House hacking is turning my primary residence into a money-making machine,” said Mindy Jensen, co-host of the BiggerPockets Money podcast. Jensen’s house hacking journey began after purchasing her first condo and renting the spare bedroom to her brother. She updated the condo and sold it four years later, earning a $25,000 profit.
From that experience, Jensen was convinced that house hacking was the path forward. Since 2018, she’s captivated her podcast audience with informative tips on a wide array of money-related topics, including house hacking.
It’s likely you’ve probably either house hacked before or known someone who has -- even if you didn’t have a handy phrase to tie it all together. If you’ve ever rented a room from a homeowner, leased a unit in a duplex while living in the other one or let a friend couch surf in exchange for a fee, you have house-hacking experience.
Our house hacking journey
Over the past 20 years, house hacking has allowed us to increase the number of rental properties we own while saving us thousands of dollars on down payment and closing costs.
While it’s a slower way to build an investment portfolio and requires relocating more often than I’d like, house hacking has been a game changer. We qualify for loan programs geared toward people with investment experience, some with more flexible terms than many banks offer. It’s also helped us reduce our annual tax bill because we can deduct a portion of the property-related expenses during tax season.
🏠 First property: We purchased our first small condo for $167,000 in 2003. We’d saved around $8,000 for the down payment and closing costs, so it was relatively affordable. We intended for it to be our primary residence, but if we had bought it initially as an investment property, we would have had to come up with over $25,000 for a down payment alone. That’s because the criteria for getting approved for an investment property loan is much stricter, and most lenders require investors to put at least 20% down.
For more than 10 years, we’ve been collecting rent from the tenants who moved in after us. Though that rental income hasn’t yet covered all expenses on the condo -- mortgage, property taxes and homeowners association assessments -- we’ve been able to benefit immensely from using it as a rental property, particularly in paying down the mortgage and reducing our debt.
🏠🏠 Second property: When we moved out of the condo in 2013, we purchased a two-bedroom townhouse for $135,000. That was a bit more of a challenge. The townhouse had a leaky refrigerator, and the unattended leak left a hole in the hardwood floors. Fixing the fridge, tiling the kitchen floor and tending to other updates while living there was somewhat inconvenient. But three years later, we were able to refinance and pull cash out.
After home improvements and property appreciation, the townhouse was appraised at $220,000, and the rent we receive from the tenants covers all our expenses.
🏠🏠🏠 Third property: By tapping into our equity, we came up with enough cash to help cover the renovation costs on our third house hacking property in 2021: a single-family home in a lakeside resort town in Wisconsin.
We’re now in the process of converting our Wisconsin home from our primary residence to a short-term vacation rental. Ideally, my family can enjoy the home during the off-peak tourist seasons.
🏠🏠🏠🏠 Fourth property: In the last year, we made our most recent home purchase: a two-unit multifamily property with a lot of potential in an up-and-coming Chicago neighborhood, where we’ll eventually be sharing a space with a tenant for the first time. We’re rolling the $130,000 purchase price and $185,000 renovation budget into one FHA 203(K) loan.
Since we’ll be using one of the units in this property as our primary residence for at least one year (or likely longer -- I’m fed up with moving), we qualified for a 3.5% down payment and a grant, bringing our total out-of-pocket closing costs to just over $6,000. By renting out the second unit to tenants for a monthly rent of around $1,650, we’ll be cutting our mortgage payment in half.
Read more: Money Anxiety? Here’s the Expert Advice I Followed to Get Smart With My Finances
How house hacking has improved our finances
Overall, house hacking has made a positive impact on our finances. Using this strategy, we’ve added $400,000 in equity to our net worth. Here are some additional benefits we’ve enjoyed:
We’ve built our investment portfolio
House hacking has minimized the upfront cost required to acquire investment properties and has lowered our overhead costs. By tapping the equity from our current home, we’ve been able to purchase other properties without draining our savings. The rental income helps pay off the mortgages for our investment properties, which we will rely on to fund our retirement.
It’s given us a larger pool of equity
We have the option to use our equity -- or ownership stake -- in our properties to fund the purchase of additional investment properties. We’ve used home equity lines of credit and cash-out refinances to get financing to cover additional properties.
Tax benefits are a welcome surprise
Because of depreciation and investment expenses, we’ve been able to legally minimize the payroll taxes we pay against our full-time employment. According to Atiya F. Brown, CPA with the Savvy Accountant, we’re essentially creating a business that allows us to write off a portion of the costs of the home used by the tenant.
We gain experience
Each time we purchase a new property, we gain new experiences, from tackling renovation projects to evicting squatters. Some challenges, such as losing money on a fix-and-flip, don’t end well, but overall we’ve had more successes than failures. We’re better able to assess the potential value of an investment and willing to face the risks involved with more lucrative real estate deals.
We move closer to our FIRE plan
Investing in real estate is one way we’re working to achieve our FIRE (financial independence and retire early) goal to have our passive income exceed our monthly expenses. If we get a multi-unit property with at least seven rental units, we will have produced enough profit to achieve financial independence.
We build wealth for our children
Purchasing assets that continue to generate income for our children is a priority. The mortgage on our first South Loop condo will be paid off in three years, and that additional rental income can be used to offset our children’s college expenses (so we don’t have to take out student loans). These properties will help us create and pass on generational wealth.
Different house hacking strategies
People explore house hacking for various reasons, and their strategies can vary widely. The simplest approach is to rent out a spare bedroom in your primary residence. Another common practice is to purchase a multi-unit property, live in one unit and rent out the remaining. Homebuyers can qualify for residential loans on properties with up to four attached units.
In our case, to make house hacking cost-effective, we’ve opted for properties where our mortgage will be less than the average rent in a given area. We generally purchase homes that need a little bit of TLC in exchange for a lower purchase price.
House hacking can also take on many creative forms. Some homeowners have turned an RV in their backyard into additional rental income. Others convert an unfinished basement into a garden apartment. You can even create a tiny home or other additional dwelling unit from a garage on your property to generate income.
The potential pitfalls of house hacking
There are risks associated with any business venture, and house hacking is no exception. When I compared notes with different house hackers, I found that the most common pitfalls involve vetting tenants and coping with different challenges from renters. For instance, we’ve had tenants who stopped paying rent, forcing us to tap into our emergency fund to stay afloat.
Acting as both homeowner and landlord also means dealing with common property hurdles. For example, living through renovations can be frustrating. In one instance, a three-day hardwood floor refinishing project turned into one month, causing us to move out temporarily to avoid the dust.
But despite some pitfalls, we don’t have regrets. Nor do other house hackers I’ve spoken to. Several started with one property and then continued tapping house-hacking strategies over the years, just like we have.
Is house hacking for you?
If you’re looking for ways to slash your living expenses and free up money to build your savings or pay off debt, try starting with your largest asset: your home.
House hacking doesn’t have to be cumbersome. Imagine the various ways it can work with your lifestyle. You can move as quickly or slowly as it makes sense. There’s no exact right way.
As you decide whether house hacking is doable, learn from others who’ve ventured down this path, such as Dan McDonald, who shares insights from his two-time house hacking journey on Instagram @HouseHackandHustle.
To be safe, consult a tax professional to learn what tax implications you can face before moving forward. But get creative, up to your level of risk tolerance, and figure out how to make your primary residence generate the most income.
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