Back in 2020, it seemed to be everywhere. But we wondered just how persistent “house hacking” would be. Turns out the trend has stayed popular on real estate investment websites, in spite of (or maybe because of) a hard-to-crack housing market.
House hacking is really just about buying and renting out real estate. Yet it carries a special meaning for today’s hopeful home buyers. House hacking is boosted by online influencers whose followers are looking for creative ways to make money. Many of these followers hope to own real estate, too. In a digital world, reliable, concrete assets still matter.
Rebranding Rentals: How New Generations Caught the Wave
House hacking is the time-worn practice of surviving by becoming an on-premises landlord. The idea involves buying a residential property, living in part of it, and renting out the rest. With a little luck and a lot of planning, the rental income might cover the buyer’s mortgage payments. In fact, if renters are already there, their stream of payments could even help an aspiring buyer qualify for a mortgage.
When Covid struck, a lot of people suddenly got intrigued by online investment advice. What a perfect storm for ideas like hacking the housing market! In the hustle-bustle house-hacking world, some took to YouTube with grand success stories. Some even take on chains of mortgages, using professionally supported strategies to keep trading up to higher-value properties.
Anyway, once they’d rebranded landlording as house hacking, confident podcasters assured people with modest credit profiles that they too could “hack” into the world of real estate income. And they could do it from right where they are — with relatively small stashes of savings. (Granted, many of these influencers do recommend borrowing from parents or other family members.)
From Mom and Pop Landlords to House Hackers: How the Lingo Changed
The first instance of the term is thought to be a 2013 blog post, How to “Hack” Your Housing and Get Paid to Live for Free.
Online content creators jumped on the bandwagon, coming up with new twists on the ever-popular “become a millionaire” advice. Blogs, videos, and podcasts spread their enticing messages far and wide. Audiences tuned in daily, seeking motivation from entrepreneurs who emerged victorious from an unbearable housing market. Some gurus had no personal experience. That didn’t stop them from creating their own income streams from telling other people about the method.
Some call house hacking a social equalizer. No one needs an expensive degree! No one needs to be a licensed real estate expert! All it takes is a go-get-‘em attitude. Do it right and you’ll be on your way to being your own boss, enjoying the high life and retiring before your peers.
Of course, the real life of a landlord is a bit more complicated.
☛ Some house hackers borrow heavily. Borrowing carries risk. Hackers must also prepare for potential rent payment delays, difficult renters, and damage to their property. Know the risks of house hacking before jumping in.
3.5% Down: How the Federal Government Incentivizes The House Hacking Game
The government incentivizes the concept of buying a multi-unit property to become a small landlord. How so? The Federal Housing Administration (FHA) backs loans for duplexes, triplexes, and fourplexes at residential interest rates, as long as buyers live in one of their units for at least a year.
Freddie Mac’s conventional Home Possible® is another option. In contrast to investment property mortgages, a residential loan requires only a 3.5% minimum down payment, not 15% or 20%.
The FHA accepts applicants with low credit scores. An applicant can get a 3.5% down with a credit score as low as 580 — or even lower, for an applicant who can part with a larger down payment.
Some buyers might live in one of their units for just the mandatory 12 months, and then move. They can use their profits to put 3.5% of the value down on a new property, finance that new building, and continue expanding their holdings year by year.
Need we say more than this video says? Its advice for the entrepreneur is to:
- Look for properties already occupied by renters. (A comment on the video notes that the buyer needs 75% of appraised rents to cover the monthly mortgage payment — including purchase price and fees, loan interest, insurance premiums, and tax payments.)
- Ask the seller for an estoppel certificate, in order to be clear on all agreements and histories of tenant income streams. In other words, get high-performing renters.
- Go all-in with fourplexes. That way the buyer can use the three units, their occupants, and their rent money to qualify for financing — thereby “getting other people’s money to work for you.”
Good advice? Or a little incomplete? One thing that’s missing from videos like this is a serious talk about risk. Even the healthiest economy can change without notice. Legions of house hackers keen on leveraging one property after the next could get themselves in trouble when it does.
Another element missing from the hacking promotions is a discussion about where the market is going, and whether house hacking as a market-beating strategy is doing society more harm than good…
Dissed for Clawing Their Way Up the Real Estate Food Chain: Fair, or Not?
Some say home hackers have done nothing but join a deeply imperfect system that they can’t beat. Home hackers might say they’re “partnering” with their renters, and giving them a better deal than the big, corporate landlords. They might say they’re good neighbors who live in the places they rent, and care about where they live.
But others say they’re too willing to thrive off the income of others who barely survive. They say house hackers have given themselves over to the very system that once excluded them.
For those who really want to work for social and economic fairness, there’s the land trust movement. For those who want to be part of a tight-knit community, there’s the co-op model. On-premises landlords aren’t usually “partnering” with their tenants.
Can small landlords do anything from where they stand to foster fairness? Sure. We all can make some degree of impact on U.S. housing justice. We can screen potential renters fairly. We can keep rental costs accessible. We can resisting the urge to exploit rising markets. We can keep homes safe, well repaired, and attractive. We can help long-term renters keep their homes, promoting stability over extra profit opportunities. This means being reasonably flexible and open to creative solutions when renters face hardships.
And we can become advocates for fair housing policies. If we keep our empathy intact, investor-owners can play a genuine part in making housing fairer, and communities stronger.
Supporting References
James Rodriguez for BusinessInsider.com, by Insider Inc.: Meet the Housing Influencers “Hacking” Their Way to Real Estate Riches (Aug. 16, 2023).
Dan Latu for BusinessInsider.com, by Insider Inc.: “House Hackers” Buy Homes to Live in, Then Rent Out Rooms to Help Pay Their Mortgages. Now Critics Are Taking to TikTok to Accuse Them of “Exploiting” Tenants (Apr. 13, 2022).
And as linked.
More on topics: FHA mortgage, residential investment properties
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