He ‘Hacked’ His Way to Homeownership — Here’s How You Can Do It, Too

When Ryan Thomson wanted to buy his first home, affording the monthly mortgage payments on his meager social work salary seemed next to impossible. But after hearing about house hacking from a friend, Thomson went down a research rabbit hole for about a year, learning the ins and outs of this unconventional path to buy a home.

House hacking involves generating income from your home to cover most (or all) of your monthly housing costs. Most house hackers start out by renting out extra rooms or spaces (such as a basement or mother-in-law suite) in their home.

If that goes well, house hackers who are serious about building a real estate portfolio usually buy a multifamily property of up to four units. They live in one unit and rent out the others to tenants and stay put for at least one year before doing it all over again.

Financial Rewards of House Hacking

The financial rewards of house hacking are well worth the tradeoffs like sharing your home with strangers and the minutiae of managing tenants, Thomson says.

“I realized I could buy a property for 3.5% to 5% down, rent out the bedrooms, cover most of my mortgage — and pay less than I was in rent,” says Thomson, who bought his first home in Colorado Springs, Colorado, in 2019.

The benefits of owning a home sooner, such as paying down the balance of an appreciating asset, building long-term wealth and reaping some tax perks, made better financial sense than continuing to rent, Thomson says.

So how’d he do it? Thomson says he jumped in the market at the right time, using a 30-year, fixed-rate Federal Housing Administration (FHA) loan with a 4.5% to purchase his first $260,000 four-bedroom home. Thomson converted a front garage into a small studio apartment and rented out for $1,600 a month as an Airbnb. He also rented three of the four bedrooms in the main living space for $600 each and lived in one of the rooms full-time.

“I was [earning double] my mortgage and living for free,” Thomson says. “That’s a massive win. The reality is you need a place to live; you're going to live somewhere and your alternative [to owning] is renting.”

Today, Thomson owns five properties, having hacked his way to financial freedom with three of them. He even left social work to become a real estate investor and agent full-time to teach other aspiring homeowners how to use house hacking strategically to build wealth at househackcoloradosprings.com.

He’s not alone. Browse YouTube, Instagram or any other social media platform and you’ll find numerous real estate influencers and investors singing the praises of house hacking. Before you dive in, here are some key things to know about how to do it and how financing works.

How to Finance a House Hack

If you already own a home, you can test the house-hacking waters by renting out a spare bedroom or two or a basement, either as short- or long-term rentals, to generate additional income. If you want to step up your house-hacking game and grow your real estate portfolio, purchasing a multifamily home with up to four units is the logical next step.

Here are some loan options to consider:

FHA Loans

FHA loans only require 3.5% down if you have a credit score of 580 or higher. While you’ll pay upfront and annual mortgage insurance premiums, renting out extra units in the property can help cover those costs and then some.

While FHA loans are ideal for duplexes, lenders require three- to four-unit properties to pass a self-sufficiency test. This means the property is able to generate enough rental income to cover its entire monthly mortgage payment after a 25% vacancy factor. In the current mortgage rate and housing market, it’s virtually impossible for these properties to pass the FHA’s test.

VA Loans

Qualified military service members, veterans and eligible spouses can use a Department of Veterans Affairs (VA) loan with 0% down and no mortgage insurance. While the VA doesn’t set a minimum credit score requirement, many VA lenders require a score of 600 or higher.

Both FHA and VA loans also have rehabilitation loan options if you need to buy a fixer-upper and finance renovations and the home purchase with one loan.

However, when you use a VA loan, you would have to refinance the home into a conventional loan. Then you request a one-time-only restoration of your VA loan entitlement. You could only house hack one additional time using a VA loan.

Conventional Loans

You can use a conventional mortgage to buy a multifamily property of up to four units with just 5% down now (it used to be 15%). Plus, first-time buyers can use the projected rental income to qualify for a loan if they’re living in one of the units and renting the others out.

However, you must already be paying rent to be eligible. Another caveat: You’ll need six months of full mortgage payments (after paying the down payment and closing costs) to qualify as well as a higher credit score (680 to 700) for approval.

Once you live in your hacked home for at least one year, you can typically rinse and repeat the process again with the next property and keep the existing home purely as a rental. This will require you to move every few years as you hack more houses, Thomson points out.

How to House Hack Like a Pro

House hacking involves some short-term discomfort, such as having housemates, learning how to navigate landlord responsibilities and maintaining multiple units. But the payoff and passive income it can generate are more than worth it.

Here are some helpful tips to house hack like a pro according to investment property platform New Western.

1. Find a Hack-worthy Home

Look for a property with extra bedrooms, a basement or an unfinished space you can easily convert into a studio and rent out. A multiunit property, such as a duplex, triplex or quadplex, is another option, but those may be harder to qualify for as a first-time buyer due to their steep prices.

2. Run the Numbers

Ideally, your rental income should generate positive cash flow. Using current market rents as a guide, the goal is to charge enough rent for each unit or room so your full monthly mortgage payment, property taxes, homeowners insurance and other recurring housing costs are completely covered.

However, make sure to factor in a vacancy rate of 5% to 10% to cover periods when your units or rooms are empty. Set aside at least six months of monthly living expenses in an emergency fund to continue paying your mortgage payment if you can’t find tenants or short-term guests for an extended time frame.

3. Consider Operating Expenses

Your mortgage payment isn’t the only expense to think about. You’ll need to hold back money for regular maintenance and repairs, landscaping, homeowners association dues (if applicable) and utilities.

You’ll also have to pay third-party costs to screen tenants, such as credit and background checks, along with legal start-up costs to draft a solid lease agreement. If you plan to rent out a portion of your home on Airbnb or another short-term booking site, factor in their fees as part of your operating expenses, as well as cleaning fees (if applicable).

4. Hire the Right Team

An experienced Realtor who has house hacked before and understands the process can help you research any potential restrictions on local short- or long-term rentals or occupancy limits. They can also crunch some numbers to help you identify properties that will offer the best ROI. Meanwhile, a skilled mortgage lender who understands how to calculate your rental income into borrowing guidelines for multifamily properties can make scaling up a smoother process.

Once you acquire a few properties, Thomson recommends hiring a property manager to help with the day-to-day administrative work you’d normally do as a landlord. Additionally, consider hiring a real estate attorney and tax professional for customized guidance on how to best structure your real estate portfolio so you protect your investments and minimize your tax burden. You’ll also want to engage an expert in federal, state, and city tenant law to review applications and place tenants. You can get into hot water quickly by inadvertently breaking fair housing laws and local ordinances.