Does House Hacking Work in 2024? How to House Hack.

What is house hacking?

House hacking, broadly defined, primarily aims to reduce mortgage costs by renting out part of your property.

In this article, we’ll explore the various types of house hacking, assess its feasibility in your area, discuss the challenges involved, and highlight the best programs for successful house hacking.

What are the different kinds of house hacking?

There are two main types of house hacking:

1. Multifamily House Hacking ( Hard )

   Multifamily house hacking is what most people mean when they talk about house hacking. Let’s make a few assumptions:

   • You want to put down a minimum amount (normally around 3-5%).

   • You intend to live in the property to benefit from primary residence guidelines and rates.

   • You aim to generate income from the other units.

   • You potentially need the income from the other units to qualify for the property.

   This combination of wants and needs creates a complex scenario for loan qualification. We’ll delve into the details in the guidelines section.

2. Single Family House Hacking (Easier but takes time.)

   This method offers a solid path to building wealth through real estate, albeit lacking the glamour often depicted in YouTube videos and by influencers.

   With single family house hacking, you acquire a typical single-family home as your primary residence, reside in it for a year, and then transition it into a rental property. It’s a straightforward process! Lenders won’t raise any objections, and you’ll enjoy the benefits of primary residence rates and guidelines for your income-producing property.

   The beauty of this approach is that there’s no limit to how many times you can repeat it.

What programs are available for house hacking?

There are two main programs that make house hacking possible. Both FHA and Conventional loans allow for multi-unit purchases but they have varying guidelines.

If you have a large chunk of money such as 10-25% down, then conventional is likely the best move if you also have good credit while minimum down will be better suited for FHA.

The guidelines that stop you from house hacking.

There are several guidelines that prevent first-time home buyers from putting themselves in scary situations they might not be able to afford.

Conventional Complications

For first-time home buyers, you will not be able to use the rental income from the other units to qualify unless you have over 1 year of property management experience. This means you must qualify for the whole property on your own. This can be okay for some but is usually very tough to do with the higher prices of multifamily properties.

FHA Complications

Although you can use the rental income the issue arises when you try to purchase a 3-4 unit property. You must meet what is called the self-sufficiency test.

The self-sufficiency test states that you must receive more “net” rental income than the mortgage payment.

There’s a catch though! You will be forced to take 75% of the predicted rental income derived from the lesser of the current tenants� leases or from a licensed appraiser.

The best way to remember this is to determine the mortgage payment and multiply by 1.33. If you can’t get that rental income, including your unit, then it will not pass the test and the loan is ineligible.

You can start to see the issue.

With today’s rates and minimum down, no tri-plex or four-plex will pass this test over 500,000.

The only solution would be to put more down or wait till rates go down ( not likely ). It doesn’t even matter if you can afford the property, on FHA if it does not pass the test, you can’t do it.

The other solution would be to do a conventional loan but then you must qualify for the entire property yourself.

What is the overall best house hacking strategy?

In our opinion, the best house hacking strategy involves focusing on a duplex (to navigate through the challenging guidelines) located in a lower-cost state but with potentially higher rents, such as near a college. Areas like Arizona, California, inner-city Utah, or Colorado will be very difficult unless you have a decent chunk of money or are not a first-time home buyer.