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House Hacking to Pay Off Debt

in Rants

Is your debt-to-income ratio rising faster than you can keep up? Consider house hacking. Successful house hackers turn their spare bedrooms, garages, and even attics into extra income every month. The benefits of house hacking are twofold: you can pay off your debt faster and increase your home equity. Keep reading to discover how house hacking can help you eliminate debt.

What Is House Hacking?

House hacking is the practice of renting out the property you currently live in. There are many ways to pursue house hacking. Traditionally, house hackers are people who own a multi-family property, live in one unit, and rent out the others. With real estate prices reaching new highs across the country, more homeowners are simply renting out rooms within their single-family homes or condos.

House hacking a single-family home is like having roommates, except you’re the landlord. You’ll be responsible for collecting rent, screening tenants, and renovating the property as needed. The monthly income will help you quickly pay off your mortgage or other forms of debt. 

Tips For Making Profit & Paying Debt Off Faster

If you’re considering house hacking to pay off debt, there are a few things to keep in mind. House hacking is similar to starting your own business, and every successful venture needs a well-formulated plan.

Buying a Home For House Hacking

House hacking can be a great way to buy your first home without taking on too much debt. The most important tip is to buy a home within your means. You may feel enticed to expand your homebuying budget since you won’t be responsible for the whole mortgage. However, you should try to keep your expenses as low as possible. After all, the goal is to eliminate debt quickly.

Location is one of the most important factors to consider when choosing a rental property. The right location can make your property more attractive to potential tenants and help you generate higher returns. Start by researching areas with large rental populations.

In addition to being profitable, you also need to find an area where renting is legal. If you’re planning to modify your home for house hacking, be sure to brush up on local building codes and zoning laws first. Some HOAs and condo associations have rules prohibiting rentals or enforcing occupancy limitations. Make sure to check the rules and regulations before committing to a property.

This legwork needs to be done before you buy a home you plan to house hack. Otherwise, you could end up with more debt than you started with.

Setting Rental Rates While House Hacking 

Your rental rates can make or break the success of your house hacking endeavor. If you price your rooms too low, you’ll lose income. Overpricing your rentals can drive away tenants and leave you covering the costs of vacant rooms.

The 1% rule provides an easy framework for setting rental rates. This rule suggests that your total monthly rate should be, at minimum, 1% of the home’s purchase price. Therefore, if you purchased a home for $250,000, you could reasonably charge $2,500 per month for rent.

Most house hackers rent their homes to multiple parties. If this is the case, it can be helpful to set room-by-room rates. For example, if that $250,000 has three bedrooms, each room could be priced at around $833 per month. You can get even more granular by measuring square footage of each room and charging extra for perks like en-suite bathrooms.

Be sure to also include utilities with your rental prices. To do so, take your average monthly bill, divide it by the number of tenants, and add that number to the monthly rate.

Estimating Your Monthly Income & Living Expenses

To ensure you’re on track to pay off your debt via house hacking, you need to estimate your earnings before starting. You can do this by calculating your gross income.

Your gross income is your total monthly rental income before expenses. Next, calculate your monthly cash flow by dividing gross income by 12 and subtracting your monthly mortgage payment.

Don’t panic if you end up with a negative monthly cash flow. A negative cash flow represents your living expenses, which will be significantly lower than they would be if you lived alone. The money you save every month can be put towards any debt you have, tucked away in your emergency fund, or reinvested towards your next venture.

House Hacking a Multi-Family Building

One of the most common ways to house hack is to buy a duplex, triplex, or fourplex. These buildings offer the opportunity to generate rental income, but come at much higher prices. The prospect of providing a 20% down payment on a multi-unit property scares off many would-be house hackers. Fortunately, there are several ways to buy multi-family real estate without hefty down payments.

The most common strategy is to use an FHA loan.  FHA loans are government-backed loans that allow buyers to put down as little as 3.5%. The only stipulation is that you have to live in the unit as your primary residence.

Other Creative House Hacking Strategies

If you want to house hack your single-family home, but don’t want to have tenants in your space, you can potentially modify your home to create more privacy.  Consider building a mother-in-law suite with a private entrance or convert your basement into a rental unit. If you’re especially handy and own a large lot, you can construct a separate dwelling in your backyard. Just brush up on zoning laws in your area before breaking ground!

Another option is to rent out extra space on Airbnb. This can be done by renting out a room in your house or renting out your entire home while you’re away on vacation. This can be a great way to generate extra income if you live in a popular vacation destination.

Use House Hacking to Reach Your Financial Goals

House hacking can be a great way to slash your bills and pay off your debt faster. By following the tips we’ve outlined in this post, you can buy an affordable house and set competitive rates so that you can start saving money right away. Once you’ve paid off your debt, you can enjoy a steady stream of passive income plus full equity of your home.

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