How to Start House Hacking
In a recent article, we talked about different real estate investing strategies to help build wealth while you travel. Here, we’re going to deep dive into one of those strategies and provide a step-by-step guide on how to start house hacking.
Table of Contents:
In addition to writing about his and Jenna’s travel and work adventures, Chipp is a CPA and founder of Walutes Capital, a real estate development and accounting firm. Wearing this “other hat,” Chipp offers real estate investment and development consulting services to clients. If you’d like help with your own real estate investing journey, contact Chipp here to set up an appointment!
House Hacking Overview
“House hacking” means renting out a spare bedroom in your home. Say you own a home with three bedrooms. You sleep in one bedroom and use the second as an office / guest bedroom, so what do you do with the third? If you’re willing to take on a roommate, you start house hacking and rent it out. This brings in extra cash every month to 1) offset your mortgage and other home-related costs, and 2) provide you extra financial flexibility while traveling.
Overseas travel isn’t an all-or-nothing undertaking. That is, you don’t have to commit to doing it full-time. Plenty of people start with a more hybrid approach, maybe spending a few months in the summer overseas, coming home, then spending a few more months in the winter somewhere else. If you try to do this while paying 100% of your mortgage, money may be tight. But, if you have someone renting out your spare bedroom, you can put that cash towards your mortgage payment, meaning you have more money to spend traveling.
In the rest of the article, we’ll outline concrete steps you can follow to start house hacking.
Step 0: Buy or Rent a Home with a Guest Bedroom
To rent out a spare bedroom, you need to have a home that actually has a spare bedroom. Traditionally, this means buying a home with multiple bedrooms, as you then control what you do with that home. If you want to rent out a guest bedroom, you don’t need anyone’s permission to do so.
But, in a somewhat less traditional approach to house hacking, you may be able to lease a spare bedroom of a place that you rent. For example, you sign a long-term lease on a two-bedroom apartment and subsequently decide to sublease that guest bedroom to bring in extra cash. However, you’ll definitely want to run this approach by your landlord to make sure it doesn’t breach your lease terms.
Step 1: Conduct a Spare Bedroom Market Analysis
Okay, so you have a spare bedroom and want to rent it out. What now? First, you need to determine the rent you can reasonably charge for that bedroom - a process known as a rental market analysis. If you charge too much, no one will rent your bedroom, and you’ll lose potential revenue as it sits vacant. Conversely, charge too little, and you leave potential earnings on the table. As such, you want to find that pricing sweet spot where you A) quickly place a tenant, while B) maximizing your potential earnings.
While you can pay someone to do this research for you, it’s pretty easy - and you’ll save money - conducting your own rental market analysis. With the advent of online listings, you have tons of free data at your fingertips regarding comparable bedroom rentals in your area (aka “comps”). First, look up five comparable spare bedroom listings and calculate an average rent per square foot from those comps. Next, you multiply that average rent per square foot by the size of your spare bedroom, which provides you a target rent price.
However, the “garbage in, garbage out” truism exists here. You know your local market better than anyone. So, when you look on bedroom rental websites for available listings, it’s incumbent upon you to identify the most similar rentals in terms of location, size, and housing quality relative to your own home and spare bedroom. For example, say you own a single-family home in the suburbs, and you plan on renting your guest bedroom. Using a spare bedroom from a luxury condo in a city-center highrise would not qualify as a reliable comp - far too different from what you’re offering.
The first townhouse where Chipp used the house hacking strategy
Step 2: Prepare Your Room for Rental and Define Rules and Regulations
Once you’ve accurately priced your room, you need to prepare it for rent. Typically, house hackers rent their bedrooms unfurnished. As such, you’ll need to clear everything out, clean the room, and throw on a fresh coat of paint - want it to show well when potential renters come to see it.
Concurrently, we highly recommend writing out a list of rules and regulations. These are separate from the formal lease terms and focus more on daily life in the home. Having a stranger in your house can absolutely lead to friction, but getting everyone on the same page up front with clear, documented expectations will mitigate potential problems. While you, ultimately, will dictate your own unique rules and regulations, here are a few items to consider:
Does your tenant have full access to house common areas (e.g. kitchen, living room, porch, etc.)? If not, what restrictions exist?
Will your tenant be allowed to have guests? If so, are there any limitations?
Will you enforce “quiet hours” in the home?
Will your tenant be expected to help out with any household chores? If so, which ones and how often?
If there’s a driveway, will your tenant have an assigned spot, or is it open parking?
This certainly isn’t an all-inclusive list. Rather, the important takeaway is that creating rules and regulations should be a process. Think about potential friction points between you and a future tenant, and identify ways to avoid that friction before it becomes an issue.
Step 2a: Identify a Property Manager (Optional)
Normally, house hackers don’t use property managers, because they’re on-site and can address issues themselves. But, if you plan on renting out a spare bedroom to help fund your travels, you’re likely going to be away from the home for extended periods of time. In this situation, you certainly don’t need a property manager. But, if you anticipate stressing about your home while overseas, you may want to consider hiring a property manager to serve as a point of contact for your tenant. This will cost you money, but it could also potentially provide you some needed peace of mind.
Personally, we’ve never used property managers for house hacking or renting single family homes. That’s not to say that, in the right context, paying for one doesn’t make sense. Bottom line, it’s up to you.
Step 3: List Your Room for Rent and Screen Applicants
Next up, you need to list your room for rent. Depending on your personal situation and local network, this may include a combination of 1) word-of-mouth announcements to friends and family, and 2) online listings.
Regardless of how you go about listing your bedroom, you’ll want to screen potential applicants. For people within your personal network, this screening may be more informal in nature - asking around to confirm this person will be a reliable roommate. But, for applicants you don’t know (likely people who apply via an online listing), we highly recommend conducting both a formal background check and former roommate/landlord reference review. Landing the wrong roommate can potentially lead to tons of emotional, legal, and - in a worst case scenario - criminal issues. A little up-front screening can prevent a ton of back-end problems.
Fortunately, when you list your spare bedroom on Zillow Rental Manager, you can use Zillow’s Applications product. With this product, Zillow will run applicant background and credit checks on your behalf. The cost is nominal, and it’s well worth it for the peace of mind these checks provide. Combined with phone calls to prior roommate or landlord references, you’ll have a good sense of whether or not the applicant is someone you’ll want living under your roof.
NOTE: Zillow doesn’t actually list spare bedroom rentals on Zillow.com. Instead, these listings populate on HotPads, a Zillow subsidiary.
Step 4: Collect the Security Deposit, Sign a Lease, and Automate Rent Payments
The Importance of Security Deposits
Once you’ve selected an applicant, you need to collect a security deposit. Unfortunately, we’ve been burned too many times in the past by potential tenants who verbally agree to move into a place then back out at the last minute. When this happens, you lose, because you’ve likely told other applicants the place is no longer available, which costs you money to start the search process all over.
Requiring a security deposit before accepting an application weeds out potential flakes by acting as an insurance policy. If an applicant plans on backing out, he or she likely won’t be willing to provide a security deposit, meaning you simply pick another applicant. While your local market will dictate the deposit amount, we recommend one month’s rent as a rule of thumb - enough to protect you but not too much to be cost-prohibitive for potential tenants.
You’ll likely receive the security deposit before signing the lease. To provide the tenant peace of mind, issue a security deposit receipt saying something along the lines of “I, [insert name], confirm receipt of your security deposit of [$] on [insert date]. I will return this security deposit in accordance with the terms of our lease no later than [legally required # of days] following the conclusion of your lease term.”
Drafting a Legally Compliant Lease Agreement
With a lease agreement template, you get what you pay for. You can download a free one online, but there’s a good chance it won’t comply with state and federal landlord/tenant laws.
Instead, we recommend shelling out a little money up front for a local attorney to draft a lease agreement for you. Yes, you’ll pay for this, but you’ll then 1) have a template to use for future leases, and 2) know that template complies with all relevant laws. In the awful situation that you have to take a tenant to court, you’ll want to ensure your lease agreement is actually enforceable.
Automating Rent Payments
Collecting checks or cash every month is a hassle, especially if you anticipate traveling around the world while renting out a spare bedroom. Instead, we highly recommend automating rent payments as much as possible. When you use Zillow Rental Manager, tenants have the option to make and automate rent payments online. It’s free for landlords, and the money gets deposited directly into your bank account! If tenants choose to pay via ACH, it’s also free for them. A small fee applies for tenants when they make credit and debit card payments.
Step 5: Track House Hacking Results and Build Wealth While You Travel
Once a tenant has signed the lease, received your rules and regulations, and moved in, you’re officially a house hacker! Now comes the not-as-fun part - tracking results for tax purposes. As a landlord, you’ll need to include Schedule E, Supplemental Income and Loss with your IRS Form 1040 to report rental revenues and expenses when you file your taxes each year. While a tax preparer can help you with completing this form and maximizing your deductible expenses, you need to track the following on a spreadsheet throughout the year:
Rents and other fees collected
Rental-specific expenses (e.g. painting your spare bedroom to get it ready to rent, a second phone line used solely by your tenant, repairs to light fixtures in that bedroom, etc.)
Expenses for the entire home (e.g. mortgage interest, property taxes, insurance, utilities, etc.), as many of these can be partially deducted as rental expenses
Yes, house hacking cash flows will help you build wealth while traveling. But, accurate recordkeeping will also allow you to grow your wealth another way - minimizing your tax bill by maximizing rental-related deductible expenses.
Good luck getting started on your house hacking adventure!
We’ve included affiliate links on this page. If you click on a link and end up buying something, we may receive a commission (without adding any costs to you). This helps us pay the bills, and we only promote products and services that we personally use and wholeheartedly endorse. Thanks so much for the support!
~ ~ ~