We have a passion for helping people build wealth through real estate and one of our favorite ways to do that is through a strategy called house hacking. While my wife and I have done numerous house hacks over the years, I’m the first to admit it’s not for everyone. So in this article, we’ll help you determine whether house hacking is right for you. We’ll look at things you should consider before house hacking, the pros and cons of house hacking, and at least one scary story from my experience as a landlord.
But first, in case you don’t know, house hacking is when you buy a small multi-unit property, like a duplex, live in one unit and rent the other out. Our clients are usually house hacking in an effort to lower their overall housing expenses while simultaneously creating wealth. Sounds great, right? But before you jump in, let’s cover some of the positives, negatives, and a handful of items that should be considered.
Pros and Cons
First, the good. When you house hack, you can save a good chunk on your monthly housing expenses while also owning a property in one of the hottest real estate markets in the country. In one of our personal house hacks in Oakland, we had expenses at thirty-six hundred dollars a month, while bringing in twenty-one hundred dollars a month in rents. That allowed us to live in our three bed, one and a half bath appreciating asset for just fifteen hundred dollars per month. That’s fifteen hundred dollars when we would have been paying four thousand or more for a comparable single family home.
And now for the bad. My wife and I were traveling several years ago, visiting my parents in North Carolina. I was out playing golf with my dad (my one round per year) when I received a call from my tenant telling me her unit, which was in the basement of our duplex, had flooded. So now while twenty four hundred miles away, I had to figure out how to dry, remediate, and repair the basement. In addition to the unexpected expenses and repairs that will inevitably happen, we also have changing governmental oversight to be aware of. Oakland and many cities in the East Bay–and now the entire state of California–have enacted various tenant protections, which may limit your rights as a landlord. The most notable are rent control and just cause eviction ordinances.
Rent control limits your ability to raise rents past certain thresholds each year, even if the current rent is below market rent. In Oakland, for example, rents can’t be raised more than about three percent a year with just a few exceptions. That means if the current rent is one thousand dollars, the rent can only go up by thirty dollars in a given year. Just cause eviction protects tenants from being asked to leave without an allowable reason. These reasons are generally limited to the tenant breaking the lease by non-payment, illegal activity, et cetera. What is not an allowable reason is simply wanting them out, or wanting to bring in higher rent.
While house hackers used to be exempt from these types of laws, that is no longer the case in Oakland. However, if a tenant occupies a unit that you or a family member want to live in, you are typically allowed to go through with that eviction, though you’ll be required to pay the tenant a relocation fee of several thousand dollars.
Things to consider
Before house hacking, you should also consider what it will be like day to day, to share your space with tenants. Many house hackers work to establish ground rules around common spaces like the back yard, quiet hours, and policies around things like taking the trash cans to the curb. And given that you’ll be sharing space, it’s worth spending a moment talking about finding great tenants. Some house hackers end up inheriting tenants from the previous owner, though many are able to go out and find their own.
There are dozens upon dozens of website to advertise your rental unit. I tend to keep it simple and stick with the Zillow Group–that’s Zillow, Trulia, and Hotpads, as well as listing on Craigslist. I use those same sites to help determine what monthly rent I should ask for by looking at similar units nearby. In our current housing shortage, a properly priced and marketed listing with good pictures should see multiple inquiries in the first few days. To save on time, I try to schedule as many appointments as possible in one afternoon to allow prospective tenants to view the unit.
So from the tenants that come through and are interested, you’ll be able to select the most qualified candidate. To determine qualifications, I run credit checks, background checks, and eviction history through Smartmove, a service through TransUnion. Assuming all looks good, I check references to make sure there aren’t any red flags or concerns about sharing a home with the prospective tenant. To respect anti-discrimination laws, and more importantly, be a good human, carefully consider the grounds for which you reject any applicants. Also note that in California, you can not reject applicants because they intend to use Section 8 housing vouchers.
Once you find a tenant that meets all your criteria, it’s time to sign a lease! I get asked often where to find a good lease, because there are so many bad leases out there. A lease is a legal document, so which lease to use and what terms are included are great questions for your lawyer. However, if you’re looking for a good place to start, check out the East Bay Rental Housing Association and their standard lease. If you’re outside the East Bay, there may be a local housing association you can join.
So after hearing about some of our experiences and getting a high-level overview of what’s required to house hack, do you think house hacking might be right for you? If you’re looking for more real-world tools on how to get started house hacking, come check out one of our live upcoming house hacking classes.
