House Hacking: Hacking Home Ownership and Living for Free!

House hacking is one of my favourite real estate strategies and one of the best ways for the average joe to break into the real estate market while not completely dampening their monthly budget. Depending on what city you live in, those who implement the house hacking strategy can potentially live 100% for FREE!

Although I haven’t house hacked yet, I do intend to do so after I sell my condo and upsize to a detached property (pending on approval from my girlfriend).

What is House Hacking

House hacking is a popular concept within the real estate investing world and FIRE Community (Financial Independence Retire Early). House hacking is when an individual owns their primary residence and lives in one unit or bedroom of their house, and rents out the other units or bedrooms of their property to off-set their housing expense.

There are many ways to implement the house hacking strategy, including renting out your basement, bedrooms, garage, storage space, or even exploring the Airbnb/short-term rental model to rent out common areas of your house.

In general, there is a balance between comfort and revenue. If you want to generate more revenue from house hacking, you would rent your house by the bedroom, but this would mean that there is less comfort and privacy for you. If you prefer comfort over revenue, you can rent a separate unit of your house out (e.g. basement) which minimizes contact with your tenants.

House hacking allows homeowners to reduce their monthly fixed costs, thus allowing them to save more of their income to re-invest it into other investments. This ultimately further increases their overall income.

The Type of Property to Purchase

Typically, the best entry level property to house hack are bungalows with a separate basement unit- very common in the Greater Toronto Area. The more units you add to the property, the greater you’ll be able to offset costs.

Personally, I would look for a bungalow house with 2-3 bedrooms with the opportunity to add one or more bedrooms. It is important to look for an opportunity to increase rents in the house beyond what the seller perceives.

The best way to do this is to see if there are ways to add bedrooms to a property. In the Greater Toronto Area, many bungalows have a dining room and living room. For most people, there is no need for a full dining room in a property given that most families eat their meals in the kitchen or living room. Buying a 3 bedroom bungalow with a dining room allows for an easy opportunity to increase the property to a 4 bedroom. Not only does this immediately add value to the property, but it also increases rent potential.

Example

Let’s say that you buy a 3 bedroom bungalow in Scarborough for 950k. Assume you put 20% down payment on a 30 year amortization and 2.04% interest rate. Your monthly mortgage payment would be $2,821 a month. Including property taxes, insurance, and utilities, you’d likely be up to $3,600 in monthly expenses. Sounds daunting right?

Thus the total outflow from your house for insurance, mortgage, property taxes, and utilities is $3,600 a month.

Renting Out the Basement

The most common and easiest way to house hack is to rent the basement.

Bungalow basements build in the mid 1900s in Scarborough are extraordinarily large and often times their ceiling height is quite high. There are many options you can explore to optimize rents but you must also consider tenant quality, wear and tear (more tenants, more repairs needed), and legality (check city zoning requirements).

Here are some options you can explore:

-         3 bedroom basement unit ($2,200 per month). Total rent $2,200.

-         1 bedroom basement unit ($1,200) and a 2 bedroom basement unit ($1,500). Total rent $2,700.

-         Studio basement unit ($1,000) and 2 bedroom basement unit ($1,500). Total rent $2,500

-         Three 1 bedroom basement units ($1,200 each, totalling $3,600). Total rent $3,600

Let’s keep things basic and assume you decide to build a 3 bedroom unit. This would be an ideal option if you do not want to manage multiple tenants. Keep in mind the more tenants you have, the less risk of uncollected rent. If one unit misses rent payment, you will still have 2 other units paying rent. Again, the decision of which option you go with depends on your basement layout and your personal preference.

At $2,200 in monthly rental income, your total capital outlay a month is $1,400. Not bad! This is definitely cheaper than renting a property, but you do need to make sure you have the funds to renovate the property.

If you don’t mind having roommates then there is a way to save even more money!

Renting Out The Main Floor

Remember how I mentioned you need to balance revenue potential with comfort?

This is where converting the dining room to a bedroom comes into play. With that additional bedroom you can rent it out at $700. Keep in mind you will be sharing common spaces with this individual. Alternatively, you can explore Airbnb’ing the bedroom if you want to test how it would be like living with a roommate. The benefit to this is that you can choose not to Airbnb the bedroom at any time and retain full use of the main floor.

At $2,200 rental income for the basement and $700 rental income for the main floor bedroom, your total revenue is now $2,900 a month. This leads to a capital outlay of only $700 a month! Imagine owning a detached property in Toronto for only $700 a month.

With all those additional savings, you’d be able to re-invest this money to achieve retirement quicker!

If you decide to build a 1 bedroom unit in the basement and a 2 bedroom unit, in addition to renting the bedroom in the main floor, that would bring your overall cash outlay even lower! When you start exploring with Airbnb, you can further increase your revenue; however this comes with the price of more active work in managing the Airbnb. But with creative strategies, you can potentially live 100% for free in the GTA while owning a million dollar asset.

Reminder

If you’re planning to house hack, just remember to invest the savings! You’re making sacrifices today so that you can grow your wealth and eventually retire in the near future.