How to Eliminate Your Living Expenses and Build Generational Wealth Through House Hacking

If you’ve ever dreamed of cutting down on your living expenses or building a financial foundation that can be passed down for generations, house hacking might be your key to achieving these goals. This strategy involves using real estate to generate income that offsets (or even eliminates) your living expenses, while also positioning you to build long-term wealth. Here's how house hacking works and how you can use it to start creating generational wealth.

What is House Hacking?

House hacking is when you purchase a property—typically a multi-family home or a large single-family house—and rent out part of the space to cover your mortgage, utilities, and other living expenses. The most common types of house hacking involve:

• Renting out individual rooms in a single-family home
• Purchasing a duplex, triplex, or fourplex and renting out the additional units
• Short-term rentals (like Airbnb) if local regulations allow
• Building a basement or garage apartment for rental

Essentially, house hacking transforms your home from just a living space into a source of income.

How House Hacking Can Eliminate Living Expenses

When you rent out part of your property, the rental income from tenants can cover your monthly mortgage payments, property taxes, insurance, and utility costs. In some cases, it can even cover more than your monthly expenses, leaving you with additional cash flow.

For example, if you buy a duplex and live in one unit, you can rent out the second unit. The rent from your tenant could cover most or all of your mortgage, allowing you to live essentially rent-free. Over time, this can be a major financial game-changer. You might even save money by eliminating utility bills if your tenant covers certain costs.

Building Generational Wealth Through House Hacking

The wealth-building potential of house hacking comes from both the income it generates and the long-term appreciation of the property. Here's how it works:

1. Building Equity: When you buy a property and rent out part of it, the tenants are effectively helping you pay down the mortgage. Over time, you accumulate equity as the principal on the mortgage decreases, while the value of the property (hopefully) appreciates. In this case, SOMEONE ELSE is buying your home for you! Crazy!

2. Real Estate Appreciation: While real estate markets can fluctuate, owning property over a long period can lead to significant appreciation. As property values rise, your equity increases, potentially providing you with a substantial windfall if you decide to sell. This is how you can grow your net worth over time.

3. Reinvesting for Growth: With house hacking, you're not just covering your living expenses—you’re setting yourself up to acquire more properties. As your rental income builds, you can use that cash flow to save for additional properties, expanding your portfolio and increasing your wealth. In this way, you are using your cashflow to reinvest - rather than using the hard earned money from your day job!

4. Cash Flow: If you manage the property well and maintain strong tenant relationships, you could generate passive income beyond just covering your own housing costs. This positive cash flow could be reinvested, saved, or used to further expand your real estate holdings.

Steps to Get Started with House Hacking

1. Educate Yourself: Before diving in, educate yourself about the local real estate market, financing options, and the responsibilities of being a landlord. There are many resources available—books, blogs, podcasts, and online courses—that can give you a better understanding of house hacking. Over at the House Hacking Pros, we designed a course just for this! See our House Hacking 101 Course.

2. Assess Your Finances: To get started, you’ll need a down payment (typically around 20% for investment properties, though FHA and other types of loans allow for as little as 3.5% if you plan to live in one unit of the property). Check your credit score and savings to ensure you’re financially ready for the investment.

3. Find the Right Property: Look for a property that fits your budget and has enough potential rental income to cover your living expenses. Multi-family homes (duplexes, triplexes, and fourplexes) are the most popular choices for house hackers, as they allow for multiple streams of rental income.

4. Secure Financing: You can typically finance a house-hackable property through traditional mortgages, though different options may exist depending on the size and type of property. A conventional loan, an FHA loan, or a VA loan are all potential financing routes if you meet the qualifications.

5. Rent and Manage: Once you've bought your property, it’s time to start renting out the extra units or rooms. Whether you choose long-term tenants or short-term rentals, you’ll need to establish a rental agreement, manage the property, and ensure your tenants are happy. Property management software can help you stay organized.

6. Reinvest and Scale: As you build equity and generate rental income, consider reinvesting your profits into new properties. This will allow you to scale your real estate holdings and continue building wealth.

Tips for Success

• Location is Key: Choose a property in a desirable location where rental demand is high. This ensures that you’ll have tenants and the property will appreciate in value over time.

• Screen Tenants Carefully: One of the biggest challenges of house hacking is being a landlord. Make sure to screen tenants thoroughly to ensure you have reliable renters who will pay on time and take care of your property.

• Manage Maintenance Costs: While house hacking can be a great way to generate income, you’ll need to stay on top of maintenance to keep your property in good condition. Proper upkeep will help protect your property’s value in the long run.

• Understand Local Laws: Different areas have different regulations regarding rental properties, tenant rights, and zoning. Make sure you’re aware of local laws to ensure compliance and avoid any legal issues.

Conclusion

House hacking offers an incredible opportunity to reduce living expenses while building generational wealth. By purchasing a property that generates income, you can live for free or at a significantly reduced cost, while also investing in something that appreciates over time. Whether you’re a first-time homebuyer or someone looking to expand your real estate portfolio, house hacking can be an effective and profitable strategy for securing your financial future. I describe it like training wheels for real estate investing. You could suck at it and STILL win! Even if you are paying a couple hundred dollars per month towards your home (normally a loss if a traditional rental) is still a WIN with a house hack!

With the right approach, you can eliminate your living expenses, build wealth, help others with affordable housing, and set up your family for success for years to come.

By Michael Fabrick