Housing in general — and affordable housing in particular — continues to be a major problem for many Americans. Depending on the source, there are between 4 million and 7 million fewer homes than needed, and this shortage contributes to the high prices of homes and apartments. A recent Zillow report reveals that as a result of the Singles Tax, single renters pay over $7,500 more per year compared to renters with a roommate. Also, some homebuyers (and renters) are also considering the move to smaller towns as a more affordable option.
House hacking has also emerged as a solution that can help both renters and homeowners. Here’s what you need to know about this trend.
What Is House Hacking?
House hacking isn’t a new concept. Aaron Tetzlaff, an agent at Coldwell Banker Warburg, tells me the term was popularized by a real estate influencer named Brandon Turner, author and former host of the BiggerPockets podcast. “House hacking is typically aimed at millennials locked out of the property market,” Tetzlaff says. In fact,he explains that it’s not uncommon to hear of newly married couples buying a duplex or triplex building, and then they live in one unit while renting out the other unit – before they move on to purchase a traditional single-family home.
However,Tetzlaff says that house hacking gained popularity in this tight, current housing market. “The housing crisis of 2008 wiped out a lot of homeowners, but also caused a lot of contractors and subcontractors to fail,” he explains.
“NIMBYism (not-in-my-backyard residents who oppose new development) and the weight of their control over urban and exurban development by more established neighborhoods and long-time homeowners has further put pressure on our housing market – such that the starter home is all but a distant memory, if not an uncomforting fairytale,” Tetzlaff says.
Sebastian “Seb” Frey, a broker associate at Compass in Silicon Valley — one of the most expensive housing markets in the country — tells me that he’s worked with a lot of people over the years who engaged in house hacking long before the term became hip. “By hook or by crook, they’d buy a property and turn it into a SRO (single room occupancy), where they themselves would occupy a single room and rent out the rest of the rooms to friends, colleagues, or people they’d find on Craigslist,” he explains.
Frey says these individuals would often add living space, by, for example, adding a garage, basement, attic, or even adding a detached 10’ x 12’ shed, and turning it into a bedroom. “It’s a smart way to take advantage of the housing crunch — by charging high room rental rates — and build equity over time while taking advantage of low down payments and lower mortgage rates afforded to owner occupants,” Frey says.
Pros And Cons To Consider
Tetzlaff believes that house hacking can be done well under certain conditions. “It’s important that the home and the rents and mortgage payment all fit within the reasonable range for what the would-be house hacker’s specific market and finances could bear,” he explains.
However, Tetzlaff admits that house hacking, in some ways, has been credited with causing stress in the market. “Generations already pressed metaphorically to the ceiling of what they can afford have needed to make homeownership work by converting garages, narrow bedrooms, sunrooms, etc., into rentable rooms in their home,” he says. “It’s a dire fin-de-siècle warning that the era of homeownership is quickly closing for many unless a strong, robust, concerted effort is made to build the millions of new homes to catch up to the dearth of market supply for affordable homes for first-time buyers,” Tetzlaff warns.
Although house hacking has been around for a while, it may not be nationwide trend. For example, Bill Golden, realtor-associate broker at Keller Williams Realty Intown Atlanta, tells me that creating SRO scenarios via house hacking does not seem to be prevalent in the Atlanta market, with some exceptions. “The exceptions I’ve seen tend to be close to large academic institutions where more students than are on a lease crowd into a rental home,” Golden says he also sees this scenario occurring in disadvantaged neighborhoods.
“My perception is that true, strategic SRO house hacking is still primarily happening in uber-expensive real estate markets like New York City, where foam-board walls subdivide many rooms, often multiple times, to maximize occupancy,” Golden says.
But in those high-cost areas like the Northeast, India Headley, a mortgage loan originator at UNMB Home Loans, Inc. tells me that house hacking isn’t just a creative strategy, but a necessity. “In Connecticut, where I serve as a mortgage lender, real estate broker and contractor, many homeowners and investors are going beyond simply renting out rooms.” Instead, she says they’re leveraging their properties by adding accessory dwelling units (ADUs)—detached or attached units that offer privacy and maximize rental income. Headley says this approach not only generates extra cash flow, but also appreciates the property value while keeping living expenses low.
One problem that Golden sees: The forerunners in markets like this tend to be illegal renting.” That is, having a below-radar apartment where it is not legally allowed, having more people than allowed in a structure — for example, extended families — and that sort of thing.”
Also, Golden says illegal accessory dwelling units are also sometimes a hedge. “It is creating an ADU from a substandard structure, like converting a shed to a place for lodging, even if it’s not used regularly – more of a guest quarters situation.”
His primary concern about any of these scenarios would be safety. “Of course, the practice can ultimately affect real estate values and certainly affects quality of life, including for neighbors and others nearby,” Golden says.
Up next, I’ll cover ADUs and other types of house hacking options.
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