House hacking is a way to live for free or almost for free by making small, multi-unit rental apartments your primary residence. That way, you can essentially get your tenants to help you fund your housing costs.
The concept is very simple. You are buying a duplex, a triplex, a fourplex, a single family home or any other creative property such as garage apartments or mobile homes. The income from the rental units can cover all or most of your expenses while you live there. After you move out of this property it can become a long term rental investment.
House hacking can reduce or eliminate your housing costs, which are a large part of your personal budget. There are other advantages – for example, the residents receive the best financing terms. Since you are the owner and live in your own home, you pay lower interest rates and have more attractive terms than with investment financing. You can make smaller down payments.
House hacking also teaches you how to invest in real estate – you live in a property and learn to invest in it at the same time. This allows you to make a smooth transition to investing in rental property so that when you are just a landlord and no longer live on your rental property, you will know what type of tenants your property will attract and how to look out for this property to get the value.
What is Airbnb House Hacking?
The internet is full of “life hacks”. You probably already know them, with clever tricks like storing your pancake mix in old ketchup bottles or dipping your oreo icing with a fork. Sure, these are fun little tricks – but how much do they really make your life better?
House hacking, on the other hand, is epic, life changing things. If done correctly, this can have a dramatic impact on your wallet and the financial fortunes of your family.
I’m talking about hacking your apartment and living for free. I’m talking about automatically building wealth and getting paid to do it. I’m talking about buying a multi-family home and letting other people pay your mortgage.
You’ve heard me – it’s often referred to as the “owner’s apartment building”, but you’ve probably heard other names for it, such as “duplex”, “triplex” or “fourplex”. These properties have more than one unit, but do not quite fit into the “apartment complex” category. There’s a good chance you’ve even rented an apartment in one of these locations in the past or know someone who has.
They can be found in any market, in any neighborhood, at any price – and by buying a small apartment building, living in one unit, and renting out the other units, you can live for free and even make money.
For this conversation to make sense, we need to identify certain key elements. The core of any house hacking business is the desire to make money; that is the essential truth. However, making money does not happen in a vacuum. Earning money in any company is associated with a certain amount of time and risk.
Therefore, it is reasonable to think of any money-making opportunity as a synergy of income (or wealth) generation potential, level of risk, and time investment. In other words, there is a happy medium where we can achieve the greatest financial gain with the least risk and the least amount of time. This also applies to house hacking.
If I would say (which I am) that using vacation rentals in your home hack is a much better idea, I want you to read: Using vacation rentals in a home hack brings the greatest financial gain which has the lowest profit-adjusted risk and the lowest profit-adjusted time expenditure. We won’t be able to explore the minutiae here, but let’s see if we can get a bird’s eye view.
Not ready to make that long term investment? In that case, you can do something similar to Airbnb house hacking. Often with Airbnb, you rent a room or two in your home and the guests pay you to stay there. The money from their payments can be used to mortgage your home.
More about short-term rentals from BiggerPockets
What Makes Airbnb House Hacking Successful?
Obviously, in a home hacking situation, it is of paramount importance that income is stable. Income stability is probably why you even did a house hack in the first place. And in this category, long-term rentals seem to be winning. After all, you give a tenant a 12 month lease and you can be sure the money will come in. While this scenario may or may not be the most stable, it is certainly not the one that is making the most money.
Have you ever heard of an economic principle called Velocity of Money (VOM)? To paint the picture very quickly, what happened during the Great Recession was that money stopped flowing through the economy. We live in a debt economy where credit is like oil in your internal combustion engine. If the oil stops flowing, the engine will freeze. Similarly, should the flow of credit stop, the economy will freeze. Why? Because buyers cannot borrow money to buy things – and therefore sellers cannot find anyone to sell to.
VOM measures the transaction speed of the flow of money through the economy. VOM froze during the Great Recession. That’s never a good thing. As for your house hack, however, the opposite is true: the faster the speed of money (think money flowing to and through you), the more money the strategy has.
Well, on a 12 month lease, you get paid once a month. But in a vacation rental situation like me, I get paid three to six times a month. Because of this, instead of making $ 600 per month, I am making $ 1,000-1,800 per month with a drawn average of $ 1,300 – which I have surpassed so far.
To really understand what makes Airbnb house hacking successful, you need to decide what matters most. Is it important to you to make more or less money but have a predictable schedule? If the latter is what you’re into, Airbnb house hacking is for you.
Choosing a property for Airbnb house hacking
If your goal is to get paid more than once a month (diversifying your earnings), you can have it. Hacking luxury homes will get you to places where you not only want to live but also want to visit lots of people both for business and pleasure. Because of this, instead of three tenants paying once a month (in the months they can afford it), you can host three short-term guests, whom you three times per via an automated process run by a third party Pay month.
Getting paid more than once a month in this situation not only brings you more money due to the increased VOM, but also reduces the risk of loss of income. And now you don’t live in a crappy fourplex in a mediocre location, but in a class A area with upscale construction. Talk about killing three birds with one stone!
But we’re not done yet!
When choosing a property for Airbnb home hacking, you need to consider how many renters you can reasonably accommodate and maintain your own sanity. After all, you don’t want to be permanently stuck with tenants who you absolutely can’t stand. You also don’t want to have too many tenants for your space.
So when you are picking up a house to do a house hack, especially as an Airbnb, you usually have to choose a maximum number of tenants, and it usually depends on how many bedrooms or beds you have in your house. You need to decide whether your tenants can have pets and whether or not a tenant can rent for an extended period of time. You should also decide how much you want to charge for a room and what type of tenants you want to attract.
Now that you’ve thought about diversifying your income and VOM, the next question to ask yourself is, “How do I get the most stable short-term rental income?”
This is a complicated and layered conversation, but in short, you want to deal with people who have money! You don’t want to rent to people who can only afford $ 20 a night for one night. You want to deal with people who are willing to pay $ 250 a night for a quality room but are happy to take your equally beautiful place at a discounted price. Why? Because these people take care of their loans, which makes them easier to manage.
What type of property are these people drawn to? Think luxury! You can afford it. You expect it. And they will get it.
What kind of people are easier to manage? Those who can afford an apartment in a mediocre location (most months) or those who take care of their loans and have money to travel?
Build a solid financial foundation
Are you tied to a nine-to-five week? Would you like to “withdraw” from wage labor within ten years? Are you in your 20s or 30s and want to be financially free? The kind of freedom that ensures you spend the best part of your day and week and the best years of your life doing what you want?
The benefits of Airbnb house hacking
Let me first ask you: have you ever given notice to terminate a tenant? I might suggest that you shouldn’t immediately assume that having her next to you and your family is a great thing until you’ve experienced all of the colorful behaviors that stressful tenants have.
See, if you’ve signed a lease and then you don’t like them, or if they turn out to be bad tenants, you have to go through the eviction process. And of course you would have used a lease if you had thought I want a stable income so I need a 12 month lease. But are you sure the best solution to a house hack is around a circumstance where you might knock on your neighbor’s door to let them know they have three days to come out? At this point, you’ve probably been living next to this person or family for months. They may have become friendly – or even friends. How much will you enjoy driving them out?
Airbnb house hacking is great for building equity and gives you flexibility in choosing when and how much to rent your property. Basically you choose your own salary. If you have guests or need the house to yourself, you can deactivate the advertisement and vacate your tenants. In the meantime, if you find a new job or have problems with your family, you can always move out and rent out the rest of the property and make more money.
Renting through Airbnb guarantees you on time payments and you don’t have to worry about a tenant not paying on time like with a traditional rental. All transactions are processed through Airbnb, which gives you financial stability. The short-term rental of real estate also receives considerable tax breaks. You can write off the guest fees and deduct 100% of the furniture and equipment used for the rented rooms. Airbnb house hacking can bring many benefits in the years to come.