The 'House Hacking' Real Estate Strategy Explained

Among the most significant financial goals that Americans hold dear, homeownership is perhaps held in the highest esteem. Owning your own home brings an important layer of financial security that renting can't always match. While your monthly payments might be similar, the overall process includes the knowledge that you'll own something tangible with significant value. Along the way, your home can be leveraged for other needs, too, though you may want to avoid taking out a home equity loan depending on your financial situation. However, getting on the so-called "property ladder" can be tremendously difficult in the modern marketplace. Younger generations don't have as much wealth as their counterparts did at the same age decades earlier, and home prices are ballooning — with the median home sale price in the U.S. hitting roughly $419,000 at the end of 2024. 

Jarek Tadla, a seasoned real estate investor, owner-operator of People Choice Apartments LLC, and podcast host of "Mastering the Inner Wealth" spoke with us about the current housing market. Specifically, he told us about a trick that some are turning to in order to jumpstart their own chance at homeownership. Tadla explained, "With rising home prices and increasing barriers to homeownership, younger buyers are looking for creative ways to break into the real estate market. One increasingly popular method is house hacking – a strategy that allows homeowners to offset their mortgage payments by renting out part of their property." Tadla also warned, "While it sounds like an easy path to passive income, house hacking is not without its challenges."

The goal of house hacking is to reduce the overall cost of a property for its buyer because the smaller a mortgage loan is the less a buyer has to pay over the long term. Traditionally, a would-be buyer might have opted to save for longer or maintained a tighter budget during their house hunt in order to make this happen, but house hacking takes a different approach. "House hacking typically involves purchasing a multi-unit property, a home with an accessory dwelling unit (ADU), or a single-family home with extra rentable space (such as a basement or spare bedrooms)," Jarek Tadla explains.

He also notes that "the owner lives in one part of the property while renting out the other units, using the rental income to cover mortgage payments, property taxes, and maintenance costs." This flips the conventional wisdom of buying a home on its head. Instead of targeting a 'starter home' to keep costs low and build equity that can be translated into a different living space later on, house hacking targets properties that can serve as investment opportunities as well as primary living spaces. "For many first-time homebuyers, this approach makes homeownership more affordable, generates passive income, and builds long-term wealth through real estate," Tadla offered. However, he also warned about more than a few caveats that buyers will need to keep front and center before exploring this strategy. 

Jarek Tadla told us, "Before diving into house hacking it's important to recognize the potential pitfalls." Indeed, he notes that there are numerous potential sore spots between any initial purchase and an idealized future financial status. Tadla highlighted three particular points of strife for buyers considering the house hacking approach: tenant management, financial vulnerabilities, and lifestyle adjustments.

Managing tenants can be a real chore. "Owning a rental property means becoming a landlord," Tadla begins. This transition "comes with responsibilities such as tenant screening, lease enforcement, and handling maintenance issues. Even in the best-case scenario, managing tenants requires time, patience." Placing your trust in others isn't always easy, and even under friendly terms you'll almost certainly get under one another's skin. Everything about the task of operating as a landlord can be extremely difficult and the job isn't for everyone.

On the financial risks and unforeseen expenses point, Talda explained, "While rental income can help offset a mortgage, it's not guaranteed." At no stage of the process will you be able to sit back and expect to see smooth sailing. "Vacancies, non-paying tenants, and property damage can quickly eat into profits," Tadla warns, and plenty of other expenses like "ongoing maintenance, property management fees," and others will rear their heads. As for lifestyle adjustments, Tadla warns would-be home hackers that "house hacking works best when owners set clear boundaries and expectations upfront." He notes that "sharing your home with tenants can impact [your] privacy and lifestyle" in unexpected, and sometimes negative ways.

Young buyers may be the most intrigued by this approach. Single people, or even dual income no kids DINKS, with reliable income and a desire to get into their first home are more likely to prioritize house hacking. Jarek Tadla notes that "house hacking offers an innovative way to build equity while reducing housing costs." This is particularly true for "younger individuals looking to break into real estate." However, he cautions that success "requires a strategic approach." First, it's important to know your market. Tadla warns, "Not all locations are ideal for house hacking." Your success ultimately depends on your ability to balance expenses and the income that your rental spaces bring in, and this largely starts with location and community considerations. Tadla continued, "Research rental demand, local regulations, and market trends before purchasing a property."

This brings buyers to the next, and certainly most important thing to consider, crunching the numbers. Tadla notes that hopefuls in this part of the real estate market will need to "ensure [that] rental income can cover expenses, including mortgage, insurance, taxes, and unexpected repairs." If it doesn't, you'll be personally on the hook to make up the remainder of the expenses. That financial demand may not be feasible. Finally, Tadla emphasized that "becoming a landlord is a long-term responsibility." Those considering buying into a house hacking property will need to "be prepared for the challenges that come with managing tenants."

There is ultimately a lot to consider before diving into this particular real estate strategy. Many properties that could serve as quality dual-purpose investments can also radically boost your net worth – a financial calculation you should be making on an annual basis by the way. Jarek Tadla explained that this strategy can absolutely "fast-track homeownership and create passive income." However, the risks are great, as well. 

Tadla ultimately weighs house hacking as something of a mixed bag. For those with the right attitude, who are willing to put in the work necessary to succeed it "can be a game-changer in achieving financial freedom through real estate." However, he explained, "House hacking is a powerful wealth-building strategy, but it's not a one-size-fits-all solution." Anyone thinking of pursuing this particular real estate strategy should make sure not to minimize the amount of work this approach will ultimately demand of them. While today's housing market is definitely hazardous, signing up for a long-term landlord scenario might not necessarily be an easier path.