The Joint Center for Housing Studies at Harvard University published a study titled, “America’s Rental Housing 2020.” In that study, the Center reports that “…10.9 million renters—or one in four—spent more than half their incomes on housing in 2018.”
Given the financial burden of rent payments, some renters have chosen to pivot to a strategy known as “house hacking.” This strategy involves buying a property, living in it, and renting part of it out at the same time. The objective is to live in the residence with rent covering most or all of the mortgage.
House hacking, though, is not as easy as it sounds. First, the real estate investor has to locate a property in a neighborhood that appeals to renters. In Baltimore, some of the neighborhoods mentioned by house hackers on real estate investment website BiggerPockets include the following:
- Federal Hill
- Fells Point
- Upper Fells Point
- Patterson Park
- Brewers Hill
- Reservoir Hill
Baltimore, like other large cities, has a rental market that benefits from, for example,
- Health care professionals supplying the large network of hospitals in Baltimore (residents, traveling nurses)
- Non-local students attending the various educational institutions in the area
- A robust public transportation network (Baltimore was rated one of the top 10 places to live in the U.S. for public transportation in 2019)
Baltimore was also one of the top 20 cities in terms of increase in high-earning renters between 2010 and 2019, according to a study by RENTCafe. This study also reported that the national average rent increased by 36% in that time period.
Many of the considerations that will drive the rental prospects for a house hack are not different from those of a traditional rental, such as proximity to public transportation and sufficient and accessible parking for tenants. However, the investor will also need to make sure the property is not in an area that restricts house hacking. For example, many HOAs don’t allow for non-owner occupancy. In addition, if the house hack is a shared house arrangement where renters have their own bedrooms, the house will appeal more to prospective renters if (1) common areas are accessible and spacious, (2) bathrooms are numerous enough such that limited sharing is required, and (3) bedrooms have sufficient storage.
Another consideration relates to a house hacker who intends for the rental income to be generated by short-term rentals, such as through VRBO or Airbnb. In that case, the investor needs to be certain that any prospective residence allows for such short-term rentals.
One interesting tip that we found on a message board for investors looking for properties that they can house hack is to email the city planning office to find out if any development projects are planned for that neighborhood.
What can house hacking look like?
House hacking can take many different forms. Options include:
- If the investor purchases a multi-unit property, he can live in one unit and rent out the others.
- If the investor purchases a single-family home, he can rent out however many bedrooms he is not using.
- If the property has an additional dwelling unit (sometimes called an accessory or auxiliary dwelling unit), the investor can live in the main unit or vice versa. The additional dwelling unit (ADU) could be a carriage house, a guest house, an in-law suite, a pool house converted into livable space, an apartment over the garage, a basement apartment, etc. Some important considerations include:
- The ADU should have a full bathroom, a cooking area, and a sleeping/living area.
- Some jurisdictions have ADU regulations, such that you might need a license before it can be rented, or a minimum acreage, or might only be able to rent an ADU to a relative.
- An investor who purchases a property with the intent to live in it while fixing it up could combine this with a house hacking strategy. That is, he could also rent out a unit or bedroom while working on other areas (such as finishing a basement). If the investor lives at the residence for at least two years out of the five years prior to its date of sale, he is exempt from paying capital gains tax on the first $250K of capital gain ($500K if filing a joint return with a spouse).
- An investor could rent a house and live in a trailer on the property (1) if the property is sufficiently large to make that practicable and (2) if such a circumstance is permitted by the local jurisdiction. For example, in Baltimore County, recreational vehicles are not permitted to be lived in on residential lots.
What are the benefits to a house hack?
As we discussed at the outset, the primary benefit is the prospect of covering a portion or all of the monthly mortgage with rental income. Other benefits include the following:
- Learn to be a landlord while in close proximity
- Learn what distinguishes a good tenant from a lousy tenant
- Keep a close eye on your tenants
- Financing terms offered to owner-occupants are typically more favorable than non-occupant terms—lower down payment options and attractive interest rates
- Learn the ropes of real estate
What are the downsides to a house hack?
One of the primary downsides to a house hack is living alongside your tenants—particularly if those tenants turn out to be problematic in any way. You may find yourself sharing common areas with messy, noisy tenants. You may have a significant issue with a tenant (e.g., smoking is prohibited but the tenant is doing it anyway) and have to deal with the person as their landlord and co-tenant. Some house hackers attempt to remain anonymous for this reason; they purchase the house in the name of an LLC and call themselves the “property manager.” This will not necessarily insulate you, though, from the ire of an unhappy tenant.
The COVID-19 pandemic has also thrown a few wrenches into house hacking. What happens if you are trying to fill rooms, but an existing tenant has just tested positive for COVID-19?
Like any other real estate investment opportunity, house hacking has its advantages and disadvantages. If you are a person who enjoys the regular company of others and does not particularly crave privacy or personal space, house hacking may be a good fit. Baltimore offers attractive house hacking options for local real estate investors.