Personal Finance

Is “house-hacking,” an actual hack? Or are you actually missing out on potential cash flow?

John Seetoo

Published: January 21, 2025 11:14 am

24/7 Wall Street Key Points

• Supply and Demand dynamics of housing, combined with rampant inflation and tens of millions of additional migrants, have escalated the costs of home sales and rentals. 
• For those with the means to obtain a house to live in with space for outside renters, “house-hacking” can be an ideal method of generating passive income.
• The income from “house-hacking” needs to be weighed against quality of life concerns, such as privacy, maintenance responsibilities, and personal space requirements before committing to the platform.
• Home ownership offers the flexibility of other financing options if required. 
• Retiring early is possible, and may be easier than you think. Click here now to see if you’re ahead, or behind. ^(Sponsor)

A December 2024 end of year report on housing rental trends from Zillow including the latest available Consumer Price Index data concluded that rents have continued to spiral higher. A Harvard study found that half of renters spent 30% of their income on housing; that figure has since increased appreciably, and overall rents have increased another 3.3% on average since 2023, with considerably higher hikes in urban centers. Since the pandemic, rents have risen over 33.5% on average across the nation.  Zillow identified several reasons for this situation:

• Inflation –  Inflation caused by government overspending elevates the prices of goods and services. The higher costs for labor, materials, energy, insurance, etc. to landlords inevitably gets passed on to renters.
• Inventory Shortage – there is a nationwide dearth of rental vacancies, even more so for affordable (defined as 30% or less than one’s gross income) vacancies. 

• Ownership Hurdles – diminished inventory, high mortgage rates, higher demand, and elevated prices have made sale closures more challenging.
• Expiration of Pandemic Rent Freezes and Discounts – Artificially low rental prices mandated by the government during the pandemic have expired, thus allowing them to assume market rates.

• Illegal Migrant Housing Needs – A significant contributor to the increase in demand skewing the diminished supply in the overall ratio, the estimated 20 million illegal migrants who have taken advantage of recent open border policies have filled many otherwise vacant units, usually at taxpayer expense. 
• Increases in Remote Work – The pandemic created a revolution in remote work out of necessity due to lockdowns. Many companies have reduced office spaces to embrace increased employee remote work, further reducing home rental vacancies, especially in larger, more modern- amenities equipped homes. 

The “House-Hacking” Loophole

A Reddit poster heard about “house-hacking” on a podcast and inquired what the difference was between the following:

• A duplex owner rents out one level for $1,150 and shares the other level with a roommate who pays him $550 rent. The combined $1,700 rent exceeds the owner’s mortgage, giving him a small monthly profit.
• If the duplex owner were to rent both units out for the same or possibly even more and rented a separate apartment for $600, wouldn’t this net the same or more, and isn’t the owner effectively leaving $600 cash flow on the table?

Constrained housing conditions and shortage of affordable living spaces have made house-hacking even more popular since the pandemic. The pressures of making rent by having to share accommodations with strangers has been familiar enough in the public consciousness for years, and has been a plot device for popular sitcoms such as Friends and thrillers like Single White Female, among others. 

While the poster may have a point regarding the cash flow mathematics in his scenario, a number of respondents pointed out some of the advantages that his example overlooked.

The Perks of Home Ownership

Private property rights and incentives are a cornerstone of Capitalism and the US legal system. There are thus a number of perks to owning a home and being an on-premises resident that go beyond simple cash flow models.

Banking and Finance:

• Banks require an average 20% down for purchasing a rental property. The threshold is much lower for an owner-occupied residence.
• The Federal Housing Authority (FHA) routinely issues loans to prospective homeowners for owner-occupied dwellings that only require living in the property for at least 12 months.
• Some cities issue grants and incentives for home purchases based on various criteria (income, ethnic background, hardship history, etc.)

Taxes:

• Property tax assessments are lower with an owner-occupied residence.
• The higher differential of $600 or higher in the poster’s scenario would be subject to income taxes, or at whatever the amount above the mortgage deduction would be calculated.
• A subsequent sale of the home would have prospective tax-shelters if declared a primary residence.

Practicalities:

• Renting a separate apartment and not occupying premises of one’s owned property entails numerous expenses that almost always exceed those that are incurred in the latter. 
• The severely tight real estate rental market indicates that the odds are in favor of the property owner, since there will be no shortage of tenants. Conversely, vetting tenants will likely become a greater concern.
• If the owner decides to marry and raise a family, expanded space requirements are mitigated, since terminating rentals is an easier option than relocating and purchasing a new residence.