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Savvy Millennials Are 'House Hacking' Their Way To Homeownership And Rent-Free Living

Money logo Money 12/6/2019 Shaina Mishkin
a person standing in front of a building © Courtesy of Craig Curelop

Like a lot of millennials, Craig Curelop lives with roommates to save money. One big difference? He’s their landlord.

In a housing market where young people struggle to afford a home, Curelop already owns three of them. He is a “house hacker,” a term he and other like-minded homeowners use to describe someone who lives a low- or no- rent lifestyle by buying a house and renting out the extra space.

The 26-year-old Denver-based blogger shares his six-bedroom, three-bathroom home with two long-term roommates and a rotating cast of vacationing Airbnbers. Curelop’s two roommates together pay $1,550. He takes in another $2,000 from short-term Airbnb travelers. The total $3,550 covers his $2,100-a-month mortgage, with plenty left over.

While the living arrangement has occasionally called for compromise — Curelop says he spent a year sleeping on a futon in his living room while renting out his former bedroom in his first house — the lifestyle has allowed him to max out his 401(k), take a trip to Thailand and cover an unexpected $2,000 hospital bill after an accident last year, he says.

Not everyone understands why a person would buy a house just to take in roommates — and that’s fine by Curelop. “You’re never going to be similar to your peers,” when you live frugally, he says, “so you really shouldn’t listen to them.”

Angela Rozmyn agrees. The 31-year-old who lives with her husband, a five-year-old son and a roommate in the Seattle suburb of Kirkland compares having a roommate to keeping a beat-up car, even if it draws looks from neighbors that drive newer ones. “There’s an expectation that, if you’re a real adult and you’re really in charge of life, you don’t need [a roommate],” she says. ”We aren’t really concerned with what we should or shouldn’t be doing.”

While the arrangement is still rare, the share of married households with roommates more than doubled to about 46 in 10,000 households from 22 in 10,000 households between 2018 and 1995, according to a February 2019 Trulia study. That increase was propelled by homeowners in recent years, says Cheryl Young, a senior economist at Trulia. “A lot of it is driven by how expensive and unaffordable places are,” Young says. “People are being more open-minded about how they cope with what’s going on in the housing market.”

It’s a well-known fact that millennials lag behind other generations when it comes to homeownership — a trend that is often associated with mounting student debt and a lack of affordable “starter” homes on the market, among other reasons. Student debt was a big factor Rozmyn, who says her roommate’s rent doesn’t cover her family’s full mortgage, but allowed her to pay off her loans in under four years, “which I wouldn’t have been able to do if we had been having to spend money on all of our housing expenses,” Rozmyn says.

Of course, house hacking isn’t always easy. Like other types of hacks, it pays to be highly strategic, says Curelop. Here are some of the most important things to know about house hacking.

a drawing of a cartoon character © Provided by Meredith Corporation

Find a Home

When you house hack, you’re not just a homeowner, but a businessperson. That means when shopping for a home it might be necessary to put your personal tastes aside — especially if they tend toward the quirky or whimsical — and focus on the basics that renters value.

“At the end of the day, a renter is looking for a functional space,” says Dan DiClerico, HomeAdvisor’s home expert. “If they don’t like what they see, they’re more likely going to walk.”

What does that mean in practice? You should balance your budget with a home that renters would find welcoming — and don’t get too carried away with personal touches.

1. Pick Your Spot

There’s a reason every real estate listing says “location, location, location.” In an ApartmentGuide survey of 2,000 renters, 32% said they were looking for a rental to be closer to work — just behind the 37% who said they were moving to save money. What’s more, 62% of renters said they place more importance on the location than the unit itself.

Nationally, monthly rent charged by buildings in “top-rated” locations is $1,655 — $444 more than the $1,211 charged in lower-rated locations, according to a 2018 RentCafe survey. Curelop looks for homes close to highways or bike paths. “If you want to live there, there’s always people who also want to live there,” he says.

2. Make It Safe

You may feel secure in your own home, but don’t automatically assume renters will. That’s especially true if you plan to share a single-family home, without separate entrances. If there aren’t already locks on private spaces in the home, DiClerico advises installing them before renters arrive.

Outside the home, installing motion-activated lighting can also help residents feel safer. “If they don’t feel 100% certain that they’re going to be safe in the rental space, they’re going to move on,” he says.

3. Furnish But Don’t Go Crazy

If you’re agonizing over a bleak bathroom or outdated kitchen, there’s good news: A house that needs minor cosmetic updates is unlikely to scare renteres away, Curelop says. “With rent by the room, you typically get people that don’t care about that kind of stuff,” he says. “They just want a place that functions.”

Of course, there’s a flip side: If you’re banking on tenants that love your hand-painted cabinets or high-end countertops, you might be disappointed. Instead of spending money on niche design elements, landlords should make sure the space is clean, safe and pleasant and “leave the personalization to the renter,” DiClerico says.

DiClerico recommends looking at comparable rental listings on rental websites. If there’s an amenity that comes standard — say, an in-house washer/dryer or air conditioning— skipping those features might deter renters who expect them.

a drawing of a cartoon character © Provided by Meredith Corporation

Get a Loan

To buy a home, you likely need to know how much you can borrow. And that calculation starts with a hard look at your savings, income and debt.

Traditionally, homebuyers are expected to put down 20% of the purchase price. While there are benefits to meeting this threshold — its less financially risky and you can avoid hassles like private mortgage insurance — it’s always been a tall order for first-time homebuyers.

As a result, there are a number of programs that let you purchase your first home with just a fraction of that, representing a potential lifeline for millennials who report difficulty saving up. That’s what “allows a regular person to actually get into real estate,” says Curelop, who put just 3.5% down on his first home, the minimum for a loan backed by the Federal Housing Administration.

Once you have an idea of how much you can afford, you can start navigating the rest of your mortgage.

1. Know the Options

There are plenty of of borrowing options for low-down payment buyers, including FHA, Conventional 97 and VA loans, among others. While FHA loans are perhaps the best known option, Curelop says many house hackers would actually be better off with a Conventional 97 loan, which allows you to put as little as 3% down and makes it easier to shed private mortgage insurance. For additional tips on how to get a mortgage, visit consumersadvocate.org.

Of course, if you have a lower credit score or extra debt, it might be beneficial to consider FHA loans, which don’t use the same “risk-based” system to determine interest rates, says Keith Gumbinger, vice president of mortgage website HSH.com. While Conventional 97 loans call for a score of 620, credit requirements for FHA loans can go as low as 580.

So, which loan is best for you? Mortgage website HSH has a calculator tool that can help you figure it out. Once you have an idea of what you’re looking for, Quicken, Guild and LoanDepot.com, among other websites, are popular places to start looking for a loan.

While you might be tempted to go with the first lender you contact, studies have shown that shopping around for a mortgage can actually save you hundreds of dollars in the long run.

2. Fix Your Budget

So how much home can you afford? Start by setting your budget the way lenders do: Use an online calculator like the ones at calculator.net or consumersadvocate.org to figure your debt-to-income ratio, essentially a measure of how much housing debt you can afford to take on.

One thing to note: While you can certainly include your salary, lenders won’t count projected rental income unless you’re already a landlord with a history of collecting rent. This can be bad news if you hoped to use rental income to help afford a more expensive house than you could afford otherwise, but you can use that rental income to help build equity fast.

Conventional 97 loans allow housing expenses to occupy up to 28% of your income, while FHA loans permit up to 31%. Your total debt, including housing expenses, minimum credit card payments and other loans, cannot exceed 43% of your gross income.

3. Build Equity

Congratulations! You’re a homeowner now. Of course, you’ve still got plenty of debt. House hackers recommend plowing as much of that money back into your home as you can, at least at first, to build the share of the home which you actually own closer to that all-important 20%. “By having more equity, you have more options,” Curelop says.

Consider this: When you own just a sliver of the home, say 4.5%, a drop of 4.5% or more in local house prices puts you “underwater,” meaning you own owe the bank more than your home is worth. That can make it impossible to sell even refinance your mortgage. By contrast, every bit of equity you put in, helps build you a bigger cushion.

Building your equity stake can also lower your mortgage costs. Homeowners that put less than 20% down typically need to purchase private mortgage insurance, or PMI, which reimburses your lender if you default. PMI typically costs between 0.2% and 2.0% of your total mortgage amount but you can shed it when you build sufficient equity. For Conventional 97 loans, PMI drops away automatically once you own 22% of your home, but you can ask to have taken off when you hit 20%, according to Gumbinger. You can’t remove PMI from an FHA mortgage with 10% or less down unless you refinance.

a drawing of a face © Provided by Meredith Corporation

Roll Up Your Sleeves

Logan Allec, a California-based accountant, was on vacation with his wife in Seattle when “the dreaded text” came in: The septic tank was backed up again. As a landlord, Allec didn’t have much of a choice but to put his vacation on hold and call around for a plumber. “It always seems to act up at the most inopportune times,” Allec says, who also runs the Money Done Right blog.

Dropping everything to troubleshoot a sewage issue might not fit into your dreams of homeownership, but it’s all part of being a landlord — which, let’s face it, you are if you house hack. And, if you’re a landlord, you need to know what your on the hook for.

1. Learn the Rules

Rules for tenants and landlords vary from state to state and can impact things like where to keep your tenant’s security deposit, which utilities landlords must pick up and, if it comes to it, how to evict deadbeat tenant.

A good place to start learning about your state’s rules is hud.gov, which includes links explanations of both tenants’ and landlords’ rights for every state. In many states, for example, a landlord has between 14 and 30 days in which to return a tenant’s security deposit or provide the reason it’s being withheld. If a landlord does not follow the law and is taken to small claims court, possible repercussions range from a fine of up to the amount of the security deposit in Nevada to up to three times the amount of the deposit plus legal fees in places like Massachusetts and Texas.

You’ll also need a lease. Template leases, like those on eForms.com, exist, but, if you want a customized lease, you may need to work with a lawyer. The average landlord-tenant lawyer can cost between $225 to $300 per hour, according to lawyers.com, but many offer free consultations, so you can get a more personalized quote by making a phone call.

2. Plan to Spend

Once you have tenants, you need to be a good landlord, by responding to problems in a speedy manor. That means you either need to be prepared to fix the dishwasher, mow the lawn and change light bulbs or put aside the money to hire someone to do it for you. Allec learned on his own using YouTube videos, while Curelop hires contractors off TaskRabbit, which have cost him between $30 and $200 depending on the tasks.

So how much should you expect to spend? A common rule of thumb is to set aside 1% of your home’s value each year. On a $200,000 house, that’s $2,000, or about $167 per month. While that guideline covers wear-and-tear repairs, it doesn’t consider upgrades or renovations. If you’re eyeing a fixer-upper, it would be wise to budget for bigger repairs and upgrades separately.

Illustrations by Agata Nowicka

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