- “House hacking” is the act of renting out part of your home to generate an additional source of income.
- According to a report from housing market site Zillow, more than half of Millennial and Generation Z homebuyers say home hacking is a “very” or “extremely” important opportunity.
- That extra money could “help make homeownership dreams a reality, considering there are so many affordability constraints in the current market,” said Manny Garcia, senior population scientist at Zillow.
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Generation Z and Millennials are “hacking” the real estate market as high prices and interest rates make affordability difficult.
The term “house hacking” refers to the practice of renting out part of your home or an entire property to generate additional income.
Nearly 4 in 10, 39%, of recent homebuyers say the practice represents a “very” or “extremely” important opportunity, according to a new report from housing market site Zillow. This share has increased by eight percentage points in the last two years.
The younger generations in particular are enthusiastic about the idea. In the Zillow survey, more than half of Millennials (55%) and Generation Z home buyers (51%) expressed positive views about home hacking.
Zillow surveyed more than 6,500 new home buyers between April 2023 and July 2023. Respondents were adults who had moved into a new primary residence that they had purchased in the last two years.
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The additional revenue from home hacking can “help make those homeownership dreams a reality, considering there are so many affordability constraints in the current market,” said Manny Garcia, senior population scientist at Zillow.
According to a report from real estate site Redfin, the average sales price for a home in the U.S. was $413,874 in October, up 3.5% from a year ago.
The average interest rate on 30-year mortgages reached 8% in October, the highest level in 23 years, according to Bankrate. For comparison: In January 2021, interest rates reached their lowest point at just under 3%.
While renting out portions of a new-build property can help offset the higher costs of owning a home, potential buyers need to make some considerations beforehand.
As home prices and interest rates have risen, prospective homebuyers will need a salary of $114,627 to afford a median-priced home in the U.S., a recent report from Redfin found. Redfin’s analysis used the average home price of $420,000 in August.
“In many places you have to earn six figures to be able to afford a starter home. “So it makes sense for young people who see how expensive home ownership is to look for options,” said Daryl Fairweather, chief economist at Redfin.
Because there are few small starter homes available, a Millennial or Gen Z buyer may have to upgrade to a more expensive home than they would have wanted, Fairweather said.
“In an area where there just aren’t as many tiny homes for sale, having the option to rent or have a roommate is important,” she said.
Home hacking can help these homeowners by giving them extra income for expenses or even helping to cover the mortgage.
The house hack opportunity may be short-lived. New multifamily properties are under construction in some markets and will have units available next year, particularly smaller one-bedroom apartments.
Rental market inflation, stubbornly high through much of 2023, has cooled due to new inventory, sending the rental vacancy rate rising to 6.6% in the third quarter, the highest level since the first quarter of 2021, according to Redfin data.
“We have already seen rental prices stabilizing, particularly for single-unit rentals,” Fairweather said. It’s becoming harder to rent out a room as more rentals become affordable, she added.
Despite the increase in available housing, the U.S. faces a “massive shortage of housing, particularly affordable housing options,” said Zillow’s Garcia.
“If you price your home competitively, rentals can be a reliable source of income as there is no shortage of house hunters,” he said.
Although renting out part of your home can provide additional income, interested buyers would still need to provide a sufficient down payment and proof of income to prove they can already afford the monthly payments.
“If you rely on rental income to qualify, you’re going to have a problem,” said Melissa Cohn, mortgage banker and regional vice president of William Raveis Mortgage.
“They have to prove they can afford the mortgage without rent,” she said.
Banks would not take potential rental income into account and would require the buyer to be able to qualify for financing without relying on the support of potential rental income, she said.
Buying a larger home with the intention of renting out part of it comes with another risk: you could be stuck with an expensive mortgage and a room you can’t rent out.
If renting out part of your home – or all of it – is ideal for you, research what the current price is for your type of home. Contact rental managers who can help you draft rental agreements and give you a good estimate of the going rate in your area, Garcia said.
“There is a lot of homework to do to make sure you price it correctly when listing your unit for rent,” Garcia said.
Also, keep in mind that there’s a good chance the home you’re considering is subject to local rental ordinances or homeowners’ association rules.
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