House Hacking is the Most Logical Way to Make Money In Real Estate This Year—Here’s Why

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Years ago, renting a room in your home for extra income was called “taking in a lodger.” Although the term used these days is house hacking, the strategy is hardly new. With high interest rates, soaring insurance, and increasing taxes, renting out a part of your home could be the most logical way to generate passive income in 2025.

Types of House Hacks 

These days, house hacking doesn’t necessarily mean waiting outside the bathroom for your tenant to finish brushing their teeth. It can take many different forms. Here’s a deep dive into ways to earn additional income from your personal residence.

Small multifamily

Many real estate investors (myself included) started by buying a small multifamily property, living in one unit, and renting out the others. I accomplished this using an FHA loan, putting 3.5% down and getting a 203K loan to cover repairs. Within a few years, I’d used the equity to buy another home. 

I’m in good company. Arnold Schwarzenegger used the same strategy. He lived in a six-unit apartment building, which he owned and managed while still bodybuilding, long before becoming an actor.

The great thing about this strategy is that not only do the tenants pay your mortgage, but you can also deduct maintenance, management expenses, and depreciation from your taxes.

Basement conversion

Another popular strategy is converting some of your home to a separate income-producing rental unit, as popularized on the HGTV show Income Property. This concept is zoning-specific, particularly with regard to installing a second kitchen in a single-family residence and converting a basement. However, electric appliances and an easing of restrictions in cities such as New York in the wake of the housing crisis have the potential to make this strategy more feasible.

An ADU

Accessory dwelling units (ADUs) have gained in popularity with the onset of the housing crisis. More cities have adopted the idea of having a separate building or extension for residential habitation on the same lot as a primary residence. Once known as a “granny flat,” these days, they come in many shapes and sizes and have the advantage of being an entirely separate space from the main living area.

Rent by the room

Renting rooms in your primary residence and sharing a living space with a stranger was the backbone behind short-term rental platforms like Airbnb. It takes a certain amount of organization (bathroom allocation, sharing refrigerator space, etc.) to monetize having a roommate into an income-generating proposition. It’s not for everyone. However, as more cities have tightened their short-term rental policies, this is the only type of short-term house hacking available to many people. 

Steps to Take When Renting a Room in Your House to a Long-Term Tenant

Short-term rental sites like Airbnb are good options for homeowners renting a room in their primary property to mid-term and long-term tenants because the platform acts as a middleman, collecting the money upfront before the guest can stay. Guests are less likely to overstay if they fear their credit card might be charged.

However, if a tenant does fail to pay or vacate the premises after 30 days, customary landlord-tenant laws kick in according to your jurisdiction. This is why, even if you are using an STR platform and renting to long-term tenants, it’s important to do your homework. 

These are the nine steps you should take:

1. Understand local landlord-tenant laws

Always be prepared for the worst. Should things turn south, you need to know exactly what steps to take. Knowing the landlord-tenant laws in the city where you live could save you a lot of headaches in the long run and will help you with the tenant screening process, drawing up a lease, and declaring your income. 

2. Get landlord insurance

If you are taking on a tenant to live in your primary home, you will need additional insurance to cover property damage, loss of income, and lawsuits.

3. Prep the space

The rental space in your home is probably in good condition. However, your tenant is not your child, and they will expect a certain standard of living for their rent. 

Ensure the furnished room is deep-cleaned and freshly painted with practical, sturdy furniture. Aside from a bed, they will need a set of drawers, an office desk and chair, and a TV—a streaming service is also recommended. You must also provide a lockable bedroom door and access to shared spaces.

4. Know your market rent

Everyone wants to make money, but if you are not familiar with market rent and overcharging, the only thing your spare room or basement will collect is dust. Look at comparable listings or work with an agent to charge appropriately.

5. Screen effectively

Most STR platforms have basic vetting protocols. If a tenant has only booked for a few days, that is not long enough for tenant-in-residence laws to kick in. However, whether short-, medium-, or long-term, if you are letting a stranger into your residence, you must do some research and take precautions. 

This is a good primer if you are a short-term rental host. The BiggerPockets forum also offers some good tips. If you’re working independently and renting to a long-term tenant, see this article on “How to Screen Tenants for Rental Property.” 

6. Market your listing

It’s still surprising how many poorly marketed rooms, apartments, and homes are displayed on rental sites. Here are some pointers:

• Take bright, crisp, professional photos showing your rental in its best light are essential.
• Clearly disclose that the room/apartment is within someone else’s primary residence. 
• State the shared areas of the home and facilities you offer. 
• Include a neighborhood description and local amenities.

7. Meet prospective tenants in person

If you are not using a rental platform and intend to lease a room to someone long-term, meeting them in person to show them the unit/room and have them fill in the application could be a good move. Red flags from an in-person meeting won’t show up on an online application.

8. Draw up a customized lease agreement

As you are renting a room in your home, your room lease agreement will differ from usual landlord/tenant leases. Your agreement should factor in house rules (shared spaces, quiet times, guest policies), pet policies, drinking/smoking, etc.

9. Stay on track with your finances

Even though your guest is staying in your primary residence, you are still running a business—taking their money and providing a service. Certain expenses can qualify you for tax deductions.

Final Thoughts

House hacking is the landlord’s equivalent of picking the low-hanging fruit. Since you already own the home, you won’t need to qualify for another mortgage (you might get a HELOC to build an ADU or convert a basement) or incur too much extra debt to leverage what you have for additional income. Providing you screen tenants effectively, are organized, and offer a good space to rent, you can generate passive income with minimal financial risks.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.