Making homeownership work – with a little help from your friends

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Published Date 11/30/2023

Hacks are to be found everywhere. But Gen Z and millennials are especially good at it, “hacking” the housing market as high prices and interest rates make affordability difficult.

CNBC’s Ana Teresa Sola defines “house hacking” as the practice of renting out a portion of your home or an entire property for an additional stream of income.

Nearly 4 in 10 (39%) of recent homebuyers say the practice represents a “very” or “extremely” important opportunity, according to a new report by housing market site Zillow — up eight percentage points in the past two years.

Younger generations aren’t too proud to share their living space and are especially keen on the idea. Zillow’s survey reveals that more than half of millennials and Gen Z home buyers expressed positive views on house hacking after having polled more than 6,500 recent homebuyers between April 2023 and July 2023. Respondents were adults who moved to a new primary residence they purchased in the past two years.

House hacking can provide the additional income to “help make those dreams of homeownership into reality, given that there are so many affordability constraints on the current market,” said Manny Garcia, senior population scientist at Zillow.

With median sale prices up as well as 30-year mortgages hitting the highest level seen in 23 years, renting out portions of a newly owned property can help offset higher costs of a home, but potential buyers will need to make a few considerations beforehand.

But home buying is still not for the faint of heart, as a six-figure income is just a start in many parts of the U.S. “As home prices and interest rates have risen, potential homebuyers need a salary of $114,627 to afford a median-priced house in the U.S., a recent report by Redfin found,” says Sola.

“It makes sense for young people who are seeing how expensive homeownership is to want options,” said Daryl Fairweather, chief economist at Redfin. “Having the option to rent or have a roommate is important in an environment where there just aren’t that many small homes for sale,” she said.

If you haven’t noticed, new apartment buildings are being built everywhere lately — which means that the opportunity to house hack may be short-lived. In some markets, new apartment buildings will have available units next year.

Sola explains that rental market inflation, which had been stubbornly high for much of 2023, has cooled due to new inventory, pushing the rental vacancy rate up to 6.6% in the third quarter, the highest level since the first quarter of 2021, according to Redfin data.

“We’ve already seen rent prices stabilize, especially for single occupancy rentals,” Fairweather said. It’s going to be harder to rent out a room as more rentals become affordable, she added.

Still, the U.S. is facing a “massive shortage of housing, especially affordable housing options,” said Zillow’s Garcia.

“If you’re pricing your home competitively, renting out can be a reliable source of income because there’s no shortage of people looking for a place to live,” he said.

While this hacking idea looks good on paper, interested buyers would still need to gather a sufficient down payment and proof of income to show they can already afford the monthly payments. Relying on rental income to qualify can present problems, however, as banks won’t consider potential rental income, requiring the buyer to qualify for the financing without the support of potential rental income. In other words, you’ll need to prove you can afford the mortgage without the rent.

Another risk is buying a house to rent out part of it, and then winding up stuck with an expensive mortgage and a room you can’t rent out.

Do your research on what the current rate is for your type of home. Then consult with rental managers who can help draft leases and give you a good estimate on the going rate in your area. Due diligence is key here, making sure you’re pricing correctly when you’re posting your unit for rent. And don’t forget that there is a big chance the house you are considering may be subject to local ordinances on renting or homeowners association regulations.

MSNBC,TBWS

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