What is House Hacking?
House hacking is a financial strategy that involves renting out a portion of your primary residence to earn rental income.
It can help lower your housing costs and build up your home equity faster.
Here’s how house hacking works in a nutshell:
Step 1: Purchase a home that can accommodate your household plus one or more tenants.
Step 2: Move into your new home and designate which areas will belong to your household and which you’ll rent out to tenants.
Step 3: Ensure the portion of your home that will accommodate tenants is move-in ready (has the proper amenities, furnishings, etc.).
You may need to do so some renovation work.
Step 4: Find one or more suitable tenants to live in your property and collect a monthly rental fee.
Can You House Hack in Canada?
House hacking is entirely legal in Canada.
As a homeowner, you can rent out a portion of your primary residence, no matter where you live in the country.
However, you must obey all residential tenancy laws in your jurisdiction when implementing the strategy.
By leasing your property, you automatically become a landlord and, as such, are subject to all laws that govern landlord-tenant relationships.
Therefore, if you’re keen on house hacking, take some time to familiarize yourself with all the applicable rules and regulations.
Otherwise, you could end up making costly legal mistakes.
And, of course, remember that the Canada Revenue Agency (CRA) will want a cut of your rental profits! Be sure to report all the rental income you earn when you file your taxes.
You may be ineligible to claim the principal residence exemption on your whole property in cases where you rent out a section of it. The reason is that the CRA deems part of your home to be an investment property rather than your primary residence.
What Types of Properties Can I House Hack?
There’s no one answer to choosing a property for a house hacking plan – technically, any home will qualify.
Some types of properties howevbver will work better than others.
Here are the top recommendations:
A detached single-family home is a prime candidate for house hacking as it’s spacious and versatile.
You’ll have options in terms of what area(s) of your home you would like to rent out.
Typically, people rent out their basements as it’s generally a self-contained suite.
Just be sure your basement adheres to local zoning laws and building codes.
A duplex (or triplex) is the ideal house-hacking property for two reasons.
First, your tenants will have an entire housing unit, not just a solitary bedroom or area in another home, which means you can charge rent accordingly.
Second, you benefit from total privacy and separation between units.
Bungalows are well-suited for house hacking because they offer plenty of extra room and clearly defined boundaries: you live upstairs while your tenants live downstairs.
In the lower half of the home, tenants will typically have access to a kitchen, living room, and bathroom, which means they’ll rarely need to venture upstairs where you and your family live.
As a result, you can earn substantial monthly rent while maintaining privacy.
Benefits of House Hacking
Afford a better home
House hacking enables you to purchase a larger home than you ordinarily can afford.
With one or more tenants paying you monthly rent, you’ll be able to manage the higher mortgage payments and other costs that come with an upscale property.
Lower down payment requirement
In Canada, you must contribute a down payment of at least 20% to buy a home for investment purposes.
However, if you intend to purchase an investment property solely to rent out, lenders will generally ask for a larger downpayment, given the added risk.
Let’s assume you’ll live in the property alongside your tenants.
In that case, the minimum down payment requirement is only between 5% and 10%, depending on the number of rental units in the property.
Build home equity fast
Building up substantial home equity is a painfully slow process.
However, inviting one or more people to be tenants in your home will accelerate the pace.
Each month’s rent they pay can be directed towards your mortgage, increasing your home equity and making you mortgage-free sooner.
Gain property management skills
An indirect benefit of house hacking is the opportunity to develop various skills associated with being a landlord.
These include advertising your property, screening tenants, and working through lease agreements.
This type of experience can prove valuable if you decide to purchase additional investment properties in the future.
You’re legally entitled to deduct on your tax return expenses you incur to manage the rental portion of your property.
These include property taxes, utilities, and mortgage interest.
These write-offs will help you keep more of your rental income in your pocket.
Risks of House Hacking
Being a landlord is the least glamorous part of house hacking.
Unfortunately, this role is unavoidable once you invite tenants into your home.
To fulfill your duties as a landlord, you’ll need to dedicate time and energy to many tasks.
- Creating lease agreements and other legal documents
- Evaluating rental applications and answering questions from renters
- Screening tenants’ credit reports, background checks, references, and more
- Keeping track of your income and expenses for tax purposes
- Resolving disputes with tenants
- Performing necessary repairs and maintenance
Living close to tenants
Depending on the state of your property, you may be in close proximity to your tenants, possibly even sharing some of the common elements in the house like the laundry room, so it’s something you must be comfortable with.
Can be expensive
Generally, the more space you have in your home, the more well-suited it is for house hacking.
For example, if you live in a small condo house hacking is far less feasible, given the limited area to accommodate a tenant.
In some cases, your condo corporation may not even permit it.
As a result, detached homes, duplexes, and bungalows are the most suitable property types for house hacking.
Unfortunately, these are typically much more costly than a condo or townhouse.
Depending on the state of your property, you may need to perform extensive and costly renovations to make your home or unit move-in ready to attract renters.
Loss of parts of your home
Allowing a tenant to live in your primary home means you lose access to certain sections as the tenant will occupy them.
Ideally, your goal is to generate continuous rental income from a long-term tenant.
However, things don’t always work out that way.
For example, your rental unit may remain vacant for some time, resulting in lower rental income.
You may also need to evict a troublesome tenant who fails to pay rent or damages your property, which will set you back financially.
Frequently Asked Questions
- Risks of House Hacking
The upfront costs associated with house hacking vary widely and will depend on a range of factors:
- The area in which you live
- The type of property you wish to acquire
- Local real estate market conditions
- The overall health of the economy
Still, house hacking is more financially and practically feasible with properties like single-family homes and duplexes. Naturally, these require higher down payments and larger mortgages than apartments and condos.
- Is house hacking a good idea?
THouse hacking can be a lucrative real estate and financial strategy. It will allow you to build home equity faster while lowering your housing costs.
However, it’s only a wise move if you’re comfortable taking on the risks and responsibilities of being a landlord.
You must also secure affordable financing and ensure you don’t overpay for the property. Otherwise, the rental income you generate won’t be sufficient to cover a meaningful portion of your housing costs.