Could House Hacking Be the Best Way to Buy Your First Home in 2024?

Despite what many experts had predicted when mortgage rates started to rise, home prices haven't declined in most areas of the United States. Homeownership still seems unaffordable to many people who would have previously been able to buy a home just a few years earlier.

If you would love to become a homeowner, but are having trouble making the numbers work, a technique called "house hacking" could be worth a closer look. This strategy involves buying a multi-unit property with a low-down-payment mortgage. Here's how it works and what you should know before getting started.

What is house hacking?

House hacking refers to situations where you purchase a home with multiple housing units. You live in one of them and rent out the others to generate income to lower, or even pay your entire mortgage.

In most cases, you cannot use a conventional mortgage to buy a home with more than one unit, unless you're buying it purely as an investment property. And in that case, you'll need at least 20% down.

However, the FHA loan has specific provisions that allow for the purchase of up to four-unit properties, as long as the buyer plans to live in one of them. FHA loans only require a 3.5% down payment, even for multi-unit homes, and have flexible credit qualifications.

Using this method, you can buy a home with a low down payment and have as many as three rental units to generate income. It's not uncommon for house hackers to generate enough from the other units to completely cover their monthly mortgage payments.

If you really want to house hack, you can repeat this process. You can refinance the loan as an investment property once your equity justifies doing so and use another FHA loan to buy yet another property.

How I bought my first home

I'm intimately familiar with house hacking, because that opened the door to homeownership for me when it seemed impossible.

In 2010, I was a high school mathematics teacher in Key West, Florida -- a very expensive real estate market. My fiancé at the time (now my wife) was a nurse in the local ICU. Even when combining both of our salaries, owning a home on the island seemed next to impossible. After all, not only were home prices expensive, but we would also need to pay for flood insurance as well as a separate (costly) windstorm policy. And saving for a down payment would be a challenge.

This was just after the U.S. foreclosure crisis, so I contacted a local real estate agent about a foreclosed home a few blocks from where I worked. To call it a fixer-upper would be generous.

He suggested another route. Many of the older homes on the island had been built as duplexes. Since it was just the two of us, we would have no problem living in a smaller space, and we could rent out the other side of the duplex to help offset the rent.

The plan worked. We ended up buying a duplex in the middle of town using an FHA loan with just 3.5% down, and thanks to the rental income from the second unit, our overall monthly payment was less than we had previously paid to rent a small two-bedroom apartment.

A few years later, we ended up selling the home and moving closer to relatives to start a family of our own. But this house hack allowed us to build more equity than we otherwise would have been able to, and it produced a nice down payment for our forever home, where we still live today.

Could house hacking be right for you?

House hacking isn't right for everyone. For one thing, it isn't practical or desirable for many people to live in a multi-unit property. If you have dogs that need a large outdoor yard to run around in, or if you have multiple children, a single unit in a two- to four-unit property might not meet your needs. And (trust me on this one), you should consider whether you want to be someone's landlord before pursuing this.

Having said that, if you're up for the challenges involved and don't need a ton of space or private outdoor area, house hacking can be an excellent path to owning a home quicker and for a lower monthly cost than you may have thought possible.