What is house hacking and is it the right move for you?

Once an app dedicated to dance clips, TikTok has become something of a personal finance oracle for Millennials and Gen Z.

It’s easy to see why “house hacking” gained popularity with catchy videos titled “here’s how to buy five houses in five years” or “here’s how I bought my house but live in it for free”.

These glimmers of hope provide a sort of financial catnip to generations trying to get on a property ladder that has become a slippery pole. But is it legit?

So what is house hacking?

Like most things young people claim to have discovered, house hacking is a new term for an old thing – renting out rooms in your home to cover the mortgage.

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However, unlike a pair of empty-nesters renting their kids’ old bedrooms out to students to make a bit of extra money, house hacking is more of a real estate strategy.

Instead of using an existing room in a house to get more income years after being purchased, you buy a house with the intention to rent parts of it out from the start to cover the mortgage while you live in it.

This could be through leasing bedrooms or additional units inside the dwelling such as a basement flat. While other house hackers buy properties such as duplexes or renovate existing ones, the primary residence can be broken down into self-contained accommodation.

Ideally, the owner has their bills and mortgage paid for via the rental income which means they can reduce their own living costs and save or invest the difference – often by putting it towards a deposit for another property.

So not only do you get out of the rental trap, you get someone else to pay off your asset while you save your money and use it to buy more assets.

[ First-time buyers: The supports that can help the ‘locked-out generation’ buy their own home ]

Sounds great in theory, but does it work in practice?

Tom Attride, a 26-year-old who recently bought his second property and hopes to have them paid off before 40 hopes it does. He says house hacking has been working out so far, so good. But with some strict conditions.

Attride, who works in pharmaceutical sales, said he had “never heard of house hacking before” when he started researching how to financially set himself up before graduating college.

“I always just knew that I wanted a house pretty quickly,” he says

“I didn’t want to rent. I had never rented.”

While that’s the preference of most young people, Attride acknowledges his ability to live at home during education and the first six months of his job put him in a privileged position to save €40,000 for his first deposit.

Attride says “there was no bank of Mum and Dad” involved when it came to his deposit.

Another factor which aided securing a mortgage and something Attride says he “doesn’t take for granted” was landing “a really good job” straight out of college with a salary “that’s good for my age”.

While personal circumstances play their part, Attride says his achievements are also the result of careful strategy built on selecting the right property, in the right location that also allows him to use the €14,000 Rent-a-Room tax relief.

Attride had to balance picking a property that was cheap enough to buy on his own, in an area with steady demand and where he could charge enough rent that covered his mortgage, but remained under the €14,000 exemption on taxes.

Not an easy ask by any means, but the first step, according to Attride, was researching location. His ability to get a deposit together fast and purchase as a solo buyer was aided “by the fact I wasn’t looking in Dublin”.

Knowing it “wasn’t possible” to execute his plan where houses averaged just below “the half a million euro” mark – he got creative. While originally from Carlow, Attride had spent holidays in Wexford, an area he liked where house prices were “quite manageable”.

[ Ten things to think about and plan before buying your new home ]

“I bought a house in Wexford town because you need to make sure that it’s in a rentable area,“ he said

“I couldn’t have house in the middle of the country or up a mountain or something because it wouldn’t have been as easy to rent a room,”

While admitting “it’s not like Dublin”, Attride says there’s still “lots of jobs and work available in Wexford town and people want a room there”,

Despite initial nerves about his house hacking gamble, Attride was overwhelmed by the response to his online ad seeking housemates.

“I had like 40 people who wanted in the room. It was bizarre to be honest . . . the demand here is mental,” he said.

The next step is to set the rent so it doesn’t exceed the €14,000 gross income received once expenses such as maintenance and capital allowance for fixtures are deducted.

That number is not per room, but the total amount for one house and it can only be claimed for the house the claimant is living in.

“You can’t even go over one euro,” Attride warns, because if the rental income limit exceeds the exemption then the whole shebang is taxed at the usual income rates, not just the amount that goes over.

“So you just need to plan it out. Like just think how much you are charging and include the bills,” he said.

“Then you also just need to remember to register that every year when doing taxes . . . because that could bite you.”

When Attride bought his three-bed property with the aim of renting out two rooms he sought one in turnkey condition with a decent energy rating even if it meant paying more. That way he could move tenants in straight away.

Attride’s first three-bedroom house cost €215,000, while his second four-bedroom cost €195,000 in 2023 because it needed some work.

The second house in Wexford town was funded with a sizeable deposit Attride said came from putting away the living expenses his first property covered.

He won’t be able to claim Rent-a-Room tax exemption on this property and will have to pay for renovations while covering more mortgage repayments on his own prior to tenants moving in.

What are the risks?

The big one is being overleveraged and over reliant on tenants to pay your mortgage/s. There are no guarantees in life. The very conditions that made house hacking look like such a good idea can change – interest rates, mortgage repayments, rental demand, your job.

Eoin McGee, author, financial planner and host of RTE’s The Complaints Bureau says there’s a valuable lesson to take from the Celtic Tiger era of rapid property investment based on projected rather than actual income.

The most common mistake he says back then was buying property “too fast, too soon” without having a contingency plan.

“As humans, we don’t have the best ability to think through worst-case scenarios. In the crash, people knew property prices could fall and interest rates could rise, but they didn’t think it would happen at the same time and rentals would be much easier to come by,” he says.

He also warns house hackers not to rely on future rental income to secure a loan, as a bank is unlikely to take that into account on an owner-occupied mortgage and will still need to see proof of enough individual income to service the loan.

The other issue is “property doesn’t have enough diversification”, according to McGee.

“If the wrong neighbour moves in, you could lose tenants or if you get the wrong renter and they don’t pay you, but then it’s hard to get them out . . . a pile of stuff can go wrong that people don’t take into account.”

Then there’s the risk of becoming used to your bills and expenses getting paid, leading to unwise financial choices.

“It’s Parkinson’s Law where your lifestyle expands to fill the income you have,” he said. “You have to be very careful, the rent should be building savings. Don’t let it come into day-to-day spending.”

Despite having the ambitious goal of having his first property paid down by 35, Attride says he takes steps to minimise risk. The first was making sure that he could cover both mortgages (roughly €2,000 combined) with his salary if he had to.

“I know I can cover it so I’m not worried. The worst thing that could happen is there are no rooms being rented, which again is likely never going to happen,” he says, clarifying it would take a major unseen downturn or event to cause disaster.

“If I lose my job? Yeah, then I think I have an issue, but I think everyone is going to have issues if that happens.”

While he accepts all investment is risk, Attride says he has a healthy fear of being overleveraged and has no desire to keep adding to his property portfolio any time soon. “I have the two houses and I’m not buying any more until I have one of them paid off,” he said.

While house hacking is a strategy that seems to be paying dividends for one clued-in 26-year-old, it’s important to remember the things that made it possible in his case might not apply to everyone. Such as the ability to live at home and save money, a decent income early in life, willingness to live with others, financial literacy, ability to live outside expensive locations, having a mortgage that can be covered by rental income yet still be under the Rent-a-Room cap.

It’s important to plan carefully and seek out financial advice to see if this is right for your individual circumstances, no matter how tempting the TikTok videos are.