How I Live for Free – House Hacking

It sounds futuristic, it sounds fancy, it sounds confusing and even worse it sounds complicated. It’s possibly been a term you heard bandied around by a financial youtuber or perhaps you just saw a news article that piqued your interest. So in this article we will be explaining what house hacking is and how it can be a great tool in your march towards financial independence.

I’m sure one realisation that nearly all of us had after moving out from mum and pops’ house is just how expensive it is just to afford somewhere to call home. Whether it is through a mortgage or rent, housing is the biggest expense for most of us and it only gets pricier once you add utilities, council tax and your water bill. For those who find themselves in the bottom 20% of earners you can expect almost ⅓ of your income to disappear in housing costs.

With people getting frustrated at the costs of housing, what we are seeing is that more and more young homeowners are turning to house hacking before they settle into family life. By house hacking these savvy people are using their homes to generate themselves a tax-free income which they can either use to fund their hobbies or stash away into savings accounts.

So What is House Hacking?

Simply put, house hacking is renting out part of your home whilst you live there to generate an income which drastically reduces your net housing costs. Examples of house hacking would be renting the following spaces:

• Spare bedroom (or 2)
• Converted garage 
• Converted lounge or dining room
• Converted attic

I’m sure there are other more unique versions of house hacking and I’ve even heard of people who have parked a caravan on their drive but the above are the most common. When house hacking most commonly the homeowner charges a weekly rent which includes all bills and services such as utilities, water and internet. Rooms will usually have basic furnishings such as a bed and furniture (wardrobes etc.) but most renters will have their own belongings that they will want to bring – who doesn’t have a TV these days?

How much you can earn and benefits

So now that we know what house hacking is we need to know if it’s really worth the hassle that comes with it. Can it really be justifiable to sacrifice part of your home just to help with your bills? This will likely depend on your salary, your mortgage costs, your personality and also what you plan on doing with the extra money.

House hacking is something that I almost fell into by accident when my brother decided to move out of London due to the UK going into lockdown. His job would now be completed exclusively from home remotely so why would he pay the extortionate rent in London to realise none of the benefits (city is in lockdown, no events, no ‘higher paid jobs’ and worst of all, no garden).

For me the rent that i receive from my brother is very minimal compared to the market value (because he’s my brother) so for this to be realistic I won’t be using him as my example (he pays £85 a week for a double bedroom, a second bedroom as a home office and full access to the house and garden and no other bills). To get realistic prices I will be using www.spareroom.co.uk

Where I live (South-West of England), £125 a week seems to be a reasonable price for a decent double room in a house with shared living space. There are certainly a large number of areas in the UK where prices would be cheaper but alternatively there are a lot of cities where that price would be an absolute bargain. For this example it seems a reasonable figure and readers can easily calculate their returns with different rental values. For what it’s worth, what I rent to my brother could reasonably be expected to generate around £150 a week.

By having somebody else living in your house it is understandable and expected that your general household costs will increase so to take that into account we will include the following:

• ≈ £2 a week water bill increase (National average of £286 a year for 1 person vs £401 for 2 people)
• ≈ £5 a week gas and electric bill increase (most of the expenses such as heating will be paid regardless if there is a second person at the home or not).
• ≈ £8 a week council tax increase – In the UK there is a discount of 25% of your council tax bill for persons living alone. This will therefore only apply to someone who previously lived alone and then decided to rent part of their house. 
• ≈ £5 a month wear and tear. This is slightly difficult to put a number on but with another person living in the house items will be used more and therefore likely to break and be damaged more often.
• £500 one time costs.- Before being able to rent a spare bedroom it may be required that items need to be purchased (bed, mattress, furniture etc.) and the room will need to be decorated. £500 is a rough figure and will change drastically depending on the room being rented. E.g. you may already have all of the required furniture and you redecorated last year or you may need to hire a builder and spend £10,000 to complete a garage conversion before it is possible to have a space available to rent.

So for the average person with a spare bedroom which is ready to rent in my area they could expect to generate roughly £105 a week (average of £125 – weekly expenses) after an upfront cost of £500 and some of their time. This would translate into £5460 a year assuming you could rent it every week. As this is the best case scenario it is more sensible to round down to a profit of £5000 a year. These calculations have been done using my own personal experiences in my area and they may not be applicable to everyone so the below should be considered:

• Is there a high demand for rooms in your area?
• What weekly rent could your spare room command? 
• The size of your spare room – the bigger the better

For myself I know that where I live there is a huge demand for rooms to stay in due to a massive construction project in the nearby area – this means that spaces are at a premium and therefore I can capitalise on that by charging more for my spare space and almost guarantee having a tenant for 52 weeks a year.

Tax Benefits

For those of us living in the UK who are interested in house hacking we are extremely fortunate that this can usually be done completely tax free. This is due to the rent a room tax relief (https://www.gov.uk/rent-room-in-your-home/the-rent-a-room-scheme) which allows you to earn up to £7,500 completely tax free as long as the room you are renting is within your property and is furnished. As long as you’re not generating above this amount you do not even need to worry about completing a tax return.

House Hacking vs Buy-to-Let Property

For most of us house hacking is a much more viable strategy compared to purchasing a buy-to-let for the following reasons:

• No upfront cost of buy-to-let (usually a minimum of a 25% deposit in the UK)
• No tax on income as described above
• No need to get a approved for a buy-to-let mortgage – these can often be more difficult and expensive than a normal home mortgage
• No stamp duty – stamp duty for a second home in the UK is extremely expensive (3% above the standard). For a £200,000 house you would expect to pay £7,500.
• No mortgage, solicitors or surveyors fees
• Quick turnaround time – Once the room is ready it can be advertised and rented immediately. 
• No commitment – If you decide that house hacking is no longer for you or your circumstances change you can quickly end the short term tenancy (usually rolling 1 or 2 weeks). This is much more difficult after paying the fees and taxes to purchase a buy-to-let property

For the majority of people in the UK purchasing a second property is not an option and therefore house hacking is the most sensible and cost efficient way of leveraging your home and producing an income from it. Buy-to-lets generally have a much higher risk attached to them and by paying tax on the earnings, amazingly renting a bedroom can sometimes generate more profit than renting a house. The downside is that over the long term a buy-to-let property is likely to rise in value and this is leveraged with a mortgage. Unfortunately you will not gain these benefits from renting your spare bedroom.

Disadvantages

As with all things there are advantages and disadvantages and so far we have only really touched on the positives. Before beginning to rent a part of your private home the below need to be considered:

• Lack of privacy – As someone who was used to living alone and doing whatever I wanted in my home when I wanted to, this took some time to get adjusted to.
• Lack of trust of housemate – your home has all of your most private and personal possessions in it and you need to be able to leave your housemate alone there without worrying about them snooping, stealing or damaging your things.
• Working hours – Perhaps your housemates’ working hours are very different to yours and you find your sleep suffering due to this.

Generally most of the above can be attributed to renting your room to the wrong person and therefore I would certainly recommend using a process in which you get to know them before offering your preferred candidate the room. You should also not be afraid to admit that it’s not working and ask them to leave (you can give whatever reason you deem to be the most polite). 

Alongside the above and if you are a private person you may prefer to offer a ‘self-contained’ living area in which the tenant cannot access your personal space. Often garage conversions are perfect for this as they can easily be separated whilst having their own entrance/exit.

What if I rent?

So far this post has been based on the assumption that the person offering the room to rent owns the house but what if you are renting an entire house and wish to do the same with a space you do not need?

Generally it is possible but only with the approval of your landlord. Most tenancy contracts have a clause in them that do not allow you to sublet any or all of the property, however this does not mean it has to remain the case and these things can sometimes be negotiated. It may be the landlord would consider allowing you to rent a spare bedroom to a friend or colleague but understandably they are unlikely to do this unless there is a benefit to them as more people in the house means more wear and tear and a higher likelihood of something being damaged.

Personally as a landlord myself I would consider this if the following conditions were met:

• I trusted my tenant
• I met and liked the person who wanted to sublet a room
• There was a personal benefit to me

It may be that you can pay an additional £100 a month for a revised contract which allows you to sublet a room to an agreed person which would then allow you to generate an income each week. The below could be an example:

1. Rent of £600 a month + £200 bills
2. Rent of £700 a month + £250 bills – £500 income.

In the first option by living alone your total housing expenses are £800 but in the second option the total costs are only £450 a month and your landlord is also receiving an extra £100 a month to keep him/her sweet. However as the tenancy holder you will be held responsible for damages to the house by the landlord and this risk needs to be factored in.

Final Thoughts and how my mortgage is free

My overall opinion is that house hacking is a phenomenally powerful idea that is not utilised nearly as often as it should be. My opinion is that for anyone who is younger and still building their wealth it is certainly an option that they should strongly consider as it will supercharge their path towards Financial Independence.

My mortgage costs me £600 a month. Of that roughly £300 is interest and the other £300 is paying down my house (essentially this is money I still own). By renting my spare room for just £85 a week to my brother I earn more than I spend on the interest on my house. If I rented it for it’s true market value (£150 a week) then it would cover the entirety of my mortgage payment.

My closing comment is that as your house is your most private place, spend time and do not rush to ensure you find a tenant who will make your life easy and you can enjoy living with. Do this and you won’t look back.