House hacking can be a great way for Canadians to begin their journey into real estate investing. By renting out part of their primary residence, homeowners not only make their home more affordable but also gain valuable experience managing tenants and properties. This strategy offers aspiring investors a cost-effective way to enter real estate by generating income from their own home, eliminating the need for a separate investment property. For those who wish to expand gradually into a portfolio of investment properties, house hacking offers the opportunity to build equity while generating rental income to offset housing costs.

At its core, house hacking is a method where a homeowner rents out part of their residence to generate income. This rental income helps reduce living expenses and can cover a portion of the mortgage, property taxes, and maintenance costs, making homeownership more affordable. The money generated through tenants helps homeowners build equity faster, giving them an opportunity to reinvest in other properties eventually.

In cities where property values have significantly increased, house hacking has become a common solution to the affordability issue. As a growing number of Canadians face challenges when trying to afford the down payment and monthly costs associated with owning a home, house hacking presents a viable alternative. It’s especially beneficial in areas where rental demand is high, ensuring consistent rental income.

Financing A House-Hacked Property

Financing a house-hacked property involves more than just securing a mortgage. Since house hacking requires larger properties offering distinct spaces with rental potential, a more expensive property is often required, creating additional considerations for potential homeowners. A mortgage broker can offer valuable advice on the best way to structure financing.

Since the home is used as the primary residence, homeowners will have access to insured mortgage rates, with a maximum amortization period of 25 years, or 30 in certain cases, for CMHC-insured mortgages.

If the property costs more than $1.5 million, you won’t qualify for a CMHC-insured mortgage which permits down payments as low as 5%. In this case, you’ll need a minimum 20% down payment. While opting for a longer amortization period of up to 35 years may lower your monthly mortgage payments, the interest rate will typically be higher than what you’d get with a CMHC-insured mortgage. For homes under $1.5 million, the process is more flexible. Homeowners can qualify for an insured mortgage with a down payment ranging from 5% to 10%, depending on the number of units in the property.

How House Hacking Works?

House hacking minimizes the financial burden of homeownership by generating rental income to offset the cost of owning a property. For example, if a homeowner buys a property for $500,000 with a 5% down payment of $25,000, that would leave a mortgage of $475,000. The monthly mortgage payment would be roughly $2,760. However, by renting out a basement unit for $1,500 per month, housing costs can be reduced.

On a monthly basis, in addition to the mortgage payment, the homeowner will also have property taxes and insurance costs. Assuming tax payments of $400, and insurance costs of $140, this results in housing costs of $3,300. The $1,500 in rental income reduces the net monthly cost of owning the home to $1,800, making ownership more affordable and starting owners on the first rung of leveraging real estate for investment income.

Of course, actual numbers and circumstances will vary, but the ability to rent out a portion of the home can provide significant income for homeowners.

Benefits of House Hacking

House hacking generates a steady source of income. For many homeowners, this income helps cover the cost of their mortgage and other housing expenses, thus reducing the financial burden of owning a home. In addition to making monthly payments more manageable, house hacking enables homeowners to build equity faster. This additional income can accelerate mortgage payments, and in turn, lead to greater savings in interest over time.

House hacking also allows homeowners to claim certain tax benefits. Expenses associated with managing rental units—such as repairs, maintenance, and even some utilities—can be tax deductible, which can lower overall costs. This strategy gives homeowners practical experience in property management, which can be a useful skill if they eventually want to expand their real estate holdings.

Drawbacks and Considerations of House Hacking

However, there are potential downsides that homeowners should be aware of.

Renting out part of your home inevitably impacts your privacy. Sharing space with tenants, even if they live in a separate unit, can mean limited personal freedom. In addition to this, house hacking comes with landlord responsibilities, including maintenance, tenant management, lease agreements, and ensuring compliance with provincial rental regulations. These tasks can be time-consuming and stressful for those unfamiliar with property management.

House Hacking : Using Your Home to Generate Income by Don Scott | Canadian Real Estate Wealth