Young Americans view the opportunity to rent out a portion of their home as 'very' or 'extremely' important — but is it a safe way to build wealth? 3 risks of 'house hacking'

Why some Americans have turned to ‘house hacking’

Thanks to high mortgage rates and home prices amid the ongoing housing crunch, some folks who haven’t purchased their first homes yet aren’t quite sure if they’ll ever be able to.

“In many places, you need to earn six figures to afford a starter home, so it makes sense for young people who are seeing how expensive homeownership is to want options,” Daryl Fairweather, chief economist at Redfin, told CNBC.

There may be fewer starter homes available as well, which can cause some young buyers to consider larger and more expensive properties.

“Having the option to rent or have a roommate is important in an environment where there just aren’t that many small homes for sale,” Fairweather said.

In addition, those who bought a home while mortgage rates were lower might be enjoying smaller monthly payments, but they’re still grappling with high everyday prices brought on by inflation, so it’s possible their incomes don’t stretch quite so far.

Renting out a spare room in your home — whether for the long term, or through a short-term service such as Airbnb — can be a solid option for boosting your existing income.

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The risks of bringing in a renter

Older generations who purchased their properties long ago might not see the need to become a landlord in their own home.

For one, it’s possible they’ve already paid off their home loans and no longer need to make those monthly payments. Some might not actually have the space available — either because they have multiple generations of family living at home, or they’ve downsized to a smaller place for their retirement years.

But there are some additional risks to “house hacking” that you might want to keep in mind before renting out part of your home.

1. Finding tenants

First off, finding and selecting tenants can be a time-consuming process. You’ll need to conduct credit and background checks so that you can verify whether they’re responsible and reliable when it comes to paying rent on time. It’s also best to interview any prospects to ensure you’ll feel comfortable with them in your home.

Setting the right rate for rent is also important. Do your research on what the appropriate amount is in your area for the type of space you’re offering. The added income you receive should be enough to help with your mortgage payments, or else it might not be worth it.

Prospective buyers also need to keep in mind that they can’t necessarily rely on rental income in order to finance their homes. You’ll still need to prove your existing income is enough to qualify for a mortgage.

2. Landlord hassles

It’s entirely possible that the hassles of being a landlord outweigh the benefits of an additional stream of income.

Aside from potentially dealing with unpaid or late rent, you could contend with costly repairs if they damage your home or constant calls if something isn’t working in their part of the home.

There’s also the possibility a tenant might break their lease early, or you have to manage periods of vacancy between tenants when you won’t be able to rely on rental income.

Of course, having an emergency fund to prepare for those situations can help. Many experts recommend setting aside at least three to six months’ worth of expenses to prepare for a worst-case scenario.

3. Safety concerns

Now, even though you may have thoroughly vetted your tenants to the best of your ability, having a stranger living in the same home as you isn’t for everyone. You might be worried about your safety, especially if you’re a single homeowner or have kids running around the house.

There are ways to boost your income through real estate without feeling concerned about a live-in roommate.

For example, you could consider investing in a real estate investment trust (REIT), which is an entity that allows you to earn returns from several properties at a time without owning a single one yourself. They’re similar to a mutual fund, except REITs own and operate properties that produce income, such as apartment buildings and shopping malls.

Or, if you’re not looking to take a huge chunk out of your paycheck for your investments, some platforms will allow you to invest in rental and vacation properties at a much lower cost.