Gen Z, millennials are ‘house hacking’ to become homeowners in a tough market. How the strategy can help

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Gen Z and millennials are “hacking” the housing market as high prices and interest rates make affordability difficult.

The term “house hacking” refers to the practice of renting out a portion of your home or an entire property for an additional stream of income.

Almost 4 in 10, 39%, of recent homebuyers say the practice represents a “very” or “extremely” important opportunity, according to a new report by housing market site Zillow. That share is up eight percentage points in the past two years.

Younger generations are especially keen on the idea. In Zillow’s survey, more than half of millennial, 55%, and Gen Z home buyers, 51%, expressed positive views on house hacking.

Zillow polled more than 6,500 recent homebuyers between April 2023 and July 2023. Respondents were adults who moved to a new primary residence they purchased in the past two years.

The additional income from house hacking can “help make those dreams of homeownership penciled into reality, given that there’s so many affordability constraints on the current market,” said Manny Garcia, senior population scientist at Zillow.

The median sale price for a house in the U.S. was $413,874 in October, up 3.5% from a year ago, according to a report by real estate site Redfin.

The average rate for 30-year mortgages hit 8% in October, the highest level seen in 23 years, according to Bankrate. To compare, rates bottomed out slightly below 3% in January 2021.

While renting out portions of a newly owned property can help offset higher costs of a home, potential buyers will need to make a few considerations beforehand.

‘You need to earn six figures to afford a starter home’

As home prices and interest rates have risen, potential homebuyers need a salary of $114,627 to afford a median-priced house in the U.S., a recent report by Redfin found. Redfin’s analysis used the median home price of $420,000 in August.

“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,” said Daryl Fairweather, chief economist at Redfin.

With few small starter homes available, a millennial or Gen Z buyer may have to jump on a more expensive home than they would have wanted, Fairweather said.

“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,” she said.

House hacking may help those homeowners by providing them additional income for expenses or even help cover the mortgage.

More apartment buildings are available

The opportunity to house hack may be short lived. In some markets, new apartment buildings are under construction that will have available units next year, especially smaller, one bedrooms.

Rental market inflation, which had been stubbornly high for much of 2023, has cooled due to new inventory, pushing the rental vacancy rate up to 6.6% in the third quarter, the highest level since the first quarter of 2021, according to Redfin data.

“We’ve already seen rent prices stabilize, especially for single occupancy rentals,” Fairweather said. It’s going to be harder to rent out a room as more rentals become affordable, she added.

Despite the growth in available apartments, the U.S. is facing a “massive shortage of housing, especially affordable housing options,” said Zillow’s Garcia.

“If you’re pricing your home competitively, renting out can be a reliable source of income because there’s no shortage of people looking for a place to live,” he said.

What to consider before ‘house hacking’

While renting out a portion of your home can serve as an additional income, interested buyers would still need to gather a sufficient down payment and proof of income to show they can already afford the monthly payments.

“If you’re going to rely on rental income in order to qualify, you’ll have a problem,” said Melissa Cohn, mortgage banker and regional vice president of William Raveis Mortgage.

“They need to prove they can afford the mortgage without the rent,” she said.

Banks won’t consider potential rental income and they will require the buyer to be able to qualify for the financing without the support of potential rental income, she said.

There is another risk to buying a bigger house with the intention of renting out part of it: You could wind up stuck with an expensive mortgage and a room you can’t rent out.

If renting out part of your home — or the entire property — is optimal for you, do your research on what the current rate is for your type of home. Consult with rental managers who can help draft leases and give you a good estimate on the going rate in your area, said Garcia.

“There’s a lot of homework to be done to make sure that you’re pricing correctly when you’re posting your unit for rent,” Garcia said.

Additionally, keep in mind that there is a big chance the house you are considering may be subject to local ordinances on renting or homeowners association regulations.

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