Is House Hacking Legal? (The Legal Considerations)

If you’re looking to break into real estate investing but need to figure out what it takes, consider house hacking. You might wonder, though: Is house hacking legal?

Is House Hacking Legal?

House hacking is legal when you do it right. For example, renting a spare room in a single-family home or a unit in a multifamily home is legal.

However, renting a garage space not meant for living isn’t considered legal. Follow your city’s zoning laws, and house hacking can be legal.

Legal Considerations of House Hacking

When determining if house hacking is legal, consider these factors.

Zoning laws and regulations

This is the most critical factor when determining if house hacking is legal. Cities and counties have specific zoning requirements you must follow. Each area is different, so you must know the regulations for the area where you’re considering purchasing a home.

For example, your locality may prohibit short-term rentals if that is your idea of house hacking, or if you’re planning on adding an accessory dwelling unit (ADU), make sure they are allowed.

This is especially important if you’re adding it in the basement, as many areas have restrictions regarding this.

Call your local government to determine the zoning laws to ensure you aren’t violating any regulations and risking fines.

Occupancy limits

Some cities and counties have occupancy limits based on a home’s size and number of bedrooms. Determine if your house hacking will exceed those limits and put you at risk of violations.

For example, if you have a one-bedroom house, you can’t rent a room to someone else unless you plan to live there, which wouldn’t be house hacking.

Landlord-tenant laws

Each city has different rules and regulations regarding the landlord-tenant relationship. Ensure you understand your responsibilities and rights as a landlord and what you can and cannot do.

For example, there may be strict laws regarding the security deposit amount, eviction procedures, and other regulations the city or county imposes on landlords.

Financing considerations

The nice thing about house hacking is you can typically take advantage of owner-occupied financing, which means the most attractive rates and terms available versus those offered to investors.

Typically, you can use any financing, including FHA loans, as long as you live in the property. You cannot rent the entire property to someone with owner-occupied financing, but renting a room is typically legal. It’s a good idea to run it past your lender, just to be sure.

Insurance requirements

The insurance requirements for house hacking vary based on how you use the property. Since you are renting only part of the property to tenants, you may not need landlord insurance. It depends on your insurance company and location.

For example, if you add an ADU, you may only need additional coverage on your traditional homeowner’s policy, but if you’re buying a multifamily property, you need adequate rental coverage to protect yourself financially should the home become unlivable.

Homeowner’s association regulations

If the property is in an HOA, read the regulations carefully. These regulations are in addition to any city or county laws. For example, they may restrict all non-owner occupancy or may only prohibit short-term rentals, allowing long-term leases.

Tax implications

Consulting with your tax professional is key when house hacking. While you must report the rental income and pay appropriate taxes, you may be eligible for certain deductions or credits for the expenses to maintain the home.

It can get tricky when splitting the mortgage interest between personal and business use, which is why involving a tax professional is essential. Also, check out our guide about house hacking taxes.

Navigating Legal Challenges in House Hacking

To ensure house hacking is legal before you invest in a property, here are some tips to help:

Research federal, state, and local laws: Never assume house hacking is legal where you want to invest. Get to know the laws at all levels, consulting with the local zoning board and the city’s compliance department.
Work with a real estate attorney: Find a real estate attorney knowledgeable in house hacking in your particular area. Ensure all contracts are properly written and you’re adequately insured for the investment.
Ensure your lender is on board: Don’t try to “sneak” the house hacking past your lender, or you might unknowingly violate the terms of your mortgage. Be open about your intended use of the property to avoid any legal consequences.

Final Thoughts

House hacking can be legal when done right. It is a great way for first-time investors to break into real estate investing or grow their real estate portfolio. Learn everything there is to know about house hacking and how it can benefit your real estate investing path.

Put Your House to Work

Discover why so many successful investors use the house hacking strategy—and learn from a frugality expert who has “hacked” his way toward financial freedom. Serial house hacker Craig Curelop lays out the in-depth details to make your first (or next) house hack a huge success.