Can't afford a home? Why becoming a landlord might be the best way to 'house hack.'

When Joe Christiano’s sister decided to move in with her partner, Christiano wanted to help. In the Bay Area, where they live, rentals and purchases are prohibitively expensive – at one point the two women were looking at houses in the $800,000 range that had structural defects.

The search was dragging on when Christiano heard from an old high school friend. “He let me know he had a workshop for co-buying,” Christiano recalled. “I thought, maybe we can go in on this together.”

The high school buddy, Niles Lichtenstein, had launched a startup called Nestment, which helps priced-out would-be buyers achieve homeownership in unconventional ways. Nestment takes familiar methods of buying real estate and equips buyers with the tools – legal agreements, financing options, and so on – that make those arrangements both formal and accessible.

Most of Nestment’s clients buy a multifamily property and live in one part while renting out the other – or they “co-buy” – splitting the cost of a purchase with friends, family or both.

Christiano’s extended family wound up checking both boxes. The house hunt led them to a duplex with long-standing tenants. His sister and her partner live upstairs and split the mortgage payment with Christiano and his wife.

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“I wouldn't say owning a rental property is for everyone, but it had been intriguing to me in terms of a way to build generational wealth,” Christiano said.  

Lichtenstein says the idea for Nestment came from his mother, a widowed immigrant who took in international graduate students as boarders to pay the bills. And as housing – whether to rent or to buy – remains stubbornly inaccessible for increasing numbers of Americans, industry watchers say those old “house hacking” approaches are worth another look.

When rental income is taken into account, the cost to finance a multifamily property like a duplex or triplex is cheaper than buying a single-family house, Lichtenstein told USA TODAY.

“But you're also getting your mortgage and property taxes and expenses highly subsidized by the rent," he said. "So it creates a more sustainable path to homeownership. I really believe that for anyone who can't afford that single family home comfortably, this is the best step you can take.”

Fostering ownership

It's not just Silicon Valley startups that see value in helping arrange house hacks. All over the country, there are nearly 800 down payment assistance programs, most of them sponsored by cities, states, and counties, that help enable multifamily ownership.

“It's a priority for them to foster homeownership, especially among aspiring new buyers,” said Sean Moss, the executive vice president of product and operations at Down Payment Resource, an Atlanta-based company that tracks such programs.

“The cost of a duplex is not twice the cost of a single unit and the cost of a triplex is not triple the cost of a single unit,” Moss said. “It could be a big net win for a potential buyer.”

At Neighborhood Housing Services of New Britain, a housing counseling agency just outside Hartford, Connecticut, many clients start out trying to buy a single-family home, said Maria Calkins, the group’s director of home services. “But they find out it's kind of tough with what they've been approved for to buy a single-family home so they kind of switch gears and say, oh, you know, let me take the landlord class and see what I'm getting into.”

Additionally, some buyers who set out aiming for a single-family home may simply not find any homes available to buy, Moss said. In such a tight market, casting the widest net possible is wise.

Tenants and toilets

Helping people achieve homeownership – of any type – is one thing, but encouraging a certain type of person to become a landlord is also a consideration, Moss says. That’s why in most cases, assistance with down payments and other parts of the financing often comes with a requirement that a recipient complete some type of “landlord training.”

Neighborhood Housing Services of New Britain helps connect buyers with financing opportunities, and also offers guidance for anyone considering becoming a landlord. One way those resources can help is by weeding out buyers who might not be up for the task. “You do get some people that get scared and say, you know, it's not for them,” Calkins said.

For many people, the COVID-19 pandemic was an eye opener, she said: a shocking economic disruption that caused mass – if short-lived – unemployment, and prompted many local governments to enact tenant protections that some landlords thought were too restrictive.

For others, the nuts and bolts of the work, sometimes referred to in the housing world as “tenants and toilets,” can be a grind – though Christiano says he enjoys it. And while he and his sister never set out to be landlords of any sort, they find they’re taking the role seriously.

“We’re just looking forward to fostering that relationship as neighbors and as people who own the building and as people in the community,” he said.

Cash flow

While working with a startup like Nestment or a housing counselor isn’t necessary for buying an investment property, Christiano said he appreciated the help that he got in understanding the finances.

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The most important question may be about whether rental income can be used to qualify for the mortgage, which varies depending on the type of loan.

Some mortgages allow rental income to be counted if the property has a history of being rented out, while others allow a portion of it, say 75%, whether there's such a history or not. A professional with experience vetting different types of loans will be able to match a buyer with the best loan program.

But Christiano also found it useful to have Nestment confirm that the property would not function as an income producing investment. In Berkeley – and many other places across the country – properties are simply too costly for rental income to pay for the mortgage and more.

In his case, the mortgage runs about $5,000 a month, and the tenants pay rent that’s equivalent to about half that amount. But property taxes are another $1,500 or so a month – and Christiano is still comparing options for property insurance.

“I could see future scenarios where (his sister and her partner) live there for the next 30 years and the tenants stay there for the next 30 years and we refinance and you know, we raise their rent, $50 a year and eventually, it's cash flowing a little bit,” he said. Alternately, he said, the couple might move on, allowing him to rent out both units. Either way, the property is only likely to gain in value, and for now, Christiano is enjoying the experience.

"Having a happy tenant who's paying rent on time makes me feel good. Like every time I get the little ping from Zelle that says you just were paid this much money, I'm like, yeah, that's awesome."