With housing costs hitting record highs across the country and student debt reaching a record $1.762 trillion, attaining the American dream of homeownership feels out of reach to many.

Necessity is the mother of invention. As the housing market has tightened, many are reinventing an old concept — living with strangers — to address the new paradigm: affording a home. They call it extreme house hacking.

What is extreme house hacking?

Conventional house hacking is when someone buys a multifamily property, lives in one unit and uses the rent from the other units to pay for their housing costs. With multifamily properties priced out of reach for those starting out, thousands of hopeful homeowners are turning to a more extreme option: buying a home and renting out individual bedrooms to strangers. It’s like having roommates, except that it’s a business.

How does extreme house hacking work?

Extreme house hacking can be done any number of ways.  If you already own a home, you can just start renting rooms. If you want to buy a home, you can purchase one with the express intention of renting out some of the living space. Before you start down either path you should assess your personality and living habits. Someone who hates having guests over or breaks out in hives if a single dish is left in the sink should probably avoid this strategy.

Buying a property for house hacking

For those that don’t already own a property, choosing one for extreme house hacking is easy. It’s tempting to inflate your budget to include potential rents but try to stick to what you can afford on your own. If this property is your first home, be sure to take advantage of first-time homebuyer programs in your area. People renting rooms put a premium on private bathrooms so finding a home with multiple bathrooms is ideal. Be on the lookout for homes that are live-in condition but may need some repairs or updating within the next few years. These homes are usually cheaper than comparables and your rental income can pay for the repairs, thereby reducing the taxes you pay on that income.

Finding tenants

If you’ve watched the program “Worst Roommate Ever” on Netflix, you know picking out a tenant to live with is a choice fraught with (potentially frightening) consequences. Luckily, there are a few steps you can take to avoid the situations the people on the show were faced with.

  • Run a criminal background and credit check. Google an applicant’s name and check through their social media if possible.
  • Verify their income and check their references. Pay stubs can be easy to fake nowadays, since so many people get paid via direct deposit, so ask for permission to verify their employment.
  • Meet them and their pets in person before you sign anything. Ask them about how they feel about cleaning, noise, and guests. You don’t want someone who is going to obsessively clean and be bitter about fingerprints on the fridge, but you don’t want a slob either.
  • Require the deposit and first month’s rent prior to them moving in. Many room-rental landlords we talked to also require last month’s rent upfront as well.
  • Get a signed lease.  Websites like Avail and Rentler offer low-cost lawyer approved leases that you can modify for your property and particular situation.

Determining rent

Determining how much to charge in rent can be done several ways. When you’re just starting out it’s best to look at what other people are charging in an area and adjust based on your property. Furnished rooms, rooms with an en-suite bathroom, newer homes and homes in prime locations rent for more so be sure to adjust for these factors.

When you settle on a rent price, sit down with your housing costs and make sure the amount you’ll be charging is at least pro-rata. To determine a pro-rata rate, add up the yearly costs of the property including any anticipated repairs divided by the number of people who will be living there. Once you have rent coming in be sure to set aside at least 20 percent of it to cover vacancies.

Charge for utilities

Including utilities in rent can save a lot of complication, especially if you’re renting out multiple rooms with people who may come and go.  Decide on a temperature to keep the house at in the summer and winter and be upfront about that when interviewing people before they move in. A good rule of thumb is to take the average utility cost, add 25 percent and divide by the number of people who will be living in the home and then adjust as needed when you renew leases or add new tenants.

Why do people do extreme house hacking?

Extreme house hacking has several benefits. We interviewed three people who have tried it;  here’s what they had to say (responses have been edited for length and clarity).

“I rented rooms to strangers to boost my income and I did not like living in a big house by myself. Doing so allowed me to pay off debt while still saving for retirement.”
— Michelle LaBaere, a metallurgical engineer in Plymouth, Michigan

“I rented for a variety of factors.  As a seasonal worker and college student, it was hard for me to find shorter-term housing and renting a room and sharing living expenses was financially lower in cost which allowed me to save up for travel and live a good moderate lifestyle.”
— Crystal Muzik, a National Park Service ranger from Arcata, California and Moab, Utah

“I rented rooms in my house to help pay the mortgage when the market was crashing from 2006-2008. Doing so helped keep me from going underwater.  Once my loan was paid down a bit, I was able to move and go back to school. Renting rooms helped me live a more comfortable lifestyle with some travel and occasional dining out. I was able to build up savings so I could cover emergencies when they occurred.”
— Josephine Sterr, a high school math teacher from Dayton, Ohio and Lexington, Kentucky

What are the drawbacks of extreme house hacking?

Living with other people isn’t for everyone. While some room rental tenants stay long term, there is usually high turnover. Learning to live with a new person every few months can be difficult. Arbitrating disputes between roommates also takes a certain temperament.

And so does playing landlord. All repair and maintenance problems are going to land on your shoulders; it’s your responsibility to provide a clean, safe space, even if someone else breaks something.

There’s always the chance of needing to evict a roommate, which isn’t fun for anyone and can become acrimonious. Also difficult, if you live in tenant-friendly states like New York. Make sure you vet any potential tenants thoroughly to avoid the need to get into an eviction situation — and the hassle of having to find new tenants before your budget is blown.

The final word on extreme house hacking

Extreme house hacking can be a way to quickly grow your income, build up savings, pay down debt and climb the homeownership ladder. But make sure you know all the risks and have the temperament to live with strangers before you jump in.

Also, before you start renting, be sure to review local ordinances and zoning regulations. For example, some towns limit occupancy to four non-related people per residence, or limit the number of cars that can be parked in one house’s driveway. Make sure you’re compliant with all the regulations — and stay that way. The last thing you need is for your perfect house hack to draw flack from the authorities.