Is house hacking legal?
My partner and I both got our start in real estate through house hacking (renting out a portion of your home to reduce your expenses), and love how it enabled us to accelerate our real estate investment careers. Along the way we’ve learned a bunch about what is legal and what to watch out for.
In most municipalities, house hacking is completely legal. However, you must be careful to adhere to any safety codes that apply to the specific type of house hack you use, any land-use bylaws, and of course, to report your income earned in your annual tax filing.
Read on for the full break down of each house hacking type, and what you’ll need to consider in each case.
Renting rooms and shared accommodations
The simplest and most common house hack is to have a roommate. College students have been doing it for years, and it’s a great way to cut down on costs. More recently, all sorts of people have begun to rent out rooms and sharing spaces beyond their college years in order to accelerate their own financial independence journeys.
Where I live in Alberta, most landlords are subject to the Residential Tenancies Act (RTA), which details the rights and responsibilities of tenants and landlords. However, shared accommodations are not subject to the RTA - they are treated like any roommate agreement. This means that the legal requirements (and on the flip side, protections) are quite limited. For that reason and to prevent future issues, it is always a good idea to draft and sign a Roommate Agreement. The agreement should specify when and how rent is paid, what the term will be, acceptable use of common spaces, and what happens if the roommate decides to move out.
A note on short term rentals
One exception exists in the form of short-term rentals. If you decide to rent out a room on a short-term basis via Airbnb or VRBO, you may be subject to local municipality bylaws that regulate these types of rental agreements. An increasing number of cities and towns are introducing regulations around short term rentals, so you will have to check to see what might apply to you. You may expect to see rules around the duration of stay, registration requirements, parking requirements, and noise limitations.
Duplexes, ADUs (Accessory Dwelling Units) and other separated suites
Where shared accommodations had very few restrictions in place, duplexes and ADUs are a different story altogether. If you are providing and renting out a completely separate suite, you will be subject to a number of code and land use bylaws, in addition to the Residential Tenancies Act. Since ADUs are becoming increasingly common, cities are increasing their efforts in trying ensure that they are done safely and with minimal disruption to the community.
The great news is that these new bylaws can give you a roadmap to house hacking that is completely legal, approved and verified by the city. Not only will that help you earn a premium on the monthly rent you are able to charge, it should also maximize your property value. I personally love that my basement apartments are differentiated over and above the majority of illegal suites that exist in my city.
If you’d like to understand the process in more detail, check out my previous post titled how to add an ADU to your property.
Have space? Consider self-storage for completely legal passive income!
Renting other spaces: creative house hacking
House hacking is not limited to renting out living accommodations. In fact, we first started by renting out spaces in her house for storage. She started by renting out space in her undeveloped basement, then by renting out garage space as well. Not only is this completely legal, but it is a very creative way to earn extra passive income every month. Here a few examples of completely legal house hacks that you could try:
rent out basement, garage or shed for storage space like we did;
rent out an unused room as an office space;
convert a garage or shed to function as a rentable office;
lease a carport or parking pad for paid auto storage.
The options to house hack are limited only by your creativity and willingness to be open to trying something new. All of the above examples are completely legal and would make fantastic use of space in your home that would otherwise be left vacant.
Don’t forget to report your income!
Even though your city may allow most or all of these house hacking opportunities, you will still need to report any income that you earn as a part of your annual tax filings. Yes, you will have to pay income tax on this, however there are a few advantages as well. In most cases, you will be able to claim many of your expenses as tax deductible! I must first say that I’m not an accountant and you will have to consult them on the specific allowable deductions in your circumstances. With that said, you may be able to claim everything from a portion of your heat and electricity, mortgage interest, home insurance, internet service, and even home repair expenses. This will drastically cut down on your tax liability (again - check with your accountant) for the income you will be earning. Just keep your books in order, copies of your rental agreements, and all of the receipts that you will be filing. An added benefit is that this is also an important start to what running a business looks like. You have to keep your books in order, so you might as well start the second you start house hacking and using your own home as its own mini-business!
Have you ever house hacked? Did you start before it was cool and had a trendy name? I’d love to hear about your experiences, whether it’s been great or a total nightmare! Let me know in the comments below!