House hackers explain how it’s done

Drew Hoefler (left) co-founded Side by Side Realty with his twin brother Scott (right) and recently purchased a Northeast Minneapolis duplex to "house hack."

“If you’re going to buy a first-time house at all, it should be a duplex,” said Drew Hoefler, co-founder of Side by Side Realty with his twin brother, Scott.

Drew took his dad’s suggestion to buy a Northeast duplex near Mayslack’s in 2013, despite heavy college debt and despite hesitancy about becoming a landlord. They rented out the upper unit and found themselves essentially living for free, he said.

“You’ve got to live somewhere. So why not live somewhere that makes money?” Drew said.

The strategy worked well enough that Scott also bought a duplex the following year. They later convinced their girlfriends to buy buildings, too.

“House hacking” — renting out space while living on the property — is not a new idea. But as housing costs rise and the city works to add housing options, some local investors think more people should give it a try.

“It’s beautiful, because someone else is paying most of the mortgage,” Scott said.

Financing a house hack

Out of roughly 24,000 rental properties, Minneapolis currently holds 2,803 owner-occupied duplexes and triplexes with rental licenses, according to city data, a roughly 4% increase from 2018 and a 13% increase from 2017.

“I think it’s more popular today because of the rising housing costs just across the board,” said Jordan Moorhead, a real estate agent who often assists first-time house hackers. “Owning a house is getting more expensive, renting is certainly getting a lot more expensive in the Twin Cities. So more people are looking for ways to reduce their costs on that end.”

“The millennial generation is becoming very aware of this type of financing,” said Kim Burke, a Minneapolis mortgage planner with LeaderOne Financial Corporation. “It allows you to make a minimum down payment, it allows you to live with very low expenses. And a lot of the time young people are paying off student loans, so this allows them to contribute more each month toward student loans.”

Buyers who live in one unit can secure better financing terms with down payments of about 3.5%–5%, she said. Otherwise, buying a duplex without living in it would typically require 25% down. And 75% of future rental income can help an individual qualify for a loan, she said.

Moorhead said most of his house hacking clients aim to keep their expenses, after rent is deducted, below $500 per month.

“Most people’s goal is to get as close as possible on covering the mortgage and any other expenses they have,” Moorhead said.

Moorhead said he sold a duplex near Lake Harriet last year to a woman who had lived in it 40 years ago.

“I know people of any income level that are utilizing this strategy,” he said.

Several investors said they used the strategy to start a portfolio. After living in one duplex for a year, they bought a new one to move into, although financing options change over time.

Realtor and “duplex chick” Kari Lundin cautions that investors should work with people who understand their long-term goals, so they don’t move out in a year with negative cash flow.

“Just make sure the numbers work,” she said. “Interest rates are so low and rents have gotten so high, numbers are working now that wouldn’t have worked four years ago.”

Living in a house hack

Scot Pekarek, a real estate agent who has lived in a Lyndale neighborhood duplex and rented out the adjoining unit, said there are pros and cons to living next door to a tenant. There are unexpected knocks at the door. And it takes a tough spine to ask a neighbor to pay rent when they’re struggling, he said. But on the plus side, he has a better handle on the condition of his property.

“I know if they’re partying,” he said. “I know if they snuck in a dog.”

For those renting a house hack, there is a good chance rent is relatively low, Lundin said.

“Oftentimes it’s easy to become friends with our tenants,” she said. “I think they’re paying less rent because [owners] don’t want to hurt their feelings or make them leave.”

Drew and Scott Hoefler said they’ve built lasting friendships with some of their renters. They can let out the dog for renters working late. They can feel comfortable leaving town for a week, knowing there are still eyes on the house and someone cutting the lawn.

“It does give you more flexibility,” Scott said. “A lot of people buying new duplexes are the millennial generation and we do thrive in community. It’s just a cool way to build community in a place that you love that becomes an investment for the long term.”

Future of the house hack

Bruce Brunner hosts meetups to coach people on house hacking, teaching the strategy to young people and North Minneapolis residents. He thinks it’s one of the answers to the affordable housing crisis.

“Maybe they can’t afford to buy a single-family home, but they can sure afford to buy a duplex,” he said.

Bruce Brunner teaches people to “house hack” — live in one unit and rent out the other — and calls it a new affordable housing trend.

After City Council adoption of the Minneapolis 2040 plan, which would allow triplexes citywide, Brunner expects to see more people custom build duplexes and triplexes for themselves to live in and house hack.

Brunner also expects to add accessory dwelling units (ADUs, or “granny flats”) to his own duplexes when the 2040 plan starts allowing them at non-owner-occupied properties.

Today, 40 ADUs in Minneapolis have active rental licenses, with nearly half of them in Southwest Minneapolis, according to city data. One home previously marketed “bonus space” above a garage on West Lake Harriet Parkway. Another, on Dupont Avenue, holds a third floor once marketed as a dance hall, a kids’ “rumpus room” or an apartment.

“There’s this preconception that people should want a single-family home,” Brunner said. “That’s not the way things are anymore. … There has to be a different model, because single-family homes cost too much.”