Ryan Barone is cofounder and CEO of RentRedi, a property management software that simplifies the renting process for landlords and renters.

House hacking—renting out a portion of the home you live in—has become a popular investing strategy in real estate. Traditionally, this involves renting out extra bedrooms to tenants who then live in your home.

However, the house hacking strategy has also taken some interesting twists, with independent landlords getting creative with the types of spaces they rent out for a variety of uses. House hacking can also be leveraged into a larger real estate investment portfolio.

The Benefits And Risks Of House Hacking

House hacking lowers the barrier to entry for investing in rental properties. Investors may be able to qualify for a larger mortgage and afford higher mortgage payments if they are collecting rent from tenants who are living in or renting space in their home. Rental income from house hacking can reduce housing expenses by offsetting mortgage, utilities and other costs of home ownership, helping investors early in their careers build equity faster.

If you purchase a home with the intention of house hacking, it is considered a primary residence, which generally qualifies for lower interest rates than an investment property. First-time homebuyers might also qualify for lower down payments and interest rates or more favorable home loan terms. FHA loans, for example, require as little as a 3.5% down payment for borrowers with a credit score of 580 or more. Conventional conforming mortgages only require 3% down, and VA and USDA loans require no down payment.

Additionally, house hacking provides valuable hands-on experience in tenant relations, property management and real estate investing without taking on the full responsibility and risks involved with purchasing a rental property.

Managing tenant disputes and maintaining a professional relationship with your tenant—especially if they live in your home—can present uncomfortable challenges while house hacking. Matters that lead to landlord-tenant disputes typically involve late rent payments and repairs or maintenance issues.

To mitigate these problems and improve landlord-tenant relations, eliminate the emotional component and clearly lay out rental terms upfront, including rent payment due dates and late fee structures and maintenance timelines and processes. You may want to consider property management software to help with this. (Disclosure: My company offers this solution, as do others.)

Additionally, vacancies are always a risk with any type of rental. They can disrupt cash flow and make it difficult to pay bills or the mortgage, so be sure to have an emergency fund set aside to cover expenses when you’re in between tenants. A good rule of thumb is to save at least 3-6 months' worth of expenses you would need to cover on your own without using rental income.

Creative House Hacking Ideas

The traditional way to take advantage of house hacking is to rent out extra bedrooms in your home to live-in tenants. If you live in a college town, for instance, you can rent extra bedrooms to students looking for affordable housing options. Some college landlords even rent by the bed.

However, house hacking does not always require having tenants live in your home or living space. Additional dwelling units (ADUs), such as an apartment over a garage, a guest home or any additional space that’s attached to the home but is separated by a wall and has a separate entrance are options that will help you maintain your privacy.

You can get very creative with renting out parts of your property. For example, affordable storage space is a hot commodity. You can rent out various spaces in your home for storage purposes, including closets, basements, attics, garages and storage sheds. You might even convert extra space in your home to storage units or build a storage facility with multiple units on your property.

Parking is another type of rental space in high demand. This can be as simple as renting out garages or driveways for parking cars. If you have a large yard, spacious garage or an extended driveway, you can also rent out space for parking/storing large vehicles such as boats, campers, motorhomes, buses or limousines. Some farmers rent space on their property for truck drivers to park their rigs overnight so they can catch up on sleep.

If you have a large, attractive home or a beautifully landscaped yard, you can rent parts of them out as event space for parties, photo shoots or filming locations. A pool can also be rented out for parties, as well as swim lessons, exercise classes or competitive training. Likewise, you can convert extra space into a home gym or dance studio that can be rented out for weight lifting, yoga, dance or exercise classes.

Growing Your Rental Business

Once you have established your house hacking business and you are generating enough income, you may want to consider investing some of your profits into additional rental properties if you would like to grow your real estate business.

Start by defining clear, measurable goals for scaling your rental portfolio by defining both short- and long-term goals, and then break down the bigger, longer-term goals into smaller milestones that include specific, quantifiable objectives that will enable you to track progress and stay motivated.

Scaling can be risky for those who don’t budget correctly and establish exceptional operations. Don’t underestimate the full costs of acquiring and maintaining rental properties, including ongoing operating expenses such as repairs, maintenance, property taxes, insurance and utilities. Set aside a rainy day fund for vacancies, unexpected expenses or market downturns. A good rule of thumb is to save 10% of your rental income for emergencies.

Also, avoid making rookie mistakes such as not purchasing landlord insurance or failing to properly screen applicants, which can lead to extra expenses and unpleasant experiences. Screening renters properly makes it more likely that you'll find quality tenants who pay on time and take good care of your property.

Starting out with house hacking as an investment strategy can be a great first stepping stone to making larger real estate investments. It allows new investors to learn the ropes with little to no initial investment and makes it easier to scale up once they become more comfortable with property management, develop investing strategies and learn how valuable real estate investing can be to building wealth.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?