A House hack is an incredible wealth vehicle to fast track your path to financial freedom. I can say that with confidence since that’s what we utilize to slash our biggest living expense – housing! In this article, we will uncover 5 things you should consider to know if house hacking is right for you or not.
Depending on where you’re at in life can determine where you can make house hacking a reality. Everyone has different starting points in real estate and in life overall. Acknowledging that can you figure out which house hacking strategy is best for you.
What is A House Hack?
House hacking is an investment style in real estate where you live in one unit/room and you rent out the other rooms to lower/get paid for living there. Think college roommates where everyone has a room and they pay the landlord (in this case you) a fraction of the full rent.
Or this could be a single-family home where you rent out each individual bedroom. Preferably, this is where you buy a multifamily home 2-4 units, live in one unit, and rent the others out.
We bought a single family with a detached mother-in-law suite. There are quite a few options but it just depends on a few things if house hacking is right for you.
Why Is A House Hack a Good Idea?
In order for an investment to become worth it, it needs to surpass a certain level of value in the buyer’s eyes. In this case, a house hack can severely lower a housing payment. Sometimes it’s to the point that the property is PAYING you to live there. Oftentimes, people save upwards of $500-$1000 of their money by using this strategy. From a cash on cash return perspective, there’s nothing in real estate with these kinds of returns.
Simply because you can get a $300K property for $10,500 down (3.5% down compared to 20% traditionally), Estimate $20,000 more for closing costs, rent-ready renovations etc. By the time everything is set up, the investor has put in $30,500 of their money. Let’s say the mortgage + PITI on the property is $2,000. All in, to break even, the property needs to make $54,500 ($30,500 + $24,000)
In this scenario, an investor could rent out a 2bed/1bath unit for $1,300. In a year’s time, you’ve made ⅓ of your TOTAL investment back. The power of house hacking is the ability to get in a home and immediately see financial benefits. More importantly, you’ve reduced your housing expense (most people’s largest expense) by 65%.
At some point, the home will be rented out along with the unit. Therefore, it’s fair to say the home could be rented out for $2,200/m and the unit can stay at $1,300/m. Now let’s say our annual expenses (Mortgage + PITI) are still $24,000 but our yearly income has gone from $15,600 to $42,000). Running the numbers again, All in expenses are $54,500, yearly income is $42,000. You’ve made your ENTIRE investment back in less than 1.5 years, from that point forward your ROI is upwards of 75%.
That’s not even including where a refinance occurs and you pull all the equity gained out of the property further increasing your COC ROI.
All in all, House hacking is a fantastic way for you to live almost for free, and build a huge investment portfolio that can skyrocket your trajectory moving forward.
1. Family situation
This is typically the very first reason most people do (or don’t) get started in real estate. A lot of people might decide that because they’re married or have a child, they shouldn’t consider house hacking. While I’d love to say this is a fair statement, sacrifices should be made in order to reach financial freedom faster. Everyone makes a sacrifice somewhere in order to reach a better financial situation. In this scenario, Investors will live with or next to someone else in the home.
My wife, daughter and I do this now. We bought a Single-family home with a mother-in-law suite that we Airbnb. This brings us around $1,300/month where our Mortgage + PITI = $1,500. We now live in a great home/neighborhood for $200/month plus utilities.
What’s really helpful is how we can see our equity grow, monthly payments go down month after month, and our financial situation gets exponentially better.
For a family looking to get started in real estate, consider either a multifamily or detached mother-in-law suite to then use as an additional income source.
2. Comfort level (living with others)
Of course, personal comfort should be considered when house hacking. This can range from people who have no problems living with roommates or someone who can’t stand hearing someone coughing near their bedroom. Pretty extreme differences but house hacking really caters to many different wants and needs.
From there, investors can base their decisions on their comfort levels. Roommates will bring the most income but will be the most uncomfortable.
Not ideal for families and/or people that don’t want to share living spaces. Most of the time, these investments can bring in $500-$600 per room. If you own a 5 bedroom, that could be a $3,000 monthly revenue for you. If you’re spending $2,000/month, you can understand very quickly how this investment style can yield huge benefits.
Other levels of comfort could simply be renting out units of a multifamily or guest suite. In this scenario, a quadplex (4 units) is best since you can live in one and rent out the other units. All together, let’s say you spend $2,500/month and the units are going for $1,200 apiece, you’re getting paid to live there.
House hacking clearly brings plenty of revenue for you if done correctly. The trick is knowing what type of investment to go after and what to stay far away from. More on that in a different post.
3. Okay With More Responsibility (Fixing Things, Phone Calls, ETC)
With great income comes great responsibility. Just because you’re making money by just living in one of the units, you’re still a landlord. So you need to treat it like a business. Anytime something breaks, guess who’s getting a call. But this could also be a pro since the damage that could be done to the property is less since you’re on site.
Many people have a love/hate relationship with being on-site as a landlord. A house hack is great until it’s not. In the situation where an A/C goes out, the water’s not running, or some other maintenance issue, you’re first on the scene.
Oftentimes these fixes are minuscule but having a house hack comes with responsibilities. You’ll need to be okay with getting your hands dirty or simply calling someone who will. This is to be expected but a house hack owner must understand the implications of owning one.
4. A House Hack is Great If You’re Disciplined With Money
Since you’re earning an additional $500-$3,000/month, a house hack owner must be disciplined with their money. Truthfully, my wife and I haven’t touched a penny from the income we’ve received.
Mainly because every payment we get, it goes right into our real estate bank account. That way we know our account already has a large portion of this month’s payment ready to go. We just cover the difference and be on our way. (Setting these up is courtesy of Ramit Sethi in his book “I Will Teach You To Be Rich“
From there, what we WOULD have paid, goes into a real estate investment account to save up for our next property and fast track our growth.
Now, this is our situation but for others, money management may be harder or easier depending on your relationship with finances.
This might be a new wealth vehicle for most so knowing the problems in advance can help your response to them. Just because you’re making money from an investment doesn’t mean you should be reckless with it. Be smart and take care of future you.
5. A House Hack is NOT For Those Who Want To Get Rich Quick
If you’re hoping to become financially free in 2 years, sorry this isn’t the investment for you. Try going all in on red or put your life savings on Cryptocurrency. This wealth vehicle is for those who want to expedite their financial freedom journey without trying to rush the process.
Truth be told, a house hack is by far one of the fastest ways to get there just by simple math but it’s not going to make anyone a billionaire overnight. Ideally, if done strategically, it’s possible to earn $6,000/month in 5 years or less. The trick is to buy as much as possible that you can confidently pay in a worst-case scenario of no tenants.
This way your income potential is much higher. So if possible, go for a quadplex instead of a duplex. Try renting out bedrooms in a single-family home.
Or if you want to rule the world, rent out each bedroom in a 4 unit multifamily. If each bedroom rents for $600, there are 8 total beds. $4,800/month is not bad at all. Rents could easily be $700 which is $5,600/month. If you live on the couch for even a year, you’re very quickly able to save up plenty of money for whatever you’d like to do next.
I mention this because you can build wealth quickly but not overnight. Even in the best scenarios, your comfort might be sacrificed.
If there’s one thing to take away from this article, it’s that a house hack can be an incredible wealth vehicle, if you’re willing to make some sacrifices.
Let me know if you have questions on house hacking! I’d love to help in any way I can!