With house hacking you have the ability to live for free, profit each month, and create long term generational wealth. If you're a millennial and you're not taking advantage of this strategy you are simply losing out on this massive wealth generator.
House hacking may be one of the most powerful kick starts to building wealth that a millennial can make. It's not official, but Brandon Turner from BiggerPockets will tell you he coined the term "house hacking." House hacking is the idea of purchasing and living in a small multifamily property and renting out the other units to cover all of your living expenses. This can also be done in single family homes by renting out the other rooms within the house. The overall profitability of house hacking heavily depends on the market you live within. For example, many individuals may be able to profit month to month by house hacking and have positive cash flow from the beginning of their investment. Other individuals living in major cities such as San Francisco, New York City, Denver, Nashville, etc.. may not be able to positively cash flow since their markets are so expensive, but it's still much better than the alternative of renting. They may be able to get their "effective rent" to be lower than the rent they would otherwise be paying while building equity in the property. Individuals in those situations probably have a better opportunity for property appreciation, as well. Again, it all depends on your market.
Saving money on your living expenses is an exciting idea. But, even more important than lowering your living expenses is what you do with those savings. Smart investors reinvest the money into more properties or use the savings to turbo charge their stock investment portfolios. The impact this strategy can have on your financial life is astounding. For example, if you can save just $400 per month on your living expenses and you reinvest that money into a good mutual fund earning 10% per year for 30 years that investment turns into $868,528 and that's just from one property!
“When I move out of my side of the duplex and rent it out, the property will be producing a 59% cash on cash return! My tenants will be paying the mortgage and I'll be building massive wealth.”
How I'm building wealth through my house hack
I purchased my first house hack deal when I moved home from Philadelphia when I left Vanguard. I temporarily lived with my dad knowing that it wouldn't be long before I found a property to purchase. Many of you probably assume I found my duplex on realtor.com or Zillow.com, but my first deal was actually an off market deal! I heard of the deal through my current tenants, who were already living in the other side of the duplex (they also happen to be my future brother & sister in law). The landlord had been trying to sell it to them for the last few years as he was ready to retire. The couple was just not interested in becoming owners of this property because they are ready to start a family and move to a forever home. So, I toured the property and met with the owner and agreed to purchase the property. That was October of 2016 and I moved in right away while in the process of purchasing the house. In the meantime, I paid $425 per month in rent and eventually closed on the house in late December for $55,000.
The other unit rents for $400 per month, which is under market rent, but considering I know the tenants very well and they brought me the deal in the first place I am not raising the rent until they move out. I financed the deal with traditional bank financing. I put 10% down with a 30 year mortgage. Since I only put 10% down I'm required to carry mortgage insurance on the property. The mortgage insurance only cost $12 per month and it goes away once I hit 20% equity. In total, my monthly mortgage including the mortgage insurance is only $263 per month. Now, I know some of you are thinking it's a cash cow from the get go since $400 of monthly rent easily covers the $263 per month mortgage payment. In addition, that's $400 I'm receiving per month instead of paying out $425 in rent! Factoring in the mortgage payment, that's a $562 per month positive swing in my cash flow and I'm building equity in the property each month! What's that worth, you ask? $562 invested every month for 30 years at 10% turns into $1,115,142.
However, there are several other expenses that many people like to forget about when calculating the numbers on a potential rental property. I also have $160 per month in property taxes and another $45 per month in insurance. The tenants on the other side pay their own utilities, but I have to pay mine while I'm living on the other side. I pay for gas, electric, water, trash, and internet. Internet isn't usually considered a utility, but since it's an essential fixed expense every month, I lump it in with that category to keep budgeting simple. On average, those utilities add up to $247 per month. I also budget $80 per month for repairs and another $80 per month for capital expenditures. So, in reality, this is how the cash flow really looks per month while I live here and also what it will look like when I move out:
As you can see in the above picture I'm cash flow negative each month while I'm living in the property. You're probably wondering why the heck I did this deal then. However, this is still much better than the renting scenario I was originally in. Remember I was paying $425 per month in rent plus I would still have to pay my own utilities on top of that rent, which you can see is $247 per month. So, if I had continued to rent, my cash flow would have been even more negative each month at $672 per month. I'm also building equity with every payment I make as the owner that is not factored into these numbers.
Once I move out and increase the rent in both units to $500 I will be cash flowing $475 per month. That's a huge swing in profitability and given the market I'm located in Corry, PA, that positive cash flow will be enough to cover the mortgage on almost two more properties just like this one. That's not even factoring in the additional cash flow I would have from the two new properties! That is wealth creation occurring before your very eyes.
Not only does a cash flowing house hack help you build wealth through equity buildup and reinvestment in more properties, it also will help you achieve your other investing goals. Many investors out there take a "real estate vs the stock market" approach and tend to choose one or the other. I personally believe that you should be focused on both. The stock market flat out has better returns over the long run as an asset class. But, you don't purchase stocks with debt like you do with real estate. Debt in a real estate deal is what juices the returns to be comparable with the long term returns in the stock market. Also, long term appreciation and the dividends you collect in the mean time in the stock market will be the easiest investment returns you ever make. Remember, in a real estate deal you are going to have to put in a significant amount of work, but with stocks you just sit and wait. Skeptical? Just ask Warren Buffett. This is a whole new topic that warrants its own article, so stay tuned to see my discussion on that!
The Pro's and Con's of House Hacking
Obviously, I have painted a pretty rosy picture of house hacking up to this point, but like anything else in life there are pros and cons. I've tried to highlight some of those below.
Pros
If you do it correctly it will:
Build you massive wealth
Create long term passive cash flows
Give you financial freedom
Build your real estate investment skills
Cons
It will be very costly if you make mistakes
Tenants can be a major headache
It will require a lot of upfront work to make sure you have a good deal and get it up and running the way you want it.
Can tie you down to one location
Properly estimating expenses before you purchase the house hack deal
When analyzing a potential house hack there are many parts that are easy to estimate or predict, but there are some parts that are not so straight forward. My key tip for purchasing a successful house hack deal is properly estimating repair, capital expenditure, and property management expenses.
It's easy to figure out how much your mortgage will be each month and it's also easy to figure out how much your taxes, utilities, and insurance will be each month because you can either look them up online or get a quote for them (insurance) before you purchase the deal.
Repairs, capital expenditures, and property management expenses is a little more difficult to estimate. It's a mixture of art and science. There are a few rules of thumb out there that say you just budget 5-10% of the gross monthly rent for each one of those categories. So, for example, if you were receiving $1,000 per month in rent and you wanted to use 5% you would budget $50 per month for each category. Over the long run, you will probably find that these three categories do fall somewhere in the 5-10% range, but this will vary drastically month to month and year to year. This will also vary greatly by property type.
So, my point is you need to become educated. I recommend reading "the Book on Estimating Rehab Costs: The Investor's Guide to Defining Your Renovation Plan, Building Your Budget, and Knowing Exactly How Much It All Costs" by J. Scott. This will give you a leg up in learning how to prepare for these costs and will greatly improve the odds of making successful deals.
My recommendations for learning more about house hacking
I'm extremely passionate about real estate investing and I spend a lot of time trying to learn as much as I can. If you are an investor or an aspiring investor, then you should too. One of my favorite places to learn more about real estate is www.BiggerPockets.com. They are a real estate investing network and family totally dedicated to all things real estate. They produce amazing content in the form of blogs, podcasts, books, YouTube videos and more. If you are a serious real estate investor then you should be involved with BiggerPockets. In fact, you should connect with me and say hi here!
Here is a list of 5 great books (I could and will give many more suggestions, but this is a start) you should read to help boost your real estate knowledge.
The Book on Rental Property Investing - by Brandon Turner (BiggerPockets)
The Book on Managing Rental Properties - by Brandon Turner (BiggerPockets)
Rich Dad Poor Dad - by Robert Kiyosaki
The Millionaire Real Estate Investor - by Gary Keller
What Every Real Estate Investor Needs to Know About Cash Flow - by Frank Gallinelli
Did you like this article? I hope you're charged up to go out and tackle your first house hack deal. Let me know how it's going for you in the comments section below! Also, please take a second and connect with me on Instagram, Facebook, BiggerPockets, and YouTube. If you could, please leave me reviews, likes, subscriptions, etc. These really help me grow my business and help me continue to produce great content. Until next time, I'm Nick with Coin Stack Financial, cashin out!