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House Hacking: Laying the Foundation for Financial Independence

Finding the True Investment Home Values for Motivated Buyers and Sellers.

9 min read

I don’t know about you guys, but I’m not interested in hearing about anything that has to do with hacking.  This hacking though, could be the first step towards financial freedom.

House Hacking is a termed coined by BiggerPockets, which basically means to buy a multi-family property and then rent out the other units while living in one of the units.  In this scenario, as the house owner, you are able to collect rent and basically live for free, which allows you to significantly increase your savings (you are saving at least 10% of your income as it was taught in The Richest Man in Babylon by George S. Clason, right?).  Pretty cool, right?

Some of the advantages to house hacking are obvious – living rent free pretty much smacks you in the face.  But, some of the added bonuses include: learning how to be a landlord, interacting and dealing with tenants’ face to face, and being able to fix issues quickly for your tenants.

This scenario sounds extremely stressful and more like a disadvantage, but is actually immensely useful as it allows you to learn how to handle these issues first hand so that you are able to create systematic approaches to problem solving and create a playbook for your future employees.  Systems will be the key to creating passive financial freedom in the future.

As Tim Ferris, American author of Four Hour Workweek: Escape 9-5, Live Anywhere, and Join the New Rich and the newest book Tribe of Mentors, often points out, it is pointless to be profitable if you are unable to separate yourself from the daily operations.

According to Aron Levine, the head of Merrill Edge, millennials focus on financial freedom instead of retirement.  In fact, 63% of millennials are saving to live their desired lifestyle vs. 37% of millennials saving to retire.  Financial freedom is a core belief of millennials – Can you blame them after the economic collapse that they witnessed?

House hacking can also be used as an alternative approach to saving for the future for retirement.  As I’m sure you know housing is expensive and paying for that every month means that you have less money to save for the future, but hopefully we can convince you that now is a great time to start saving by letting tenants pay for you to live in YOUR house!

I did it.  I’ve convinced you that house hacking is the route for you, but now what?

Time to get packing cause you just won a plan for how to buy your next house!

First, let’s look at some of the advantages to house hacking.

Advantages to House Hacking

1: Save money:  According to the Consumer Expenditure Report (April 2017), published by the Bureau of Labor Statistics, housing accounts for 32% of total annual expenditures for consumers.  Imagine if you were able to cut the number to 10% by house hacking.  What would you do with an extra 20% of your net income every month?

2: Financing Terms:  Buying a property often requires a 20% down payment, and this is definitely true if you are investing in a property.  House hacking gets you the best of both worlds.  As an owner occupant, you probably qualify for the FHA 201 and FHA 203 loan.  These loans typically require a 3.5% down payment and can also help pay for repairs that the house requires. See our note later about FHA 203 Loans.

3: Education:  I think we all collectively can agree that what we learned in college didn’t quite live up to the bill.  This opportunity will allow you to learn all about the real estate market.  You get to learn about finding deals, closing deals and negotiations, financing deals and managing properties all while saving you money every month.  What did I actually learn from that college degree again?

There have to be some disadvantages, right?  Well, let’s look at a few common complaints people have about house hacking – and how to avoid them.

Disadvantages to House Hacking

1:  Tenants Problems:  We all know the story of the landlord unclogging toilets in the middle of the night and then we quickly decide not to become landlords because we don’t want to do that.  What if I told you that this is the exception and not the norm?

SOLUTION: Screen your tenants. Here is an entire article that will help you do this when you are ready! (HINT: Be sure to at read this BEFORE purchasing your property!)

2: Inexperience:  One of the reasons that real estate investing is scary is because it is a HUGE investment.  Unfortunately, I don’t remember having ‘Purchasing Your First Home 101’ covered in any of my semesters of schooling.  Luckily, you found us.  We fell in love with this stuff and will provide you with everything that we can to help you make the right decision.

SOLUTION:  You are already on your way to solving this issue by coming here today.  We will provide you with the calculations that we use when we analyze properties and we are easily accessible if you have any questions about the process of finding deals.

BONUS SOLUTION:  You were already going to buy a property at some point, right?  House hacking is the perfect opportunity to buy a home and buy an investment property!

3: Hard Work:  This part is true.  This will require a lot of work and research and learning, but if you want to become financially independent then it will require work.  Luckily, we will help provide you with a lot of the education portion!

SOLUTION: Do the work now, and then enjoy the margaritas on the beach as tenant’s deposit rent checks into your account and property managers deal with the day-to-day operations of your portfolio.

4: Ugly:  One of the scariest parts about this investment is that the duplex may not look great before you purchase it, but now is your chance to be these guys!

Well, probably not on your first one, but you can definitely make simple changes to some older homes to make them look fabulous.

Let’s revisit those FHA Loans real quick so that we don’t scare anyone off to quickly  FHA loans are provided by the Federal Housing Administration (Duh). The loans are insured by the Federal Housing Association, which allows lenders to be more aggressive with their lending for mortgages.

There are mortgage brokers who specialize in FHA loans so you are going to want to ask around and find one near you!

Now just because FHA Loans give us access to  properties that we otherwise could not have afforded does not mean that we should spend all of our savings on the biggest property that we can get.  It is important to utilize this loan in order to make a sound financial investment in order to substantially grow in real estate later.

One of the advantages of the FHA loan is that it can allow people to get into real estate without having to get a group of two or three friends together where everyone chips in $20,000 to get some property that one of your friends promises is a deal!

There is also a loan called the FHA 203, which allows homebuyers to finance up to $35,000 of repairs on a property in the mortgage.  This allows real estate investor to finance a kitchen overhaul on their brand new rental property, which should add instant equity!  As the homebuyer, you never see any of this $35,000 as it is deposited into an escrow account and is released as the repairs are completed.

You’ve learned about what house hacking is and seen some of the advantages and disadvantages (I know, I know – it is obvious that the advantages clearly outweigh the disadvantages, I agree!) Now let’s take a look at some of the numbers from our calculators so that we can start looking for your first deal today!

Single Family Home vs. Multi-family Home

Let’s look at two houses.  I’ll walk you through the numbers of two properties below.  We will assume House A is a single-family home (SFH) and House B is a multifamily property.

House A SFH     
Purchase Price$250,000Monthly Mortgage$1,083Cash Flow-$1,438
Down Payment$8,750Other Expenses$355
Closing Cost$3,000Monthly Rent$0

House B Multifamily     
Purchase Price$250,000Monthly Mortgage$1,083Cash Flow-$851
Down Payment$8,750Other Expenses$968
Closing Cost$3,000Monthly Rent$1,200

We can see in the above graphics, that the houses were both purchased for the same price for a down payments of 3.5%.  The multifamily property in this example collects rent every month, which decreases their payments from $1,438 per month to $851.  And if they ever decide to move out this house will make them money every month.

It will be important for you to learn how to run the numbers.  You can look at some of our case studies here to see direct examples of how to run the numbers.  You will also want to verify the numbers that you are using with someone who is more experienced in real estate and hopefully he or she also invests in your local area!

One thing to note from the above graphic is the increased costs associated with being a landlord.  It is important to understand what these costs are and how to estimate them before purchasing a home!

The above example exemplifies the power that the FHA loans have given to everyone in order to begin to build tangible wealth.  The FHA loans provide an opportunity for everyday people to utilize a  small  down payment necessary  to purchase a cash producing property.  Utilizing this method allows you to join “the game” for a cheap entry point.

So what do you get from this first property that is so important anyway?

Hopefully, you have done your market research up to this point and the house that you buy appreciates naturally.  If that is the case, then congratulations!  You can now utilize the equity from that property in the future to help finance another deal!

Let’s talk about equity real quick.  Equity basically equates to this:

Equity = Total Amount You Can Sell The House For – How Much You Owe 

The cost of selling the house must also be subtracted from the equity.  Equity will give you options and optionality is a great thing when you want to find ways to finance potential deals.  Creative financing options will open a new playbook for you in real estate and really help you to grow your portfolio.

Now that we have conquered our first deal and have steady tenants in place it is the time to begin planning our next moves.  I would recommend waiting until you have stabilized your first property before you start searching for another one.  You just got this portfolio started and I don’t think you want to risk everything by trying to bite off more than you can chew as a newbie!

So now you have your property stabilized you get to do the real fun parts.  You have some experience in closing a deal and the actual steps that must be taken when purchasing a property so now is the time to find out which parts you liked and pursue strategies that utilize your passions in order to make profit!

 Recap

  • House Hacking: living in a rental property investment where tenants pay for you to live at a discounted (or maybe even free!) rate.
  • FHA Loans: Loans that are insured by the Federal Housing Association so that lenders are able to offer better deals to homebuyers.
  • House Hacking Advantages include:
    • Increased Ability to Save
    • Free Landlord Education!
    • Great Financing Options

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