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Mustard Seed Money

Mustard Seed Money

How I Used House Hacking to Grow My Net Worth by $100,000

January 19, 2018

THIS POST MAY CONTAIN AFFILIATE LINKS. PLEASE READ MY DISCLOSURE FOR MORE INFO.

 

Today, we have a guest post from Erik who runs the blog The Mastermind Within, a blog looking to help others in the areas of personal finance, self-improvement, and entrepreneurship. He loves to help others and uses his blog as an outlet for this passion. Erik will be sharing his story of house hacking.  Specifically, he will share how it has helped grow his net worth to over $100,000 at age 25.  Read why he recommends it to all young adults.

 

In the summer of 2015, I bought my first home. Like the author of Mustard Seed Money, I was 23. After reading about the benefits of real estate for a few years, I wanted to dip my toe into investing, and rent out the spare bedrooms to my friends – the concept of house hacking.

 

I took a risk, and it paid off. In the last 2.5 years, I was able to pay off my consumer debt, and also grow my net worth over $100,000. Looking back, I made a great decision to buy a house. At the time though, it was quite stressful, and definitely a risk given my financial situation.

 

In this post, I will be sharing with you how I used house hacking to bring in over $39,000 in rental income, pay down over $27,000 in mortgage debt, and increase my net worth over $100,000. Finally, I’ll share why I believe we should look to rent out our unused stuff to speed up the time to financial freedom.

 

What is House Hacking?

First, for those unfamiliar with the term, house hacking is buying an owner-occupied property and getting paid to live for relatively cheap or free.

 

How are you able to live for relatively cheap or free? You get a house which has rental potential, and rent out your additional rooms or units to other people (friends, Craigslist people, strangers, etc.) House hacking allows you to get into the real estate game and also have your housing subsidized by roommates or tenants.

 

House Hacking to Grow My Net Worth by $100,000

 

My House Hacking Story

It was June 2015. I had just finished up my Master’s degree in May and have been working full-time for about 5 months. I was paying down my student loan of $15,000, and was looking to start saving for retirement. Life was good.

 

Over the past few years, I had been reading about different wealth creation strategies on various blogs. I was interested in building extreme wealth and was interested in real estate. I’d dabbled in some stocks by trying to day and swing trade about $750, but didn’t have too much success. I was renting at the time and my friends and I were interested in moving to a vibrant and hip community in a different part of town.

 

The problem was there were no available options for 4 people where we were looking.

 

Then, a clever idea popped into my head. I was sitting on the couch with my buddy and said to him, “Hey, I know we are kind of striking out with the whole apartment search… I wonder what I could buy.” That set off a 1 week search for my house.

 

Buying a House in 1 Week

In the next week, I went from couch to lender’s office to house showing to agent’s office.  I’m someone who takes action when I want something – and just 6 days after deciding to buy a house, I had signed a purchase agreement.

 

My roommates were stunned, but were happy to know that they had housing for the next year or so. Financially speaking, my mortgage would be $1,820 a month, and I would be receiving $1,650 in rent a month from 3 of my friends.

 

Paying only $170 in “rent” is a fantastic deal, and I secured this for the first year after becoming a landlord and bringing in my friends.

 

Why is House Hacking so Great?

There are 4 reasons why I believe house hacking is a great early age wealth building strategy. House hacking allows you to live for cheap and gives you many options for your money:

  1. Passive Income with Low Capital Requirement
    • When I bought my house, I was using FHA financing. I put 3.5% down for my down payment, which turned out to be roughly $10,000. My monthly rental income, as I mentioned above, was $1,650. On a yearly basis, this is nearly $20,000!
    • For $10,000, I was able to create an income stream of nearly $20,000. To create a similar income stream with the stock market, I would need nearly $500,000 in investable assets!
  2. Appreciation through Owning an Asset
    • Houses are an asset and have the potential to increase in price. Housing prices typically increase 2-3% a year due to inflation (sometimes more when there is limited housing supply or the house is in a desirable area.)
  3. Tax Benefits
    • I mentioned above that for the first year I was bringing in $1,650 a month in rental income. This resulted in about $19,000 in rental income for the first 12 months. Here’s the best part: I was able to claim part of my insurance, interest, and any repairs as expenses. In addition, depreciation has a huge tax impact for home owners.
    • For the first year, my taxable income was about $9,000, or a reduction by $10,000.
  4. Gaining Landlord Experience
    • Before owning my house and renting it out to my friends, I had zero landlord experience. I didn’t understand many of the legal ramifications of being a landlord, and wasn’t very handy.
    • I’m now a more handy, and definitely more comfortable going forward if I buy another property to rent out.

 

Improving My Financial Situation Through House Hacking

Now, on to the numbers of how I used house hacking to save over 40% of my income, helped pay down my consumer debt, and increase my net worth to over $100,000 at age 25.

 

Getting Paid $39,000 for Living in my Own House

Since I started house hacking, I’ve made $39,325 in rental income.

 

House Hacking to Grow My Net Worth by $100,000

 

I didn’t do anything special – all I did was purchase a house with 3 rooms and I rented out 2-3 of those rooms to my friends. I was literally being paid to live, and it was amazing.

 

Only Paying $7,600 in Rent

As I mentioned above, this income went straight to paying down the mortgage. The difference between my mortgage payments and rental income was only $7,600.

 

But here’s the best part: I was also paying down my mortgage balance each month. Even though I was technically paying a little bit out of pocket to cover the difference of my rental income and mortgage, I was gaining equity through my mortgage payment.

 

In the past 2.5 years, I’ve increased the equity in my house by over $27,000. I’m not looking to pay it off early as of yet – I have a 2.625% interest rate, but these extra mortgage payments will drastically reduce the amount of time I spend paying down the mortgage in the future.

 

Owning an Appreciating Asset

As I mentioned in the most last section, I decreased my mortgage balance by a little over $27,000 since I started house hacking. In addition to increasing my net worth through paying down the debt, the house I own has appreciated. Houses are assets, and tend to appreciate over time.

 

While I don’t know if I could sell it at this level, at least someone thinks my house is worth quite a bit more than when I purchased. Take a look at a recent RedFin estimate of my place:

 

In the last 2.5 years, I’ve increased the equity in my house by nearly $25,000, but I’ve also been holding an asset that has appreciated by nearly $70,000! This means I’ve increased my net worth nearly $100,000 in 2.5 years by LIVING and having shelter. Amazing.

 

Paying Down Debt

With rent coming in at the beginning of the month, I was able to make payments on my debt, make other investments, and save up money for  emergencies more effectively.

 

I had about $8,000 left on my student loans when I started house hacking. After buying my house, I paid these loans off in 4 months because I was able to throw more money at them than before and by pre-paying my loans, I was able to save on interest. After finishing my student loans off, I loved the extra cash flow. I could move money to different accounts or pay off my bills and not have to worry about the next paycheck.

 

Other Additional Comments on my House Hacking Experience

First off, being a landlord isn’t all that bad when you make sure to have a roommate agreement and lease in place. My roommates were solid gentlemen – they didn’t always pick up after themselves, but they are very nice and friendly people. My living experience with roommates was great and I’m very happy with the location I’m in.

 

I’ve spent about $1,500 on various repairs and fixes, put proper grading around my house for $5,500, and bought new windows and a door for roughly $12,000.

 

I’ve been lucky that I haven’t had my 28 year old furnace go out, or a pipe burst. I don’t think house hacking is for everyone, but it’s definitely something I would recommend to all.

 

How You Can House Hack

Anyone can house hack if they want to. I’d recommend house hacking because it’s both a boost to your income and it’s an investment in real estate. You improve your cash flow, and get invested in one of my favorite asset classes.

 

Why do I like real estate as an asset class? Real estate is:

  • Accessible – Anyone can buy it
  • Appreciable – Can increase in value over time
  • Leverageable – You can buy on margin and borrow against equity
  • Rentable – Cash flow baby!
  • Improvable – Through sweat equity or contracting out
  • Deductible/Depreciable/Deferrable – Amazing tax benefits

 

Looking for duplexes in your area, or homes with extra rooms you can rent out are fantastic ways to get started with house hacking. In addition, I would also recommend reading different books on real estate. Reading and learning will you become more familar with the various real estate investing concepts.

 

Other Bloggers Renting Out Their Space

One of my fellow personal finance and real estate bloggers, Guy on FIRE, has amassed a nearly $500,000 net worth by age 30 through house hacking and real estate.

 

By buying a multi-unit property (such as a duplex or triplex), you can have the privacy of a single family home. Plus, you can rent out the remaining units to cover your mortgage and reduce your housing costs.

 

Another solution to renting out your unused space is through AirBnB. I’ve never done it myself, but I know of many people who are successfully doing this. One of them is a friend of mine, Financial Panther, who rents out one of his rooms on AirBnB. He is making a pretty good amount each month, which is helping to cover part of his mortgage.

 

There are many ways to reduce housing costs. Depending on your level of comfort with renting out your house to others, there are various solutions you can try.

 

Concluding Thoughts on House Hacking

House hacking is amazing and I recommend anyone who has an interest in getting ahead financially to consider it. These days, it is definitely tough with student loans, the want to live in luxury apartments, and the increased responsibility of being a landlord. All of those things considered, it is more than worth it financially. As I mentioned above, I increased my net worth by over $100,000 just by living. What could you do?

 

At the end of the day, house hacking is all about reducing one of the main 3 big expenses: housing, transportation, and food. Focusing on reducing these will have the biggest impact on your financial situation. Yes, it’s easy to look at that $4 latte each day and think dropping that will help reduce your expenses, but honestly, $4 a day is $120 a month. Switching houses or apartments could result in a $500 per month saving with little to no effort – and you’re still caffeinated. 🙂

 

I believe we all should be cognizant of these 3 expenses.

 

Readers: have you thought about house hacking, or other methods of sharing your unused stuff? If you have house hacked, did you think it was worth it? How are you looking to increase your savings rate?

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Comments

  1. Erik @ The Mastermind Within says

    January 19, 2018 at 6:20 am

    Thank you for the opportunity to share my story with your readers MSM!
    Erik @ The Mastermind Within recently posted…The Benefits of Index Fund Investing: Why I Own Thousands of CompaniesMy Profile

    Reply
    • Mustard Seed Money says

      January 20, 2018 at 9:55 am

      Thanks Erik for your awesome post!!!

      Reply
  2. Mrs. College Rental says

    January 19, 2018 at 6:59 am

    If only I had the same foresight as you at that age, Erik… Great job!
    have you considered investing your cash flow into something else instead of paying down the mortgage given your really low mortgage interest rate?
    Mrs. College Rental recently posted…How We Found a Buy One Get One Free Rental PropertyMy Profile

    Reply
    • Erik @ The Mastermind Within says

      January 19, 2018 at 7:08 am

      Yes, in the middle of 2017, I started a business, and also now am working to max out my 401k and Roth IRA while I’m still working at my 9 to 5.

      I’ve realized that even with PMI, the money that will go towards debt should instead go towards investments. Building a strong investment base will help in the coming years!
      Erik @ The Mastermind Within recently posted…The Benefits of Index Fund Investing: Why I Own Thousands of CompaniesMy Profile

      Reply
  3. Chris @ Duke of Dollars says

    January 19, 2018 at 6:59 am

    Interesting strategy – thanks for sharing!

    My biggest concerns would be having terrible roommates, losing mobility for career moves, and not being able to find people to fill out the place.

    If you’re able to cover the mortgage without help, probably not a huge issue, but does mess up the strategy a bit.
    Chris @ Duke of Dollars recently posted…Could This Little Haircut Doodad Increase Your Net Worth by 100K?My Profile

    Reply
    • Erik @ The Mastermind Within says

      January 19, 2018 at 7:10 am

      You are welcome Chris 🙂

      I like to look at life with a glass half full! There are always negatives, but with proper screening and a solid location, you can be successful.

      Happy Friday!
      Erik @ The Mastermind Within recently posted…The Benefits of Index Fund Investing: Why I Own Thousands of CompaniesMy Profile

      Reply
  4. Tom @ Dividends Diversify says

    January 19, 2018 at 7:25 am

    Hi Erik, Great post. I didn’t really know what house hacking was until now. It wouldn’t be for me.
    I was burned out with roommates after college, so I lived alone until I got married. It was a higher cost living option by my choice. House hacking truly has great financial benefits if you are committed to it and can pull it off so well like you did. Congrats. Tom
    Tom @ Dividends Diversify recently posted…What I Have Been Investing in LatelyMy Profile

    Reply
    • Erik @ The Mastermind Within says

      January 19, 2018 at 7:46 am

      Thanks Tom for stopping by and the comment! I’m living alone now and it’s amazing – I can’t blame you 🙂 Have a good weekend.
      Erik @ The Mastermind Within recently posted…The Benefits of Index Fund Investing: Why I Own Thousands of CompaniesMy Profile

      Reply
  5. Ms. Frugal Asian Finance says

    January 19, 2018 at 7:40 am

    I’ve seen the story on Erik’s blog before, but I always feel inspired whenever I read it again.

    Great job landlording and growing your net worth!
    Ms. Frugal Asian Finance recently posted…Boy Or Girl & How Many Kids Should You Have?My Profile

    Reply
    • Erik @ The Mastermind Within says

      January 19, 2018 at 8:03 am

      Thanks Ms. FAF for the compliment 🙂 Onwards and upwards!
      Erik @ The Mastermind Within recently posted…The Benefits of Index Fund Investing: Why I Own Thousands of CompaniesMy Profile

      Reply
  6. Leo T. Ly @ isaved5k.com says

    January 19, 2018 at 8:26 am

    Great job with starting early and investing in such a great asset that has the ability to appreciate over the long run.

    I also do house hacking too, but in a different way. I am currently living in my primary residence and I refinanced my mortgage after my home has appreciated significantly. I use the proceeds of my refinancing to further invest in the real estate market and the stock market.

    Borrowing to invest is not for everyone, but if you have the discipline, your money will eventually work for you and you won’t have to work for money again.
    Leo T. Ly @ isaved5k.com recently posted…Are Your Finances Better Than The Average Canadian’s Finance?My Profile

    Reply
    • Erik @ The Mastermind Within says

      January 19, 2018 at 9:10 am

      Using other people’s money is a great way to build wealth. If wealth is the goal, then using debt wisely can help you reach that goal.

      That’s a smart way to take advantage of appreciation!

      Have a good weekend Leo
      Erik @ The Mastermind Within recently posted…Treating Blogging as a Business and Why I Made The Mastermind Within a Sole ProprietorshipMy Profile

      Reply
  7. Bernz JP says

    January 19, 2018 at 8:47 am

    Great story and strategy! Just wondering if your roommates stayed with you all these years? For you to start that age is really awesome but I was wondering if you had a good job prior to purchasing the house. Did you buy the house all by yourself at age 23?

    Reply
    • Erik @ The Mastermind Within says

      January 19, 2018 at 9:08 am

      Thank you Bernz. They stayed with me for 2.5 years, and now I’m living alone.

      I was working at the time and did buy the house all by myself. I did get a short term loan of $3,000 from my dad, but was making solid money and have since paid him back.
      Erik @ The Mastermind Within recently posted…Treating Blogging as a Business and Why I Made The Mastermind Within a Sole ProprietorshipMy Profile

      Reply
  8. fin$avvy panda @ finsavvypanda says

    January 19, 2018 at 9:41 am

    Hi Erik!

    This is an excellent post. We are doing something similar, instead I’m renting one of my units to a family. My fiancé and I live in the basement unit. I definitely love this concept. Tenants help you build equity, our housing expenses are a lot less and we don’t even feel deprived at all!

    Another thing is that the family makes us feel safe bc there’s always someone Home looking after the house.

    Experience is another great benefit. Oh yeah, it also allows us to save more money and invest in the markets bc we don’t have to cover most of the mortgage cost. We were going to buy a house anyway so may as well reap some benefits if we are not using all the space.

    Another good consideration is renting out your parking space if you have lots and living in a high demand area. More passive income!! ❤️

    Good stuff, Erik!!
    fin$avvy panda @ finsavvypanda recently posted…Make Compound Interest Your BFFMy Profile

    Reply
    • Erik @ The Mastermind Within says

      January 19, 2018 at 10:16 am

      Thank you fin$avvy for the comment!

      I’d love to get into the duplex or triplex game – that seems to be a great compromise between full rental property and house hacking since you get your own space.

      Renting out my parking space would be very interesting… I may have to look in to that!

      Erik
      Erik @ The Mastermind Within recently posted…Treating Blogging as a Business and Why I Made The Mastermind Within a Sole ProprietorshipMy Profile

      Reply
  9. FullTimeFinance says

    January 19, 2018 at 10:02 am

    You know, I had a friend in college whose parents bought a house next to campus. He stayed there and his friends rented from them. Not quite a starting out house hacking but still seemed like a cool idea.
    FullTimeFinance recently posted…Insurance You Should Never PurchaseMy Profile

    Reply
    • Erik @ The Mastermind Within says

      January 19, 2018 at 10:15 am

      The parents made out great on that deal I’m guessing!
      Erik @ The Mastermind Within recently posted…Treating Blogging as a Business and Why I Made The Mastermind Within a Sole ProprietorshipMy Profile

      Reply
  10. Carlos says

    January 19, 2018 at 11:51 am

    Hi Erik,

    Congratulations on your house hacking adventure. It has paid off … I know you have quite a few things going for you and are involved in several endeavors. Just make sure you don’t spread yourself too thin.

    Congrats on maxing out your 401k this year. I will do the same for 1st time in my life … but then again, i can afford it now …

    See you later on your blog …

    Reply
    • Erik @ The Mastermind Within says

      January 19, 2018 at 12:14 pm

      Thanks Carlos for stopping by MSM’s blog 🙂

      I’m working on focus right now. Congrats on maxing out your 401k – I’m very happy for you to be able to do so!!!
      Erik @ The Mastermind Within recently posted…Treating Blogging as a Business and Why I Made The Mastermind Within a Sole ProprietorshipMy Profile

      Reply
  11. Jason says

    January 19, 2018 at 12:00 pm

    I wish I would’ve found the house hacking concept a long time ago. Alas, we have a single-family home, but I think it is a great idea for people starting out.

    Reply
    • Erik @ The Mastermind Within says

      January 19, 2018 at 12:15 pm

      Thanks Jason for stopping by 🙂
      Erik @ The Mastermind Within recently posted…Treating Blogging as a Business and Why I Made The Mastermind Within a Sole ProprietorshipMy Profile

      Reply
  12. Cathlene says

    January 19, 2018 at 12:42 pm

    House hacking! Love the term. That’s what we’re doing. Have 2 cottages on our property. Greetings from South Africa.

    Reply
    • Erik says

      January 19, 2018 at 9:33 pm

      Thanks for the comment Cathlene!

      Reply
  13. Jennifer Beadles says

    January 19, 2018 at 1:34 pm

    This is a fantastic article Erik! My husband and I started buying rentals in our early 20’s, we took turns buying houses as owner occupants which we converted to rentals, and lived in half of a duplex for a year. Doing these creative property acquisitions allowed us to reach FI in 7 years, and we’ve built a ton of equity in doing so. I love reading out other peoples stories on how they’ve used the house hacking strategy to build wealth and income streams, and yours is an amazing example of how simple it really is!

    Keep up the great work and thank you for sharing!

    Reply
    • Erik says

      January 19, 2018 at 9:38 pm

      Thank you for your kind words 🙂

      I’m really happy for you and your success over the past few years 🙂
      Erik recently posted…Treating Blogging as a Business and Why I Made The Mastermind Within a Sole ProprietorshipMy Profile

      Reply
  14. Olivia @ Birds of a FIRE says

    January 19, 2018 at 5:09 pm

    Makes sense! I wish we could house hack over here. We’re in a HCOL city where it doesn’t even make sense to buy unless you’re going to live there for 10+ years. Instead we’re buying rental properties out of state and getting a property manager for them. Peopleshould def do this though!

    Reply
    • Erik says

      January 19, 2018 at 9:35 pm

      That sounds like a great strategy and something to look in to!

      Make a lot of money in a high income of living area and take advantage of the lower!
      Erik recently posted…Treating Blogging as a Business and Why I Made The Mastermind Within a Sole ProprietorshipMy Profile

      Reply
  15. Harmony@CreatingMyKaleidoscope says

    January 19, 2018 at 6:31 pm

    I really wish we would have tried house hacking when we were younger. With five kids it’s not really an option anymore. But this is a really good option for singles or married couples with no kids. Thanks for sharing your story and great job!
    Harmony@CreatingMyKaleidoscope recently posted…Make A Resolution To Track And Improve Your Credit Score This YearMy Profile

    Reply
    • Erik says

      January 19, 2018 at 9:36 pm

      As long as I’m single, I’m going to try different ways to build wealth!
      Erik recently posted…Treating Blogging as a Business and Why I Made The Mastermind Within a Sole ProprietorshipMy Profile

      Reply
  16. Bob says

    January 20, 2018 at 6:52 am

    Hi Erik,
    Great job of having the foresight to buy a house at such a young age and to see that you could build some equity that way. I do have a couple of questions though so my math is straight.
    1. Is your mortgage of $1820 per month including property tax and insurance?
    2. Your article says to received $39,325 in rents so far and had $19,000 in repairs is that correct?

    Thanks for the article!

    Reply
    • Erik @ The Mastermind Within says

      February 1, 2018 at 5:05 pm

      Thanks Bob for the comment.

      Yes, the $1820 a month included tax and insurance.
      #2, the $19,000 was for improvements, not necessarily repairs 🙂

      Have a good one!
      Erik @ The Mastermind Within recently posted…My Values and Purpose – Episode 1 of The Mastermind Within PodcastMy Profile

      Reply
  17. SMM says

    January 22, 2018 at 9:45 am

    So many benefits of house hacking. Anyone should do it who has the ability. It basically puts a turbo in paying down your debt. You also get to develop relationships with your tenants in the process. 🙂
    SMM recently posted…Simple Robinhood ReviewMy Profile

    Reply
  18. Kate Ashton says

    February 14, 2018 at 10:44 am

    We did this for a while and then sold it when we had to move out of state. It is a great idea and works!

    Reply
    • Mustard Seed Money says

      February 16, 2018 at 6:53 am

      Thanks for sharing Kate!!!

      Reply

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