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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.
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:
- 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!
- 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.)
- 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.
- 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.
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.