House Hacking 101

The term house-hacking was coined by real estate investor Brandon Turner.*

There are different definitions for it, but it is basically "living in one room/unit and renting the extra rooms/units".

In the context of this course, House Hacking refers to purchasing a duplex, triplex, or quadplex, living in one unit, and renting the others.

We've all seen people post to Craigslist and Facebook, seeking a roommate to help offset the rent/mortgage.

The difference I want to show you here, is that you don't have to be a twenty-something recent grad to take advantage of this strategy, and you don't have to share your kitchen with a stranger.

You can have your own space by purchasing a multifamily home, and living in your own unit!

If you're dead set against living in a multifamily building, consider this scenario:

Let's say you slug it out, and house hack a duplex for one year.

The mortgage is $1,200/mo, and the rented unit is bringing in $900/mo. Your financial responsibility decreased from $1,200 to $300, the difference between the mortgage and the rent.

Over the course of that year, you're able to save your $900 portion each month, and now you've accumulated $10,800.

Guess what you can do with that? You can put that towards a $300,000 personal residence, at 3.5% down (FHA financing) or a $200,000 residence, at 5% down (conventional financing).

Play with the numbers, (I know different markets prices vary widely) but you get my point.

The longer you hack, the more you can potentially save!

Year 1 - $10,800

Year 2 - $21,600

Year 3 - $32,400, etc.

After one year, you could move out of the duplex, and move into your own home.

Here's the cool part - you aren't simply 'moving out'.

You're DOUBLING your rental income!

When you rent out the now vacant unit at $900/mo, you've got $1,800/mo coming in. After the mortgage of $1,200, you've got $600 left over.

Who couldn't use an extra $600 bucks a month?

[For those thinking ahead, YES, you absolutely need to account for expenses. The $600 difference isn't true cash flow, it's the gross amount. This is just a quick napkin sketch, to show you the income potential.]

The temporary sacrifice of 'your own home' now will reap huge benefits in the future, as you begin to secure your financial independence with your rental portfolio.

Which sounds better?

1) A piece of the pie - Renting (yes, you're not a homeowner until the principal mortgage balance is paid off!) a nice 4 bedroom, 3 bath home (with a mortgage of $1,300/mo), driving the nice car ($350/mo), and eating out several nights a week ($200/mo).

This is the appearance of wealth, a twisted version of the Dream that many aspire to, for the sake of appearing to have it all.

2) The whole pie - Owning several income-producing properties AND owning the 4/3 house, and owning (not paying on!) the nice car AND comfortably (not stressfully!) eating out several nights a week.

Now, obviously, Door #2 will take some time to accomplish. The goal is to get you thinking about prioritizing your household income allocation.

Think Save (Emergency fund), Invest (income producing assets), Earn (dividends/income from those assets). Repeat.

This is what creates wealth!

Door #1 has about $1,850/mo going out of the house. This doesn't even include student loan payments, credit card/personal loan payments, utilities, car insurance, gas, groceries, cell phone, cable/wifi, subscriptions (Netflix, Amazon Prime, Hulu, Apple Music, gym membership, etc.), or personal/family activities.

A household can easily spend over $2,500/mo on LIFE and not even realize it.

This is part of the reason many people feel it's so hard to 'get ahead'.

Even if you don't envision having a portfolio of rental properties in the future, house hacking just one home for a year or two can dramatically reduce those LIFE expenses and help you build up a healthy savings account. It's worth a shot!

[*Brandon Turner and BiggerPockets, Inc. are in no way associated with House Hack Nation.]

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