Are you interested in real estate investing but aren’t quite ready to pull the trigger on 15 properties? Instead, are you looking for a more manageable first step?
Alyssa Carpenter, a personal finance writer turned house hacker, may have just the solution.
Read on for her insights on house hacking, the process that could be a seamless first step in your real estate investing journey.
Rents are rising higher than ever before—along with the cost of everything else, from gas to groceries, to dental care. As such, it’s easy to get stuck in a rent cycle. Your living expenses are so high that you may struggle to save any money from month to month.
If this sounds familiar, you may want to consider house hacking as a method to lower your largest monthly expense. House hacking is where you rent out part of your property to someone else for extra cash flow. This can significantly lower your own living expenses. Plus, house hacking provides a quick and efficient way to break into the real estate investing sphere.
As a house hacker, I was able to cut my living expenses in half. With an FHA loan at only 3.5% down, I was about to seamlessly purchase a duplex and rent out one side. This plan of action has allowed me to allocate more money to retirement, investing, and overall savings. Long story short, house hacking is a great strategy for anyone who needs to save a little extra money each month.
Personally, house hacking transformed my financial wellbeing and has allowed me to begin to plan for complete financial independence. You may be searching for an expensive dream home. Instead, you could look for a property that will allow you to live with less stress and leave more money in your pocket.
There are many different ways to house hack but, in short, house hacking is using your home to make extra cash flow and lower your living expenses. People opt to house hack by renting rooms, listing their home on Airbnb while they are away, or even buying a multi-family property and renting out units.
House hacking is often a smart financial move, because most Americans’ biggest expense is housing, and it’s one cost that the overwhelming majority of people simply have to pay. According to the U.S. Bureau of Labor Statistics, Americans spend about 33% of their annual income on housing, and you can’t cut housing from your budget like you can travel or eating out. For most of us, a significant chunk of a paycheck goes to housing, so finding creative ways to lower this expense is often a prudent choice.
House hacking is a creative way to lower expenses, and almost anyone can do it. For example, whenever I travel over the holidays, I list my property on Airbnb. Since it’s such a high demand time, I can charge $100-200 a night, which pays for holiday travel, dining, gifts, and more.
So, take a moment to consider how you could house hack. Do you have a spare room or guest house you could put to work? And, perhaps most importantly, what could you do with that extra money to further your financial position?
House hacking can make a huge dent in your living expenses, leaving you more money to save or invest. When you have rental income coming in each month, you can use this to supplement your mortgage.
With an FHA loan, you may be able to get a 30-year fixed-term mortgage. This means that your monthly mortgage payment will never change. Rents almost always go up, though. This means that you can charge a (typically increasing) market rate for your rental even as your mortgage stays the same.
A mortgage on a $300,000 duplex at a 5% interest rate will cost about $1,703 a month. Depending on your area, you may be about to get about $1,000 a month for rent from one unit. This leaves you with about $700 a month remaining to pay for your own unit. As the average rent in the US is $1,295, house hacking allows you to live even more inexpensively than renting, all while owning your own home and building equity.
Of course, in reality, the applicable numbers will depend on your financial situation, market, and investment goals. You’ll want to speak with an experienced home finance professional to ensure house hacking is right for you.
After moving out of New York City, I was sure of one thing—I was sick of paying rent. After all, New York City boasts the most expensive rent rates in the country, and I paid about $2,900 a month while I lived there. After two years of living in the Big Apple, I gave someone else $70,000. That’s money I will never get back.
So, when I moved to Austin, I knew I needed a plan. I began reading and researching house hacking. I had never owned a home before, so I qualified for an FHA loan, which allowed me to buy a duplex for only 3.5% down.
Within the first few months of living there, I renovated the property and placed a renter. After applying the rent to my mortgage, about $1,250 a month remained. And while some of that money went to the bank as interest, I was also able to start gaining equity in the home. Renters never get equity, even after $70,000.
Today, the property is worth $150,000 more than when I bought it, and I have a good amount of equity built. After saving for another down payment on a single family home, I moved out of my unit last year. Now both sides are fully rented. The rents completely cover the mortgage, and I earn $700 a month in cash flow.
Pro tip: Working with a partner, like Evernest, can make finding the right property, placing a tenant, and overall becoming a landlord that much easier. After all, real estate is a people business, and it helps to have someone experienced in your corner.
If this sounds attractive, you can easily get started with your own house hack! Think of where you currently live—is there a way you can start making money off your home? Could you rent a room or put your home? List it on Airbnb whenever you’re out of town? Or, maybe you could even rent out your parking space!
Start by considering how you can start house hacking in the short term where you currently live, but you can also begin to plan long term. Can you save money for a down payment on a multi-family property? Could you buy a house with plenty of spare rooms to rent? There are many ways to house hack, and the sooner you can start earning a little money on the side, the better.
I always heard from friends and family that owning a multi-family property was a dream. Millennials have to rent forever, right? Instead of accepting that notion as truth, I decided to take matters into my own hands and begin learning how to make homeownership a reality for me. I wish I would have known that it was easier than everyone else thought…
We’ve lived through some financially scary times, and more uncertainty may be on the horizon. From the recent global COVID-19 pandemic to rising inflation, it can feel like you are always on shaky ground financially. House hacking is one way to protect yourself from the turbulence and find success in trying times.
Take action to secure your financial future by planning your own house hack. Even renting a single parking space for $100 a month could turn into $6,000 in five years. Little steps will change your trajectory, so take your first step today.
You can learn more about my financial journey by visiting my personal finance blog about financial independence and retiring early.
Whether you’re purchasing one investment home or one hundred, you don’t have to go it alone.
If you’re ready to buy your first (or next) investment property, here are 3 steps to get started today:
Alyssa is a writer with FI/RE Manual.com. She purchased a duplex and owner-occupied for a year while renovating the property and, in that time, more than doubled total rents. The property now cash flows about $750 a month.
Start the conversation!