Today we’re attacking the topic of house hacking! Welcome back to the Rent To Retirement Blog where we write about all things real estate education and investing!
WHAT IS HOUSE HACKING?
House hacking is the method of using a little creativity in your living situation. In turn, this creates massive wealth in your life. It usually entails renting extra space in your home to another person. However, there’s no limit to how creative you can get. House hacking is not always the most comfortable, ideal, or traditional way to live. But the strategy is powerful beyond belief and can be customized in any way you want.
Below, we will go through a few different house hack scenarios and prove just how powerful this strategy is! Be aware, not all markets can support the same house hacking scenarios as others. Prices of property, market rents, and zoning can vary greatly throughout markets.
APARTMENT VS. CONDO
In the apartment or condo house hack, you have autonomy in just your specific unit, so the most obvious option is to rent out extra rooms or space in your unit to others. For instance, you have a 3-bedroom condo and its mortgage payment is $1,500 a month. You rent out the two unused bedrooms for $750/month each. This covers your mortgage payment and you are now living in your condo for free! In fact, you are basically getting paid to live there because your renters are paying your mortgage and therefore building your equity in the property each month! The incentive for your roommates is that they can live somewhere for $750/month as opposed to $900-1,000/month for their own 1-bedroom place!
Cost savings will also be realized by splitting utility bills such as water, electricity, and internet. Many people are looking to decrease their cost of living and are open to a communal style of living to achieve that. Sure, there is a decrease in privacy, but this is mainly where the power of the house hack is derived from; the willingness to be unconventional. If you’re really feeling ambitious, put up a divider in your living room to create an additional bedroom, rent it out for a few hundred dollars per month or live in the living room yourself while renting your third bedroom for an additional $750/month. Now you’re really cooking with gas!
SINGLE FAMILY HOUSE
In the single family house hack, you have more options! The more options you have with a property, the more opportunity there is to create wealth for yourself. We can apply the same idea from the apartment or condo scenario to the single family house hack and assume you have a 3-bedroom house. However, many single family homes have garages, driveways, and yards. No, I’m not going to suggest that you sleep in your garage but you very well could! The possibilities are endless! On top of renting out the rooms to cover your mortgage, more pragmatic strategies for the single family house hack include:
1. Turning a den or dining room into an additional bedroom. You’ll still have a living room now!
2. Charge additional fees for parking or just build the fee into the base rent. Tenants will pay a premium for off-street or covered parking!
3. Rent out the space in your garage or shed to someone with a classic car, small boat, or just boxes of junk they want stored.
4. If your neighborhood code or HOA allows it, rent out your yard to someone wanting to store an RV or other large items. This might be unsightly but so is a bank account with fewer than five figures in it!
Platforms such as Neighbor.com can help easily facilitate this and match you up with people in need of storage.
5. Lastly, my personal favorite, build an ADU (Additional Dwelling Unit) in your yard, above your garage, etc to turn your property into a multi-unit property or just let someone park their tiny house on your property!
This type of strategy tends to work better in rural areas or areas with looser zoning laws and less restrictive HOAs.
MULTI FAMILY HOUSE
The multi family house hack involves purchasing a property with 2-4 units. However, you’ll want to stay in this unit range because anything with five units or more is considered commercial real estate and your competition suddenly skyrockets as larger investors and companies look to buy these properties for income.
Your monthly mortgage payment on your duplex is $900/month. There is a 1-bedroom unit on one side and a 2-bedroom unit on the other side. You live in the 1-bedroom unit and rent out the 2-bedroom unit for $950/month. You just covered your mortgage payment ($900) and utility bills for the month, $50!
You now have a 3-unit building with a 1-bedroom unit, and two 2-bedroom units. Your monthly mortgage payment is $1200/month. This property isn’t as nice as the duplex above, so you rent the two 2-bedroom units out for $800 each. Your monthly income from these two units is now $1600/month so now you’re not only living for free but you’re getting paid $400/month to live there!
Make sure your tenants pay their own utility bills by having sub-metered utilities. This will act as an incentive for them to use less electricity, water, and gas which is environmentally friendly too!
Okay, I think you get the idea! House hacking is supremely powerful! In most cases, the more units added, the more relative income and equity accumulation can be derived from the property.
Allow me to do some additional elementary math to show the difference between renting and house hacking over a 10 year period if you’re not convinced already!
Renting a 1-bedroom apartment costs you $800/month or $9,600/year. Over 10 years, this equates to $96,000. This is without adjusting for rent increases which are usually around 3% per year on average. So, after 10 years, you are $96,000 in the hole.
House hacking a duplex and covering your mortgage payment each month, you would now have roughly $36,000 in accumulated equity in the property assuming a $190,000 price tag at a 4.75 interest rate.
The total difference in your net over 10 years is the spread between -$96,000 and $36,000. This is without ever assuming appreciation on the property or various tax advantages. The final difference in your net worth from renting for 10 years vs. house hacking for 10 years is a whopping $132,000 in net worth from choosing to house hack vs renting. That is HUGE! That’s a full college tuition for your kids.
GETTING STARTED WITH HOUSE HACKING
Stockpile cash for a downpayment on a property and purchase a home where the numbers work well. Yes, math is required to make a house hack work properly! It is harder to do in some real estate markets than others! If you are creative enough, it can work in just about any!
Use the apartment/condo, single family, or multi-family house hack strategies described above.
Enjoy reaping the financial benefits from utilizing all the potential your living situation has to offer.
I hope you are now sold on the power of house hacking and can implement some if not all of the ideas I have presented in this article. Make sure to buy intelligently, embrace communal living, share costs, and hack into the value of your living situation where others cannot see it!
If house hacking isn’t for you because of your personal preferences, real estate is still a great investment! Here at rent to retirement we have properties listed for sale on our website at renttoretirment.com and you could start house hacking right away! Set up a call with one of our investment counselors to start strategizing today.