“House Hacking” is a new term for an old concept. House Hacking refers to the practice of buying a house that doubles as:
- Your primary residence and
- An investment property.
This essentially means that you can have your cake and eat it, too.
Hacking would commonly be used in situations where a person interested in building a rental portfolio may not be able to afford a primary residency in addition to purchasing a second property. “It is a really interesting niche where you can begin talking to people who want to buy their own place, but maybe cannot afford it,” said Charles Roberts, President of Your Castle Real Estate.
How Does House Hacking Work?
House Hacking is simply a launching pad for real estate investing. This practice allows you to use extra rooms or units in your home as rental spaces. Once you purchase your primary residence, the goal is to then rent out the extra space in your new home as a means to additional income.
After a period of time (our model uses two years), you then move out of Property #1, buy a new home (Property #2), and rent out the remaining space in Property #1. During this time, you will move into Property #2 and follow the same practice of renting out any additional space.
This pattern repeats itself indefinitely until you have the security to live independently from your rental properties. At the end of our model, you will have acquired four rental properties in the span of eight years and will have a six figure net worth of almost $800,000 – not including your other income and assets.
Property types common for hacking include:
- ADU (Additional Dwelling Unit, such as an apartment above the garage)
- Basement Suite
- Family Living Together
To help analyze the best deals, Your Castle and The Denver Metro Investment Group use a House Hacking Spreadsheet model created by Joe Massey, branch manager of Castle and Cooke Mortgage. For the purpose of our model, we have chosen to examine four 3/2 condos with exactly the same layout.
When building this model for yourself, you may adjust these numbers as necessary for your situation. Typically, disparity between values stem from differences in house prices, property taxes, or average rental prices. A best practice recommended by Roberts for estimating rental prices is by comparing similar homes on either Zillow or Craigslist. However, this model generally works across the board in different cities.
Chris Lopez, a prominent investor at Your Castle, says that it is important that those looking to start House Hacks, “…make sure to not hyper-fixate on costs and expenditures when deciding on a property. You will become paralyzed and never make an investment.”
Below is an example of the model used by Your Castle:
The numbers presented in this model are taken from a real deal executed by one of our Your Castle team members.
On FHA (Federal Housing Association) Loans:
- Must be for the purpose of securing a primary residence
- Cannot use it to finance a second primary residence if the second property is <100 miles away from the original property
- FHA requires 3.5% down on the loan
Again, these numbers are centered around the assumption that the investor will be moving out of Property #1 in two years’ time. Below is the Income Summary Assumption for the first two years:
On the initial summary, Lopez stresses that savings become a very big factor when investing in additional properties in the future. In this model, all savings stem from money being saved from living for “free” in the rental. If this is not possible, it is still highly encouraged to save as much as possible from additional income sources.
The money you save during this time will then be used to purchase Property #2. Below is a cost breakdown for the property:
This same formula and pattern will be used for Property #3, Property #4, etc.:
Note that at the end of Year Six, you will still end with money in your account, even though you bought a property. This is due to the savings that you will have ideally been building over time, and speaks to the importance of properly maintaining that account.
Note that at the end of Year Eight, you will have four investment properties and a net worth of over half a million dollars.
If we fast-forward 40 years using the same patterns and money inferences, your money flow will look something akin to this:
At 40 years, you will have a net worth that is situated well into the six-figure mark – still with only four rental properties!
Like all real estate, this model is speculative- but these speculations are based on facts. The Denver Metro Investment Group has conducted meticulous research, as well as drawing from the personal experiences of our own investors who have followed this same model.
House hacking is a delicate balancing act between your personal life and making your investments. You must also balance what works for you now, and what will work for you in the long run. When you look to purchase your first house, it must be someplace you are willing to live in now, and someplace you are willing to invest in long term.
These concepts can be fairly complicated. It’s important to remember that it’s all about making the right decisions for you — which may not be the same as what’s right for someone else. Simply do the math and figure out the best path for your needs.
If you are interested in attending one of our FREE classes on House Hacking, find the schedule and register for our November and December classes on our website.
Have you tried House Hacking? How has it worked for you? Let us know in the comments below!