🏡 Owning a Home: Build Wealth + Tactics to Save More

On average, Americans spend 25.8% of their earnings on housing costs, but there are plenty of creative ways to reduce that through house hacking. Now, don’t let that conjure up images of roommates or bunk beds, you don't necessarily have to sacrifice your lifestyle to make it work. In 2020, I discussed how to house hack like a pro with Andrew Kerr (🎧 Ep14), who hosts The House Hacking Podcast and last year I read Robert Leonard’s amazing book The Everything Guide to House Hacking. Between my personal experience and everything I learned from those two resources I hope this leaves you with a few ideas you can use to save money on your housing costs.

🏘️ What is house hacking?

It’s finding creative ways to reduce your housing costs. Think of it as a version of real estate investing but for the property you live in. It could be a great tool to get your foot in the door if you want to do broader real estate investing or even if you don’t ever want to be a real estate investor, you can use it to save money on housing.

🤔 A mental framework for house hacking

Andrew (🎧 Ep14) provided a simple way to think about the process. Here are the two fundamental questions to consider:

1. What’s the best type of house hack that fits my needs? 

2. What’s the best type of tenant base that also fits the space, and what I like as well?

Let’s examine them more closely.

🏠 House hacking options

If you’re wondering, “What’s the best type of house hack for me?” here are six common types:

• A small multi-family involves buying a house with 2-4 separate living areas (e.g., duplexes, triples, fourplexes). One space is yours, while tenants occupy the other spaces. A building with four or less units will usually qualify as a residence and not be treated like a commercial property.

• A roommate rental involves renting out part of your living space to other tenants.

• An income suite can maximize your home’s space and convert part of it into an income-producing area. You can turn an unfinished walkout basement into an income suite.

• An accessory dwelling unit (ADU) is a separate structure on your property that can be rented as a secondary living space. The term is derived from the building code and is meant to be understood similarly to pool houses, garages, and guesthouses. 

• A work provided house hack is when you specifically choose a career path that includes housing, such as travel nursing. 

• Flipping a home is the process of buying, renovating, and reselling it. You can do a quick flip (under one year) or a slow flip, where you live there while renovating, which can be advantageous when it comes to reducing your capital gains tax on the appreciation… but more on taxes later.

🔍 A closer look at the ADUs

The multi-family market competes against a larger market of investors, so it might be hard to find a good deal. However, single-family homes with ADUs or income suites might be an even better option for house hackers.

Depending on where you live, building an ADU might be a much easier process than you think. In fact one of the co-founders of Airbnb just launched a company called Samara to make it even easier. You will probably still need permits to run electrical, plumbing, etc. but it can be an amazing option to start house hacking and earn some extra income. If we had room on our property for an ADU, we’d have already done it. They’re great because they’re so flexible:

• The ADU can be rented while you live in the house 

• The house can be rented while you live in the ADU 

• The ADU can be rented while your children are young, then let them live in it when they are older

🏚️ Any property can be hacked

Here are three examples of house hacking:

• Andrew’s multi-family (🎧 Ep14): He converted a corner store into three high-end apartments with an ADU. He and his wife lived in a two-bedroom, one-bathroom specialty-style home. Their property was fitted with high-end furnishing, 11-foot ceilings, and hardwood floors AND the rent from the other units covered the entire $20k/year in payments, plus gave them another $8-$10k in profit.

• Brandon’s multi-family  (🎧 Ep80): He has a multi-million dollar triplex on Maui with a pool that overlooks the ocean. He rents out the back unit to cover half of the mortgage and could easily rent out the other unit to cover the rest. 

• My income suite: I’ve had my own experience with house hacking (before realizing it was even a thing). We bought a three-bedroom San Francisco-style walk-up with a separate entrance on the ground floor. We didn’t need all three bedrooms at the time and I’m usually against getting a house bigger than is required, but we knew the income from renting would offset the additional cost and provide flexibility for future needed space. That was 7-8 years ago and it was amazing. We locked the door to the ground floor bedroom from the rest of the house and rented it to tenants that didn’t need a kitchen. Our rental income covered >50% of our entire mortgage payment and helped us meaningfully increase our savings rate.

🔽 Benefit: Reduced down payments

If you’re buying a 2-4 unit property for house hacking AND you plan to live in one of the units, then it should qualify as owner-occupied, which often comes with loan advantages like lower down payments or down payment assistance. Investment properties on the other hand often require at least 20% down. 

In a future newsletter, I’ll talk more about loans and mortgages, but if you’re looking to hack your house, consider an FHA loan. It’s ideal for those who’ve never owned a home or haven’t had an FHA loan. There are restrictions based on your income level and where you live, along with a 3.5% down payment requirement.

💸 House hack while renting

You don’t even need to own a property to house hack. Although the options are a bit more limited, here’s some tips. Since the property is not yours, you should do two things. Check your lease to see if it allows you to sublease the space. Additionally, ensure the lease allows short-term rentals (as well as the area you live, some cities/counties don’t allow short-term rentals). You should also speak with your landlord and have a plan for managing the space. From the landlord’s perspective, “more people tend to mean more risk” (higher maintenance, more challenges), but if you work alongside them and ensure that the process is aligned with the lease and eases their concerns, it puts you in a better position. Here are some things you can do (and share with your landlord) to minimize risk:

• Establish a screening procedure.

• Obtain a security deposit or collect a few months of rent in advance.

• Tell your landlord that you will be in charge of everything and remind them that more income for you increases their chances of getting paid each month.

• If necessary, consider giving the landlord a portion of the sublease rent.

🛌 Tenants 

If you’re wondering, “What’s the best type of tenant base that also fits the space and what I like as well?”, start by breaking them down into three timeframes:

• Short-term tenants will stay less than 30 days

• Mid-term tenants will stay for 30 days to 9 months

• Long-term tenants will stay for at least 9 to 12 months

Like any business, focusing on a specific niche may help you save costs and get a premium price for your property. Apply that thinking to your tenant base.

• When renting a short-term place (such as VRBO or Airbnb), tenants may be interested in something other than the home itself. They may not require a kitchen or laundry room, so having a microwave, mini fridge and coffee maker might be perfect. A minimal, streamlined operation, where the space is designed and intended for sleeping rather than living, might do the trick.

• Mid-term tenants often want a furnished place, but only sometimes with all the bells and whistles. For up to 6 months, these spaces provide a more “home” feel than hotels. These spaces are ideal for corporate executives or traveling nurses who want to engage with a new city or community. The tenants may not require a full kitchen since they may eat in hospital cafeterias or out at local restaurants and cafes. 

• A long-term tenant will require more from your property, but keep in mind that if you’re in a city or near a college, your tenants may have access to food, laundry, or extra benefits that you won’t have to provide fully. 

4️⃣ Building wealth with real estate

Since many house hacks involve owning the real estate, it’s important to remember there is more than one way to make money on a property:

1. Appreciation: The Case-Shiller index of real estate prices over the past 100 years shows that real estate prices have appreciated by 3% a year on average (despite dips, pullbacks, and recessions). While the stock market might have higher average returns, don’t forget that your real estate investment is likely leveraged because you didn’t put 100% down to purchase the home. 

2. Cash flow: You could generate income on top of the monthly costs, like mortgage, maintenance, utilities, taxes and insurance.

3. Debt paydown: Even if your property doesn’t appreciate and you never turn a profit, your tenants might be helping you pay down your mortgage, leaving you with more equity in the home each month.

4. Tax advantages: There are so many real estate strategies available, but the best advice I can give is to find a CPA or tax advisor with whom you can talk so that you understand which ones are best for you. Here are some of the advantages Andrew Kerr (🎧 Ep14) and Brandon Turner (🎧 Ep80) mentioned:

• If you itemize your deductions, you can deduct the mortgage interest on up to $750,000 of mortgage loans.

• As a real estate/rental business, you can deduct your expenses from your rental income (including a prorated portion of expenses if you’re also living there).

• You can depreciate the value of the buildings (not the land) to reduce your taxes, but remember that it will lower your cost basis, so you will have a larger tax liability down the road.

• Capital gains up to $250k (or $500k if married) could be exempt if you lived in residence for two of the last five years.

• By reinvesting your profits into other properties you can defer taxes indefinitely via the 1031 exchange.

• If you rent out a property for 14 or less nights per year, the income is tax free thanks to the Augusta Rule.

💼 House hack like it’s a business

If you start to get serious about house hacking, you should really be treating it from the mindset of an investment property (even if legally it’s owner-occupied). That means you should understand the following:

• Gross rents. Use tools like rentometer to determine how much your location could rent for.

• Vacancy. Determine the general vacancy rate benchmark can be found online for your city, and match it to your situation. If a tenant moves out, the property will be vacant for at least a week, if not a month, for cleaning and marketing, so a vacancy plan is essential.

• Maintenance. Account for minor repairs (e.g., window breaks) in your property. Common benchmarks are 5-10% of your gross rent.

• Capital Expenditures. Account for the extensive repairs and replacements that will occur over time (e.g., roof). Plan to set aside money each year for the eventual need. For example, for a $20,000 roof replacement in 10 years, set aside $2,000 a year (and maybe adjust that amount each year for inflation).

• Miscellaneous. Plan to pay or pass on the costs of running the property (e.g., utilities, lawn care, and snow removal). 

• Property management. Factor your time and level of expertise to manage tenants and the property. This is not required, but you could outsource the duties to a property manager that can cost ~8-10% of gross rents.

🧑‍🔧 Property managers 

Whether you’re house hacking or running an investment property, let’s look at the responsibilities of a property manager because many amateur real estate investors don’t have one. They have three primary responsibilities:

• Market and fill the property. Handle marketing, finding tenants, screening tenants (credit/background checks), pricing, and signing the lease.

• Manage the property ongoing. Handles tenant requests and the coordination of services/contractors (e.g., plumbers and electricians). Their fee covers the cost of managing, but not the actual service costs, so you will still get those bills. 

• Manage the lease renewal and turnover. Handles the resigning process, lease updates, and verification process for renewals. And if there’s no renewal, they’ll handle move-out, cleaning, and start finding a new tenant.

If you’re new to real estate it might be helpful to manage your property for a year to better understand the process, but after that I’d encourage you to consider turning it over to an experienced property manager.

📃 Protect yourself though great leases

If you plan to house hack, you must have an outstanding lease. Having everything written down is extremely important in the worst-case scenario. Managing your life can be challenging, and adding tenants can make it harder. So use a standard lease document or let an attorney draft the lease to protect against headaches, stress, and financial losses.

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Editor’s Note: Today, I’m grateful for the support of our partners Pacaso and MileValue. Opinions expressed here are the author's alone, not those of any bank, credit card issuer, hotel, airline, or other entity. This content has not been reviewed, approved or otherwise endorsed by any of the entities included within the post.