My Accidental House-hack
Updated: Sep 20, 2021
This is where it all began - my accidental house hack in 2015. I know this house doesn't look like much but this is the best thing that has ever happened to me. This 5 bedroom, 2 bathroom home not only started my real estate journey but it is going to make me hundreds of thousands of dollars one day & I have spent less than $7,000 to own it & less than 5 years later, I have $0 invested when all is said and done. That's an infinite return. How, you ask? Let me rewind a bit.
Let me start by explaining what a house-hack is. House hacking is a real estate investment strategy where you own a property and rent out some portion of the property for passive income. This is most commonly seen in multi-family rental properties, but it can also be done by renting rooms within a single-family home, an in-law suite, a garage apartment, an RV (or other type of housing) on your property etc. There are so many ways to make it happen. Side note: Check your local zoning laws to see what is possible for your area.
There are many benefits to house hacking. To me, the top 4 benefits are:
1: You eradicate, or come close to eradicating, one of your biggest monthly expenses - your rent. This brings your cost of living (COL) significantly down allowing you save/invest/pay-off debt every month.
2: Because it is your primary residence, your loan options are better. You can get a better interest rate & you can put less down.
3: Someone else is paying your mortgage and you get all of the benefits. If you chose the right property, you are benefiting from natural appreciation (average in US is about 3% a year) while your equity is increasing and your mortgage loan is decreasing. There are also tax benefits associated with owning a property.
4: It is the easiest way to get started in real estate investing. It doesn't require a ton of capital, you dip your toes into the process of finding and keeping tenants & it helps you understand what it takes to own and maintain a home.
Although I think the pros/benefits outweigh the cons, the most excuses I hear are:
1: Choosing the house isn't necessarily about you, but about what will work best for this investment. The first one may not be your dream home, but it will get you on the right track to getting it!
2: You have to share your space in some capacity.
3: What if the tenants don't pay? I hear this often and it's a valid concern. You will want to make sure you are still buying a property that you can afford! Try to keep your mortgage payment similar to what you pay in rent or at least in a range you can afford if something were to go wrong!
At the end of the day, you either want it, or you don't. Some sacrifices have to be made now to be living how you want to in the future. If I could do this over again, I would have done it earlier. I would have bought the house my freshman year of college instead of shortly after college.
Now, let me get into the specifics of my deal.
A little background about me just in case you haven't been following me for awhile. When I bought this house hack, I was over $80,000 in student debt alone working an entry level job. I was pretty much living paycheck to paycheck and working multiple jobs to stay afloat. I never thought I would be able to buy a house. I've always been a positive person, but I was also realistic. I knew making $13 an hour plus commission and having nearly 6 figures in debt wasn't putting me at the top of a list for a mortgage, or so I thought.
Although I never thought buying a house was possible for me, I spent my spare time watching HGTV and skimming through Zillow fantasizing about flipping homes & daydreaming about the day I could buy one. Real estate was and is truly a passion of mine. One day, as I was scrolling through Zillow.com, I found the perfect house at a reasonable price point (a price point that I still couldn't afford, but hey). I talked about it out loud. My roommate had one of her best friends over from out of town and I had known him for 2 days. He said, "let's buy it". Huuhhhhhh, I thought. He lived in Illinois at the time and this house was in Maryland. He was serious and I was shocked, but excited. So, we took the next steps.
I knew my debt to income was too bad to get a loan on my own. His willingness to co-sign & buy with me would help me seal the deal! We got pre-approved and then got a realtor and started to take the necessary steps. I remember it all happening so fast and thinking, is this really happening? During the negotiations, we didn't get as much closing cost assistance as we wanted and the fear of not being able to rent it out settled in. Because of this, I brought my boyfriend in on the deal for more up-front capital and less stress if we couldn't rent out all of the bedrooms. Each of us would be liable for 1/3 of the property. Therefore, 3 people were responsible for mortgage, 3 people were responsible if we couldn't find renters, 3 people were responsible for maintenance etc. It helped ease my anxiety about such a big transaction - although not necessary, it gave me a sense of ease.
It's funny now because I used to be embarrassed by this. I used to be embarrassed that I had to buy a house with 2 other people. And I was embarrassed about what the exterior looked like. Now, I like to tell my story whenever I can because I realize I am not the only person in the situation I was in. I like to let people know that it is possible.
Now, to the fun part - the numbers.
We bought it with the intentions of me living in one of the rooms & renting out the other 4 bedrooms. We each put $7,000 in a bank account to start. The $21,000 covered the down payment, closing costs etc with a few extra thousand leftover in a joint bank account for emergency funds. The rent from the tenants would cover the mortgage (PITI) plus we would have $900 leftover each month. We would save some in the account for emergencies, and the two others would walk away with a few hundred each month.
The numbers looked like this:
Rental Income: $750 + $750 + $650 + $600 = $2,750
Rental Income - Mortgage = $900 each month
I would live for free in one of the bedrooms & I would be splitting my utilities between all of my new roomies. My COL went WAY down. The two others made $300 each a month, we would save $200 a month for emergencies & pay $100 extra to the principal of the loan to make it go down faster. When I moved out, we would have an extra bedroom to rent out for an additional $650.
Not so bad, eh? All of our original investments ($7k each) were made back in less than two years (if we are only considering our income only, not including mortgage getting paid down).
So, what if we looked at this chart? What if we reversed it from the cost of renting to an investor mind-set? This is how much you could be earning each year.
With the numbers I provided, if our rental income remains consistent at $2,750, then our earnings will look like this:
1 year: $33,000
5 years: $165,000
10 years: $330,000
15 years: $495,000
Keep in mind that this does not consider your expenses, but you are also not paying them, your tenants are. And your taxes will still consider it all income.
Now, go back up to the con list and tell me this is not worth it. With all things considered, we have all been paid back our investment and we continue not to pay anything out of our pockets to maintain the property, or to pay down the mortgage. On top of this, our home also naturally appreciated. We bought this house for about $290,000 4.5 years ago and it is now valued at $330,000. Therefore, we have made $40,000 just for holding on to it.
When we did this, I had NO IDEA what I was doing. I didn't even know it was a known real estate investing strategy. I did not understand the value of what I was doing until I did it. This opened my eyes to real estate. I am sharing this with you because now you can do it with intention and understanding what you are doing.
I have now moved out but we have not stopped this strategy. It is hard to go back to paying your own mortgage after seeing how effective this is. I am not sure we will ever go back no matter what we can afford! After growing up in a household with 2 parents and 5 siblings, I can live anywhere!
If I understood what I was doing before I did it, what would I have done differently?
1: I wouldn't have bought an already flipped house. I would've bought a fixer upper & rehabbed it for extra equity - forced appreciation.
2: I would've had a more experienced realtor. Not to knock our realtor, she was great, but I ended up getting my real estate license during this process because I was signing documents that I didn't understand and that couldn't be explained. I had no idea what was going on. In the end, I am happy I got my license. This transaction allows me to relate to my clients more. It allows me to see the transaction from a different lens. I understand what they are going through & I also know the questions they didn't know they had.
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