There are many strategies that can propel your Financial Independence journey that I am not an expert in. Without that insight, the FI Action Series would be incomplete so I have asked some of my friends in the FIRE (Financial Independence – Retire Early) space to lend their knowledge to me and provide an intro to their specialty with links back to their in-depth content. Today, Drew is going to share his knowledge on House Hacking.
My writing normally focuses on building passive income and being a landlord. I also write about financial independence and retiring early. Today I am looking forward to sharing my biggest life ‘hack’ – house hacking. This allowed me to get ahead and accelerate my path to financial independence.
Saving and investing are important parts of wealth building. I am not a fan of focusing on the small expenses like a latte at Starbucks. Rather, I choose to focus on bigger items in any budget.
Housing, transportation, and food are generally the three largest items on a budget. Most people spend a third of their income on rent. In expensive cities like New York, Chicago or LA that number is closer to 50%.
That is a lot of money going to pay for a place to live. Eff that, why would I want $0.50 of every dollar I make going to a roof over my head? And if that is rent – I will never see that again.
House hack to live and be financially free
House hacking is one of the best ‘hacks’ for housing and building wealth. It allowed me to go from negative net worth to over $500,000 in 4 years. I have successfully house hacked twice and been doing so for almost five years.
My first house hack occurred at my first property. This living arrangement lasted for almost two years. The house had three bedrooms and two bathrooms. I rented out the two extra rooms which covered most of my mortgage.
Owning a house in the Washington, D.C. area for less than $400/month was a big win. This served as a great foundation for wealth building and kept my cost of living low. A low cost of living allowed me to save more. The additional savings let me invest in stocks and real estate; which increased my passive income.
What is house hacking?
Not familiar with a house hack or house hacking? I will lay out the terms you need to know real quick:
House hack noun – an owner occupied property that keeps the owner’s cost of living low. This is achieved by renting out extra rooms or apartments. In some cases the owner makes a profit while living at the property.
House hacking verb – the act of living in a house hack to keep one’s cost of living low or getting paid to live while living in said house hack.
As you see, house hacking is actually a simple concept. Buy a house or multi-unit building and rent out the ‘extra’ space.
This means you can live in one room and rent the other bedrooms out. Or you could live in a house hacking duplex, live in one unit and rent the other unit.
The new property was a home run. I no longer had living expenses as my rents were about double my mortgage. I actually was getting paid to live there. Does life get any better than that?
Don’t have a lot of money? That is ok! House hacking FHA style is cool too. An FHA loan will allow you to buy a house hack with only 3.5% down; I did this twice. There are many different financing options that will allow you to house hack. Discuss your options with a mortgage broker.
Why you should consider house hacking
Eliminating your housing expense will do wonders for your ability to save. Instead of spending money on rent you could save that money. Better yet, you can invest and grow that money over time. This will significantly reduce your time to financial independence.
Not having housing expenses provides great flexibility financially. Living with roommates or dealing with tenants for a few years is worth the hassle.
House hacking is a great way to lay a foundation in your younger years to set you up for the rest of your life. A few years of aggressive savings will go a long way. You will be able to live a life most people only dream about.
Benefits of house hacking
Most homes are liabilities and not assets. This is a common teaching of Robert Kiyosaki. When you house hack, your home is actually an asset since it puts money in your pocket. By house hacking, you prove Robert Kiyosaki is wrong.
House hacking also provides the usual benefits associated with real estate. A house hack provides tax benefits through interest, depreciation, and expenses. Be sure to talk with your accountant.
Your tenants pay down your loan. Most house hacks will also provide positive cash flow every month. This means your rents are larger than your expenses and you have cash leftover at the end of the month.
Your house, like most real estate, will appreciate over time.
You can own a house. Have your tenants pay your mortgage, collect extra cash, enjoy tax benefits, live for free and get paid to own an asset that will likely increase in value over time.
What’s not to like? Why are you not house hacking?
Well, that about wraps up ‘House Hacking 101’. Please contact me if you would like to discuss house hacking ideas or want more information.