What is house hacking, and who coined the term? While it’s a newer term and a great name, this investing strategy has been around for a long time. Check out this module to see how each of the authors define it, the variations of it, and how it differs from traditional investing.
This module covers:
- House hacking variations
- House hacking vs. traditional investing
- A real-life example
- House hacking vs. Nomad™
- What strategy is right for you?
- Answers to common questions
What is House Hacking?
I believe BiggerPockets coined the term “house hacking.” While it’s a newer term and a great name that they coined, this investing strategy has been around for a long time. Here’s how each of us define it:
My definition: “Buying a property that you’ll live in while you’re renting out part of it to reduce your living expenses or live for free.”
Joe’s definition: “Living in a property and renting out a portion of it. The portion you’re renting out will generate rent for you that you can use to make mortgage payments and offset living expenses.”
Jeff’s definition: “House Hacking is purchasing a primary residence with a low down payment, renting out the other rooms or units to achieve the highest rental income to offset the mortgage costs, and aiming to live for free until the next property.”
House Hacking Variations
- Buy a duplex, triplex or fourplex; live in one unit and rent out the others.
- Buy a house, condo or townhouse; live in one room and rent out individual rooms.
- Use Airbnb or another service to rent out rooms or your property on a short-term basis. Make sure to follow the rules!
- Rent out the garage or RV parking pad for additional income.
- Have grandparents, parents and children all living in one property to save on living costs.
Ultimately, house hacking is a balancing act between your personal needs and your investing needs. Don’t get hyper focused on one property type or one way to generate income. There is no right or wrong way as there are several different versions of house hacking; it’s about what works best for your individual situation.
We’ve previously named Jeff White as the “poster child” for house hacking in Denver. Jeff has house hacked a fourplex, rented room by room and used Airbnb for short-term rentals.
I’m currently living in a variation of the multigenerational house hack. We converted the basement into its own living space for my mother-in-law. She helps with childcare and cooking meals. It’s a great setup for a family and saves us over $2,000/mo.
House Hacking vs. Traditional Investing
The number-one difference between house hacking and traditional investing is that you’re going to live in the property. Lenders give much more favorable terms to people who are buying a house as their primary residence than an investor who is buying a rental property.
Let’s say a person owns their primary residence and one rental property, then the economy hits a rough patch and he can only afford to pay one mortgage. Is he going to pay the mortgage on the house where his family lives or his rental property? Most likely, his primary residence. Lenders realize this and offer much more favorable lending terms.
The 4 main differences are:
- Down Payment - The down payment required for a primary residence can be as low as 0%-5%. For a traditional investment property, you typically need 15%-25%.
- Interest Rate - In general, the rates for a primary residence are significantly lower than they will be for any investment property.
- Primary Residence - You need to live in the property as a primary residence.
- One-Year Occupancy - It needs to be where you continue to reside for one year.
I helped Jeff buy his third house hack property for $485,000. Joe helped Jeff with his loan. Jeff was buying as an owner-occupant. Joe was able to offer a more favorable interest rate and require less of a down payment from Jeff. When it came time for closing, Jeff was required to bring only $17,000 to the closing table. Lenders don’t care if you’re house hacking, they just care if it’s your primary residence or not.
If I purchased the same $485,000 property as an investor, the lowest down payment would be $72,750 (15% * $485,000).
My down payment would be four times as much money! To keep it simple, the power of using owner-occupant financing is that you get to keep more money in your pocket. The added benefits gained from financing a house hack are overwhelming and are why the house hacking strategy is preferred over traditional investing if you are up for it.
|Down Payment on a $485K Property|
|Jeff (house hacker)||0%-5%||Lower||Required||Yes||$17,000|
|Chris (investor)||15%-25%||Higher||Not Required||No||$73,000|
House Hacking vs. Nomad™
If you start to gather information online about house hacking, it won’t take you long to see that the common house hacking scenario described is one in which you buy a duplex or fourplex, live in one unit and rent out the other unit(s). However, those blog articles are usually not written by Denver house hackers! The current Denver market makes it so buying a multi-family unit is not always the best or easiest move. We’ll discuss why in more detail in a later chapter.
Don’t get fixated on finding the “grand slam” of a house hack. Let’s say I wait for this best-case scenario and get my fourplex house hack. I’m living for free, and I’m cash-flowing about $1,000 per month from the rent I’m collecting. I’ve found this amazing property, so I decided to stay in it for 10 years.
At the same time, Jeff does the same thing but stays in his properties for the required one year. With the same timeline of 10 years, Jeff now owns 10 properties while I own one. In the long-term, who will be wealthier? Well it doesn’t take a mathematician to know that income from 10 properties will beat income from one property.
The term we use to describe the process Jeff used in the example above is Nomading™. It’s a term that was coined by our investor friend and Realtor in Fort Collins, James Orr. We use this term to help clients distinguish between traditional house hacking and the process of obtaining not just one property but the sequential process of buying multiple properties to build long-term wealth.
With Nomading™, you’re buying and living in a future rental property. You may or may not house hack with tenants or roommates.
Again, using our poster child, Jeff, he first bought a fourplex, lived in it for one year, then bought a single-family home, lived there for a year, then bought his current house. He’s combining traditional house hacking with the Nomad™ strategy to help expedite his accumulation of properties, which, in return, will accelerate his amount of wealth. Using the Nomad™ strategy to acquire and repeat is a powerful way of building your wealth through real estate.
Overall, you don’t need to find the perfect house hack or that one “grand slam;” you need to find good, “base hit” house hacks. Collecting those base hits over time builds the foundation and sets you up for long-term success.
It’s changing your mindset to start thinking more long-term. Don’t get stuck on finding something perfect today, but instead, think about what will make the most sense five, ten, or twenty years from now. The answer, to put it very simply, is owning multiple properties. In later chapters, we’ll discuss examples in detail.
If you want to stack your returns, combine house hacking and the Nomad™ strategy like Jeff does.
Note: For simplicity’s sake, I’ll generally combine the investing strategies and just refer to house hacking throughout this book.
What Strategy Is Right for You?
Our famous question, which we will continue to ask again and again through this series: Which method is right for you?
Our classic answer: It depends on your situation.
Are you single, no spouse and no kids? Does moving every one to two years, having roommates and managing a house with several people seem like a manageable task? If so, maybe you’re like Jeff and house hacking is a great fit!
Are you married, have two kids and want to focus on how to best balance improving your quality of life while also creating ways to save on living expenses? Maybe you’re more like me who is doing a multigenerational house hack, which is saving me over $2,000 per month. I live in a very unique situation. Many people cannot live with their family for numerous reasons. Many of my family clients focus solely on the Nomad™ strategy.
Maybe you’re wanting to try a house hack but, as life’s obligations of family and kids grow, you realize you want to stay in one house, so you switch your focus to a more traditional investment strategy.
Regardless of which strategy you choose or what modifications you apply, you have to make the decisions that are right for your individual situation. You have to be comfortable with your scenario and balance your priorities of investing with your quality of life. There is no clear-cut right or wrong answer. There is more to this than analyzing a property with a spreadsheet!
On paper we can make a case for both pros and cons of participating in house hacking or really any investing strategy. Ultimately, the important thing to remember is that with any investment strategy, house hacking included, your mindset will play a huge role in your success or failure of those investments.
Jeff illustrates a great example of exactly how his mindset sets him up to be successful, no matter the circumstances because, for every con we put on the list above, he came up with how that con could be looked at as a pro.
While moving every year to two years will seem daunting to most, if you have Jeff’s point of view, you can see how moving every year forces you to be more efficient in material belongings and live a more minimalist lifestyle. When you don’t have 4 tables, 3 couches, 2 TVs, multiple bed sets and boxes upon boxes of crap, suddenly, moving isn’t as daunting of a task as it could be.
When you take the time to properly and effectively screen your tenants, there’s less of a likelihood that you will end up with tenants who will cause issues. When you set expectations and house rules from day one, you set a standard for tenants to adhere to and hopefully cause less issues between roommates. We as humans also have a natural ability to easily adapt to most situations, so, once living with others becomes part of your new “normal” routine, it doesn’t have to cause you the stress you might think.
With higher leverage and risk, it’s good to remind yourself to think longer-term. House hacking allows for huge savings up front so you can increase your ability to save and accumulate properties quickly, but then allows you to have more options when the time for house hacking ends and you want to transition to a more traditional method of investing.
The great part about having Jeff as an expert in this series is we get to pull back the curtain and see exactly how Jeff does these things. In later chapters, we will get to see how Jeff screens his tenants, what expectations Jeff sets for those tenants and how he handles the day-to-day issues of living with other tenants.
How much money do I need to house hack?
When it comes to down payment and money needed to buy a house in the Denver market, be prepared to invest about 5% of the purchase price and around $5,000 in closing and acquisition costs. You can do it with less, but most of my clients end up investing between $20,000 and $35,000. You can do lower down payment loans such as FHA or VA, so make sure you talk with a lender to see what options you have.
Does house hacking still work in the Denver market?
With prices going crazy and inventory being so low in the Denver market, it’s easy to see why you would think this wouldn’t be possible, however, it is. Jeff is just one example. There are still plenty of deals out there and ways to make house hacking work! It’s about being able to think creatively, building the team of lenders and brokers who know the market, setting you up with good expectations and, ultimately, finding a property that works for your situation.
What is the best property type? A multi-family, right?
Classic answer: It depends! Don’t get hyper focused on one type of property. The best property type depends on your individual situation and several factors that may be out of your control. Continue on to chapter, The Best Properties for House Hacking, for more details.
I don’t want to live with tenants, what can I do?
You can focus on a property that has totally separate living quarters, such as a multi-family property or a house with separate entrances for a mother-in-law suite. Another option would be to focus on the Nomad™ strategy. It won’t matter which house hack method you used because you would have several properties which are contributing to your wealth and investment goals. Investors who live with tenants are usually doing so to save money for a down payment on their next property.
If you don’t want to live with tenants, you can also live in the property longer to save more, you can go out and create a side hustle to help increase your savings rate per month, or you can get creative and think about how your property can generate other forms of income—like renting out a garage or RV space.
My clients who are executing the Nomad™ strategy are families and couples who want more privacy and do need the house hacking income to save for the down payment on the next Nomad™ property.
Should I flip or house hack?
This is definitely a loaded question and everyone will have a different point of view, but in general, flipping produces a short-term gain while house hacking produces a long-term gain. Flipping is a job or business. House hacking, after you move out, is more of a passive investment.
To be a good flipper, you have to have lots of skills and relationships to make things move quickly and smoothly. Flipping is a business, not a hobby. If you are a good flipper, (not a lot of people are) in the Denver market, you can expect between $20-$50k in short-term profits.
With house hacking, you are able to achieve comparable returns for much less work and you get to cash-in on that year after year. House hacking is more effective for long-term wealth. Another great thing about house hacking is that you can get the hands-on real estate and flipping experience without the risks of a flip by being a live-in landlord. You know what breaks down and how to fix it, and you gain some insight if you were to then do a flip.
We’re not discouraging you from flipping, but many people spend years trying to do their first flip while renting a place. You can house hack at the same time to start building real estate retirement income. We get it, house hacking isn’t sexy, nor does it throw up big dollar amounts like flipping, but it’s a damn good way to start investing with very low risk.
Can I BRRRR (Buy, Rehab, Renovate, Rent, Repeat) and house hack?
Sounds good on paper, but it’s very hard to do in the Denver market. It’s basically a unicorn scenario. Ultimately, numbers don’t work because of how little down you get the house hack for. It is much more realistic to focus on house hacks which will build wealth instead of combining these two strategies. A big bonus with house hacking is that you’re only putting 0% to 5% into the property, which is the best-case scenario of a BRRRR. Investors cannot get the same financing that house hackers can.
How do I start?
Definitely finish the Ultimate House Hacking Guide for Denver.
Set up a consultation with myself and our team at www.DenverInvestmentRealEstate.com/Consult to answer your questions and create your real estate roadmap.
Can I house hack if I have student debt?
It depends, but the student debt itself doesn't disqualify you. Joe has given loans to people who have $10k, $50k and $100k in student loan debt. The biggest things to consider are how the debt compares to your income, can you afford payments on your student loans, can you afford payments on a new mortgage and do you have a cosigner. Every situation is different, so talk to a lender.