When I wrote How to Go from Zero to Millionaire I detailed what I would have done differently financially if I had to do it all over again.
But after some time and thought, I realized there are a couple things missing even from that re-writing of history. One of them: I would have gotten into house hacking.
Many of you have probably heard of house hacking, but for those who haven’t, it’s basically buying a house (like a duplex), living in one side of it, renting out the other to cover your housing costs, then buying a second place (fully renting out the first), and rinsing and repeating.
It’s a great way to build wealth using something similar to the “buy one house per year for 20 years” method.
So when writer Jamie Cattanach, who has been featured at Fodor’s, Yahoo, SELF, The Motley Fool, Roads & Kingdoms and other outlets, offered to write a piece for me on the subject, how could I refuse?
Then the piece got even better when Jamie interviewed Scott Trench. Jamie will tell you about Scott below, but just let me say here that he’s a very impressive young man. If I had 10% of his maturity and ability when I was his age, I would probably be a decamillionaire today. Yes, he’s got that much on the ball IMO.
Anyway, that’s enough rambling from me. Let me now turn it over to Jamie to detail the steps in house hacking…
As an ESI reader, you already know the secret to wealth accumulation. It’s right there in the name of the blog: earning, saving and investing.
Of course, the day-to-day reality of actually making that process happen isn’t always easy (despite the acronym). But what if there were a way to make all three of those smart money moves…just by taking care of one of your most basic human needs?
What is House Hacking, Exactly?
We all need to keep a roof over our heads, and doing so is usually one of the biggest-ticket items in our budget. Whether you rent or own your home, you’re likely paying hundreds of dollars a month — or more — toward keeping yourself sheltered.
Enter “house hacking,” a term coined by real estate investor Brandon Turner. It’s a simple idea with a huge financial payoff, and it’s guaranteed to catapult your wealth accumulation strategy to the next level.
Although there are a number of ways to go about it, the basics of house hacking are simple: It’s finding a way to turn what’s likely your largest expense — housing — into an earning opportunity, or at least breaking even.
In most cases, this is done by becoming an owner/occupant in a multi-family property, thereby offsetting your mortgage payment (and ultimately generating profit) by collecting rent from lessees.
But any living situation that helps you build wealth is house hacking, and today’s house hackers have gotten even more creative, sometimes utilizing sharing platforms like Airbnb to turn their homes into income-earning factories.
House hacking is a genius money move for a few reasons. First, homeownership is already (usually) a solid financial tactic, since property tends to appreciate and build equity. And second, you’re saving thousands of dollars in rent and/or mortgage payments.
In fact, if you do it right, house hacking lets you live for free — and eventually start to generate a passive income. And for Scott Trench, house hacking was a major key in the path toward financial independence.
How Scott Trench Became a Multi-Property Real Estate Investor — Before Age 30
All cards on the table: I am not a house hacker. It requires being in one place, and I’m too fleet of foot, taking advantage of my freelance lifestyle to do the remote nomad thing.
Starting in 2013 at the tender age of 22 with just $2,000 in the bank, Trench decided he didn’t want to spend the rest of his life slaving away at a job he didn’t love so he could spend too much on stuff that didn’t matter. So he came up with a plan to overhaul his relationship with money.
Although his salary was less than $50,000, Trench took on an aggressive saving strategy — and had enough to put a down payment on a $240,000 duplex in just a year’s time. He spent a few months and some more of his savings to renovate the building before moving in and finding tenants, officially beginning his house hacking journey.
Today, that property is worth more like $440,000 per Trench’s estimate, and rents out for a total of $2,700. After paying the mortgage, Trench pockets about $1,300 per month off that duplex — and estimates he spends less than an hour per month on maintenance.
He’s since scaled the business, moving from one duplex to another and acquiring other investment properties, as well. He’s even got some offers out on the market as we speak.
But it all started with that first duplex back in 2013.
How to House Hack: 5 Valuable Insider Tips
I got to talk to Trench on the phone, whereupon he regaled me with all sorts of insider secrets about house hacking. So without further ado, here’s what to know if you want to try house hacking for yourself — straight from the mouth of someone who used this strategy to jumpstart a gainful real estate investment business.
1. Step One: Save Up for a Down Payment — Without Going Crazy
Trench was able to save $20,000 in just a year’s time while earning a $48,000 salary. You math hounds may note that seems an improbable figure, given that it’s over half of his net, post-tax take-home income.
But Trench took advantage of the art of the side hustle to make extra cash, driving for Uber and tutoring in his after-office hours. He also relied on the power of compound interest by investing in the stock market.
Along with taking on extra work where he could get it, Trench also followed a strict savings plan… but not one that left him living a fun-free life. After all, there’s only so many pennies you can pinch by saying no to happy hour beers or morning lattes.
Not sure how to save money? According to Trench, it all starts with a long, honest look at your budget.
“You have to analyze where money is actually leaking out,” he says — and for most Americans, those leaks occur in three big categories: housing, transportation and food.
While planning his house-hacking purchase, Trench moved from his swanky downtown Denver digs to a smaller apartment in a “not-so-nice” part of town, which he shared with a roommate. By doing so, he cut a full $1,000 out of his regular monthly expenses. He also started biking to work and got serious about meal planning.
With saving strategies like those, it was easy for Trench to spend a little extra coin on an Uber downtown to grab a drink with his friends. He found a way to have the best of both worlds by maximizing savings on the really big ticket items — which usually aren’t very exciting — so he could occasionally splurge on the (relatively inexpensive) fun stuff.
2. You Might Not Need as Big of a Down Payment as You Think
Trench put down $12,000 on his $240,000 duplex in what he rightly assessed to be an up-and-coming part of Denver — which is only 5%. He also took advantage of an FHA loan, which can help homebuyers get the ball rolling with only a small down payment.
Even factoring in closing costs and interest rates, Trench knew his property would be a good investment. After all, purchasing a home is already considered “good debt,” a wealth accumulator even if he hadn’t been able to find tenants.
By only forking over a small down payment, Trench theoretically increased the amount of interest he’d pay over time — but he offset those costs by renting out the spare unit. So if the idea of amassing tens of thousands of dollars for a down payment is overwhelming, don’t worry: You might still be able to utilize the house-hacking tactic.
3. Maximize Your Returns by Getting Cozy
As a young bachelor, Trench had a unique opportunity to maximize his returns on his first house-hacking property. He didn’t just rent out the second unit to tenants — he also shared his own unit with a roommate.
Here’s how the math broke down: Trench’s monthly mortgage payment was $1,550, and the secondary unit rented for $1,150. He charged his roommate $550 per month, coming out $150 ahead — or breaking even after minor repairs and miscellaneous expenses.
As mentioned above, some house hackers get even cozier with their accommodations, sleeping on the couch and renting out each bedroom on Airbnb, for example. (However, it’s important to keep in mind that rental laws vary by state and city; some districts have very specific requirements about short-term rentals.)
4. Put in the Work Ahead of Time — and Do it Yourself
When Trench bought the duplex, he knew it needed work. But he also knew he could save a ton of cash by DIY-ing it. He hired out some plumbing repairs, which were complex and extensive, but did most everything else himself in order to save money.
He’d spent $12,000 on the down payment and spent the rest of the $8,000 he’d saved that year on the repairs… which is a pretty low figure considering it includes expensive, infrastructural upgrades.
The project took him about six months and a lot of hard work, but it paid off in the long run: Today, he spends less than an hour per month on maintenance, and that’s after five years of ownership and constant occupancy.
5. Screen Your Tenants Well, and Maintain a Good Relationship With Them
When I asked Trench if he had any “bad tenant” stories to share, he had to wrack his brain to think of an example — and still came up empty, despite the long pause. Thanks to his careful (but fairly simple) screening process, Trench maintains that he’s never placed a poor tenant into one of his properties.
He starts by asking prospective renters to fill out a simple data form, including references from employers as well as previous landlords. He also verifies earnings by checking pay stubs or tax returns, looking for an income of three times the rental rate.
If they’ve got the cash, Trench sits down and actually calls and emails those references. He asks a set of straightforward, yes-or-no questions, like “Did this person get their entire security deposit back?” or “Is this person eligible to rent from you again?”
If everything checks out, he moves on to a comprehensive background check, including any criminal records and a credit score. Although Trench admits this latter metric can sometimes be problematic, in his experience, it’s an invaluable tool for assessing would-be renters.
“I’ve met dozens of landlords with horror stories,” he says, “and each time I ask about the credit score, either they don’t know it, or it was a bad one.”
This may all sound like a lot of work, “but it takes maybe 10 minutes,” Trench says — and he calls it “the No. 1 way to avoid rental problems.”
Finally, once the renters have signed the lease, Trench works hard to create and maintain a good relationship with them. “I’ll bring a bottle of Champagne when new tenants move in, and sometimes on the holidays as well,” he says. (I don’t know about you, but I’ve never gotten that kind of red carpet treatment from a landlord.)
Along with drafting a strong lease and collecting a security deposit, Trench considers this cordiality one of his major protections against tenant troubles. After all, it’s a lot harder to behave badly if you actually like your landlord.
And aside from safeguarding his investment property, maintaining good relationships with tenants also helps him keep his units occupied. Trench reports he hasn’t had a single day of vacancy since his first tenants moved into that duplex back in 2014, in part because each time someone leaves, they refer a friend to take over.
How to Save Money on Housing — Even if You’re Not Ready to Hack
Although house hacking is a powerful tool for slashing your housing budget and creating passive income, it might not be practical for everyone. But there are still plenty of ways to maximize the money you do spend on keeping that roof over your head, and to make sure your property investments are sound ones.
For example, paying for a house in cash isn’t just possible — it’s a great way to save thousands of dollars in interest. (And it might even help you negotiate a better deal.)
And before you even get that far, check out our guide on how much to spend on a house to make sure your potential purchase is actually within your budget.