In my series How to Go from Zero to Millionaire I detailed what I would have done differently if I could go back in time and re-do some of my major money moves.
One thing I forget to mention in that list was to do at least one (maybe more) house hack.
That’s why I loved the guest post Five Tips for Growing Wealth Through House Hacking! It gave all the details about how to make the best of a house hack — something I found pretty fascinating.
Today we have another guest post on house hacking, this time from Riley at Young and the Invested. This one is fascinating in a different way.
I find this interesting because:
- It’s a personal story more than a how-to. I find real-life testimonies to be very compelling/inspiring.
- Riley and his wife are house hacking a duplex, which they turned into a semi-triplex.
- They house hack using two different strategies — one the more traditional long-term rental and the other with an AirBnB listing — all in the same building!
They took on this challenge with one goal in mind: to create a larger down payment for their house purchase.
This story is very cool IMO. Boy, I wish I had this much on the ball when I was their ages.
Anyway, I won’t blab on any longer — let me turn it over to Riley…
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When my now-wife and I got serious about our relationship, we knew some serious financial decisions lay ahead. Both of us shared common goals for what we wanted out of life and knew realizing them would require a lot of effort. Effort we were more than willing to put in if it got us what we wanted.
Despite this willingness, we wondered if there might not be an easier, smarter way to seize what life had to offer. If we wanted a house to raise a family and reach our financial destiny, this would require learning how to save money for a down payment.
At the time, we had little by way of the necessary funds to make this dream a reality.
We needed to think creatively to accelerate our down payment accumulation. We needed a hack to provide a dramatic effect on our wallets. We needed an opportunity we couldn’t pass.
Fortunately, such a break fell into our lap and we took full advantage, thereby allowing us to save money quicker. This is our story of house hacking our way toward a bigger down payment fund.
“Honey, Let’s Get to Know the Neighbors”
It might not come as news to anyone reading this, but housing isn’t cheap. And as much as the nation bemoans this fact, it isn’t getting any more affordable as time passes.
So, what is a young DINK (dual-income, no kids) couple to do if they have their hearts set on homeownership? Much like any true Millennial, take a shortcut, of course!
At the beginning of 2016, my mother graciously decided to support my girlfriend (now wife) and I by investing money received from her mother’s estate in a multi-unit property. The agreement would have us cover the mortgage each month by filling the two additional units with long-term tenants and short-term rental guests. Any shortfalls would be paid for by us.
We appreciated the deal because it gave my parents a return on their investment and my wife and I a free place to stay. This bargain also gave us an incentive to keep the property in good shape and make it attractive enough to potential renters and guests.
Primarily, this required us to vet the tenants, maintain a competitive AirBnB listing, and make sure everything ran smoothly. But it also included maintenance and repairs, some of which proved more-costly than others.
However, between these two income sources, we would be comfortable covering the monthly note and other expenses encountered along the way. We’d also get to pick our neighbors and the guests who stayed with us.
In the end, it was our way to get us what we wanted. This has allowed us to live for free and house hack our way toward accumulating a down payment fund quicker.
The Space Perfectly-Suited to House Hacking
The house we call home has a duplex layout, meaning we have two units on the property on the same foundation. Our long-term tenants live in the other unit.
In our unit, we have a lock-off unit with a separate side entrance near the rear. In effect, this gives the house three units instead of the two you would normally associate with a duplex. The reason it isn’t a triplex is because this third unit adjoins to our space but can be separated.
This partition makes the space suitable for a short-term rental because the guests do not need to interact with us. The arrangement gives them complete privacy to come and go as they please.
Aside from competitive pricing, this is one of the most frequently cited positive features about the unit shown in our reviews. When combined with other amenities, it allows guests to be completely independent during their stay as they would in a hotel.
In the other unit of the duplex, we have long-term tenants who cover 80% of the mortgage and related housing expenses. But we would not have received such a favorable rent had we not renovated the entire unit top-to-bottom.
We knew the improvements would be necessary to fetch a fair rent as well as attract tenants we would want to call our neighbors.
Let’s Look at the Numbers
We confront three primary costs each month for our multi-unit house. Outside of non-recurring maintenance and related supplies, our monthly housing costs consist of:
1. Mortgage.
The total monthly mortgage comes to $1,795. Of that, fully $650 goes to property taxes and insurance. I wish I could say we lived in a big house, but in totality, we have 2,000 square feet, of which 1,000 is on our side, and fully 350 is cordoned off for the short-term rental. That leaves 650 square feet for my wife and I, which is more than enough for our current needs.
In a year, we pay $3,525 in flood and homeowners’ insurance on the property. What unspeakable joys of living in a floodplain!
2. Financed repairs.
We also pay $255 per month toward a replacement heating and cooling system we financed for the tenants’ unit. That was a $12,000 surprise we did not fully account for when we bought the house.
It turns out the entire system needed to be replaced within 12 months of buying the house, which included the system in the attic and the compressor outside. However, the repair company offered 48 months no-interest financing through Wells Fargo Bank. Without it, we would have been sunk.
This repair also became our responsibility to pay. With these first two buckets of cost, the total comes to $2,050 per month needed to be even on the house. To be even, we consider these our primary costs for recovering from tenants and guests. However, we can also include the next category to offset our housing expenses fully.
3. Utilities.
Depending on the season, our bills average $150 per month for water, waste and sewerage split between the tenants and us, internet of $55 also split with the tenants, and $120 for electricity and gas. Lumping these amounts into the previous two lands us around $2,250 per month.
Our tenants pay $1,650 per month and when you compare this to the total housing expense, we need an average of $600 per month from the short-term rental to cover the balance. So, each month, we target an average $500-$700 to cover the remaining housing expenses (inclusive of utilities).
If we make extra money above our needs each month, we wouldn’t choose to pay off the mortgage faster, but would instead opt to use it to grow our down payment fund. Because we received such a great rate on the 30-year fixed-rate conventional mortgage (3.675%), we would opt to keep it in place should we maintain the property as a rental.
We Considered Alternative Platforms to List the Short-Term Rental
When we first started in February 2017, we attempted to market it simultaneously on AirBnB and HomeAway but it quickly became overly cumbersome to manage the calendars on both platforms. In fact, we had to turn down a few bookings on HomeAway because we had not managed to remove the space from the available dates in time.
After this happened a number of times, we chose not to continue dual-listing the space. We felt if we kept canceling reservations for long, HomeAway likely would have penalized us.
We opted for AirBnB because we knew there was a bigger market on the platform. This would give us a better chance of house hacking successfully.
We have not revisited our decision but also have not felt compelled to do so given our success meeting our monthly quota to offset our cost of living.
Seasonality Plays a Big Part in Bookings
For those who haven’t visited New Orleans, you should know it gets hot and humid during the summer. It is not the greatest time to visit and as a result, our bookings are seasonal.
Typically, we will have our place booked on 50%-80% of the weekends from October – May and with a rare summer booking. We will also have people who book for a week and receive a 15% discount for staying so long.
Those are our favorite bookings, not only because it is more money, but also because it reduces the number of times we need to clean the space between guests.
After much practice, my wife and I have our cleaning routines down and can flip the space in 20 minutes, not counting the time it takes to wash the sheets and towels.
Because our bookings are seasonal, we must budget our expenses and revenues throughout the year to make sure we breakeven. Despite the slower season and cash flow seasonality, we still manage to net $500-$700 per month on average.
Why House Hacking a Multi-Unit Property Has Worked for Us
Now that you have a better idea of how we go about house hacking, let’s review four major takeaways for why leveraging your space can be financially rewarding and why it is worth the effort for us.
1. Low Time Commitment
At first, we were wary of how much time flipping the space would take given our busy schedules. At the time, I worked a demanding job and my wife is a busy medical resident.
After the first 6 months of guests, we developed a routine for preparing the room. The tasks became much more clearly defined on how to flip the space.
This made the opportunity rather attractive as a means for making money. If you need to make some extra money but your schedule is tight, this could be a good option.
Regarding the traditional rental, finding the right tenants can take time. If these will be your neighbors for at least a year, you will want to make sure they are people you would want to live near.
Our experience has been wonderful with the two groups of long-term tenants we have had. Both sets have been graduate students and stellar overall.
2. Utilizes Assets You Already Have
A primary reason why house hacking is a great option is the ability to leverage assets you already own. This is also why it does not require a lot of your time. We are not making the traditional trade-off between time for money and we are leveraging our existing assets.
The intrinsic value of providing quality shelter makes it possible to rent out to others at a fair return.
3. No Special Skills Required
Thankfully, house hacking required little in the way of special skills. Mostly, it requires soft skills, such as relationship management and marketing, and having the judgment abilities to know when to make a repair yourself or when to call a contractor.
We have had several issues spring up over the couple years we have house hacked, but most have been handled by me. These problems have forced me to learn more about home maintenance and will be useful down the road should my wife and I ever desire to buy a fixer-upper.
4. Earn a Decent Return
For the amount of time and money invested, house hacking can generate a decent return. This is all the truer if it leads to a complete offset of your living expenses.
If you have multiple units for rent like we do, the potential to earn a decent return is high. This arrangement has allowed us to save money much quicker than we would have by renting a 1-bedroom apartment elsewhere in the city.
Ultimately, the decision rests with how much you can reasonably expect to earn from your multi-unit property and the area you live. We live in an up-and-coming neighborhood near two universities and a bustling nightlife.
Before proceeding with a house hack and indebting yourself on a multi-unit property, make sure the fit is right for you. While nervous in the beginning, we have found the arrangement to be very rewarding and a great place for my wife and I to start our lives together.
You forgot reason #5 for why House Hacking a Multi-Family Property has Worked for Us:
5. Mother bought a multi family property for two able-bodied, working adults with no children.
“my mother graciously decided to support my girlfriend (now wife) and I by investing money received from her mother’s estate in a multi-unit property”
There are some cool points in this article and the transparency is appreciated, but I don’t think it’s proper to talk about “4. Earn a Decent Return” when you didn’t buy the property yourself. I’m sure it’s a wonderful return to receive a quality multi-family property as a gift, but please don’t promote this is as normal or repeatable for most in order to further your blog readership.
House hacking is certainly repeatable.
While the guest poster received the home here, it could just as easily been purchased by him.
For instance, instead of buying my first home (which I did 100% by myself), I could have bought a duplex, triplex, etc. and started house hacking.
Consider the concept and open your mind to the possibilities…
My first reaction was the same as @Bill’s on all counts. At the end of the article I found myself scratching my head about the funny math used to compute a “decent rate of return.”
And yes, if you can look past those points, there are some nuggets in there that others might be able to use.
I think the way post was positioned is what’s not working – the set up makes it sound very novel and interesting, when the reality is that a young couple was fortunate enough to have their homestake given to them and smart enough to seize the opportunity to make it work (for them).
LOL, I have to agree with the sentiments of Bill and Tom. The fact that the writer was gifted a valuable asset to rent out is something that the vast majority of the readers won’t have the benefit of. This is similar to a story providing tips on dividend investing where the investor is gifted $150,000 to start dividend investing.
With that said, I think there are some good things about what the writer is doing. The article may better be targeted to people who already own a home who want to make a side hustle or want to accelerate paying off their mortage. The writer makes a big sacrifice by cordening off the 350 sq. ft. portion of their house in exchange for making the AirBnB side hustle. This type of sacrifice is possible for others and requires dedication and sacrifice that’s definitely commendable.
I have definitely come across posts that really do make house hacking seem like a great way to live for free. In college it certainly would come in handy as some examples have already shown.
The fact that you are right at the property location also cuts down on inconvenience time as opposed to having to drive out to a rental with any issue. Of course it is not for everyone and there can be expenses (like the HVAC) that can completely destroy a budget. But overall it does seem like a reasonable and relatively safe way to have your housing taken care of with others paying rent.
We need “like” buttons because I agree with Bill, Tom and John. To be fair I also agree with xrayvsn a major benefit is living in the property. I would love to add a triplex to my portfolio but prices just don’t flow where I am, even with the ability to pay cash.
On a side note I hate when people here give high earners a hard time. I have worked hard and never been given any type of financial gifts, in fact at 25 I took out a high interest loan to help out my mother and buy her a place to live. I have gifted both brothers with down payments on homes with no strings. So I feel I have earned my way into my current situation.
Hard for others who receive significant help from family to say “you can do this too!” The only people I know personally doing better than me all got help from their families. It’s a great head start and especially when young you have the time value of money on your side. That starter home at 20 turns into a heck of a home after seeding a couple flips.
I understand the critiques but there are many situations like this (wealthy older generation with assets to spare and no need for an aggressive market return), so both the general and specific lessons may be applicable to many. Every house hacking situation, by definition, will have some opportunistic element, so perhaps the lesson is that when it’s presented, grab it!
Let me say that this guy is hustling. Yes, his mom helped him, but he’s doing something to make that gift work for him. There are plenty of people handed things that still sit on their butt waiting for the next handout. This isn’t one of those people and I appreciate his work ethic and sharing. Go check out Bigger Pockets for other ways to do this.
Agreed. At the end of the day, Riley is putting in the time and energy to try something new. In the process, he will learn many valuable lessons that he can apply in his next endeavor. No one is going to get rich on one house hack. But if you can take away valuable lessons on each house hack, then you can try to scale and multiply; and then make real money.
So to that, I say good going Riley and wife.
First, thanks to ESI for publishing my story.
Second, thanks to all for your comments. All points raised are valid, but allow me to clarify some major items I neglected to include in the post for the sake of brevity. I hope my comments below do not come across as defensive, but merely factual in nature.
Yes, we were gifted a down payment. I fully confess to this, as I openly admit in the post. As a family, we decided to use the small generational transfer of wealth for productive purposes of mutual benefit to my parents and us.
The property serves two goals: (1) as an investment for my parents, for which I am acting as a steward of their wealth by improving the property’s value and (2) as a beneficial short-term housing solution for my wife and I.
I would also be remiss if I didn’t mention the money my wife and I have invested in the property.
We have funded major renovations out of our own pocket (e.g., expensive HVAC unit replacement mentioned in the post, multiple other costly repairs to appliances and areas of the property) in order to get the home in shape to rent out to tenants and short-term rental guests.
We also furnished the tenants’ rental and the short-term rental with our own money because we knew it would add to the ROI. This decision also plays into the major renovations being necessary, but not sufficient for monetizing the property. Absent these investments, the property would be unoccupied at current rental pricing or fetch far lower rents with similar occupancy.
While this is unlikely to change people’s impressions, I do feel it is necessary detail to provide a fuller picture.
Sorry in hindsight seems like I was piling on! Well done and clearly you and your family are working together for the benefit of the family unit. Family is whats most important in life!
Sounds like a lot of work and you are making it happen. Not a lot of people would be willing to block off the second unit for short term rentals. Sorry we got off on the wrong foot.
Riley,
Nice response. It is always easier to criticize someone else. My wife and I work for the same company and people accuse us of double dipping. Huh? We are working separate jobs in different departments… “You guys make so much”, “No wonder you will retire sooner”,
There are others making more than us and live paycheck to paycheck. They don’t know about our plans with savings, living below our paychecks, and investments. I tell them about savings and 401k, Roth IRA’s, but there are always excuses.
There is no way you can completely explain your situation, but the positive thinkers know that you worked hard to achieve what you have done. There really is no need… you made it work for you and that is all that matters.
I think your situation is more relevant than some people might think. With a down payment gifted, it’s not that different from someone buying a house with a small (or no down payment). Several of the other commenters appear to have missed the more subtly mentioned details in the original post. It always amazes me when people reading an investment blog seem to jump on basic aspects of capitalism like it’s a dirty trick. As you are managing the property, and your parents are essentially shareholders, this should be viewed as a creative approach to raising the capital for the initial purchase that might work for others too, maybe with slight tweaks for individual situations.
Riley, congrats on what you & your wife have accomplished! I’m just now thinking about house hacking in my mid 40’s but better late than never. Your article certainly makes it sound approachable.