How House Hacking Gets You on the Fast Track to Financial Freedom

Erik Entrepreneurship, Financial Education, Real Estate, Thoughts of a Mastermind 16 Comments

July 23, 2017 marked my 2 year anniversary of owning my house. I want to share with you my experience with house hacking – becoming a landlord and living with your tenants, and how this experience has had an amazing positive impact on my financial situation. In this post, I will tell you what house hacking is, my house hacking story, and how house hacking gets you on the fast track to financial freedom.

What is House Hacking?

House Hacking Gets You on the Fast Track to Financial FreedomHouse hacking is buying an owner-occupied property and getting paid to live for relatively cheap or free. How are you able to live for relatively cheap or free? You get a house which has rental potential, and rent out your additional rooms or units to other people (friends, Craigslist people, strangers, etc.) House hacking allows you to get into the real estate game and also have your housing subsidized by roommates or tenants.

How I Became Interested and Started House Hacking

In June 2015, I had just graduated with my Master’s in Financial Math in May and had been working full-time for about 5 months. Life was good.

Over the past few years, I’d been reading about different wealth creation strategies on  Financial Samurai. I was interested in building extreme wealth and was interested in real estate. I’d dabbled in some stocks by trying to day and swing trade about $750, but didn’t have too much success. I was renting at the time and my friends and I were interested in moving closer to Uptown in Minneapolis – a vibrant and hip community. There were 4 of us who were looking to live together and we were looking to rent. The problem was, there were no available options for 4 people where we were looking.

Then, a clever idea popped into my head. I was sitting on the couch with my buddy and said to him, “Hey, I know we are kind of striking out with the whole apartment search… I wonder what I could buy.” That set off a 1 week search for my house.

Buying a House to Hack

For the full purchase story, click here.

Over the next week, I looked at a few houses and found a great one. Built in 1900, this two story house had been a rental for the past 8 years. The kitchen had been re-done, the bathrooms re-done, and the woodwork was in great shape. Below are a few pictures:

backyard and deck

View off the back deck

clean kitchen with granite

Updated Kitchen

In addition to the back deck, updated kitchen and bathrooms, and the fact it was a rental property, there is a 3 season porch off the master bedroom and a 3 season porch off the front of the house. The downside was there were only 3 bedrooms (and we had 4 people); there was a den though, and I was hopeful we could turn it into another room. The location was in a vibrant area; very walkable, people were walking up and down the streets for the hour I was there. I lucked out and got it!

After moving in July 2015, the past two years have been fantastic for me financially. I’m going to share with you now my financials from house hacking and how house hacking has help me get on the fast track to financial freedom.

My Financials Proving House Hacking Gets You on the Fast Track to Financial Freedom

I love transparency. Right now, I’m going to show you the nitty, gritty details and numbers from house hacking.

First though, a quick digression into how spending on housing affects your ability to save. There are three categories that determine the bulk of your spending each month: housing, transportation, and food – if you can reduce any of these, you will be able to save a lot of money a month. House hacking tackles the first category, housing, and allows the house hacker to save a lot of money due to the decreased cost of living.

Year 1 of House Hacking Results

Back to my story, in July 2015, I bought my house for $287,900. I put down 3.5% through an FHA loan, and my original mortgage balance was $282,684. This meant, I only had $5,216 in equity starting off. My mortgage payment at the beginning was $1,820 (this included principal, interest, PMI, and taxes).

For the first year, I had 3 roommates who were paying me $1,650 a month. My housing expenses were essentially $170 a month, while my roommates were paying me $600, $575, and $475. In addition to the cheap “rent”, I was gaining equity at roughly $400 a month, and had the nicest room in the house!

In the first year, I brought in $19,325 in rental income through my roommates and tenants. At the beginning of August 2016, I refinanced and got my loan principal to $275,000. In 1 year, I had created $19,325 of income, had spent only $170*12 = $2,040 on “rent”, and increased my wealth by $7,684. That’s absurd!!!

Year 2 of House Hacking Results

But wait, it gets better!!

By refinancing, I was able to drop my payment to $1,702. Unfortunately, 2 of my roommates left, and I went to Craigslist to find a replacement. For the second year, I had 2 roommates who were paying me $1,300 a month. My “rent” now was $402 a month, but again, my roommates were paying $600 and $700 to rent from me and I was gaining roughly $500 a month in equity now.

I had refinanced into a conventional loan and wanted to get rid of PMI. To get rid of PMI, I would have to reduce the principal amount to roughly $245,000. I started off throwing an additional $2,500 a month towards principal and over the past year, I’ve been able to reduce the mortgage amount to $257,874. I’m about 4 months from getting rid of PMI and I’m extremely excited. This will increase cash flow by $144 a month!

In year 2, I brought in $16,100 in rental income. I’ve been able to decrease the mortgage principal balance from $275,000 to $257,874, a reduction of $17,126 and I only paid $4,824 in “rent”!

Wait, Can’t Houses Appreciate in Value?

YES and this is what makes house hacking even better! As I mentioned above, I originally only put down $5,216. Take a look at my most recent RedFin estimate (I think, given the Minneapolis market, I could sell it for this price):

An increase of $69,300? That’s incredible!

Let me get this straight: in 2 years, I’ve increased the equity in my house by nearly $25,000, but I’ve also been holding an asset that has appreciated by nearly $70,000! This means I’ve increased my net worth nearly $100,000 in 2 years by LIVING. Amazing.

Other Additional Comments on my House Hacking Experience

First off, being a landlord isn’t all that bad when you make sure to have a roommate agreement and lease in place. My roommates are solid gentlemen – they don’t always pick up after themselves, but they are very nice and friendly people. My living experience has been great and I’m very happy with the location I’m in.

I’ve spent about $1,500 on various repairs and fixes, and put proper grading around my house for $5,500. Other than that, I haven’t had too many major expenses related to the house.

Since I was living very cheaply, I had no excuse to keep paying the minimum on my student and auto loan. I paid off both in 4 months after moving into my house, and I’m extremely happy that the only debt I have is my mortgage. This is another reason why house hacking is great – you are able to get fancy with your cash flow!

Financial Summary of 2 Years of House Hacking

In the past 2 years, I’ve brought in $35,425 in rental income, had my house appreciate $69,300 in value, and paid down my mortgage by $24,810. All I’ve been doing is living for cheap and I’ve increased my net worth by $94,110. I’ve had a few house repairs that have totaled around $7,000, and I’ve been frustrated with my roommates, but overall I’ve been pleased with my experience. In addition, I was able to pay off my auto loan and student loan, and now am building solid wealth for the future!

Conclusion

House hacking is amazing and I recommend anyone who has an interest in financial freedom to consider it. It is definitely tough with student loans, the want to live in luxury apartments, and the increased responsibility of being a landlord, but at the end of the day, it is more than worth it financially. As I mentioned above, I increased my net worth by $100,000 just by living. What could you do by house hacking?

Readers: are you interested in house hacking? Have you house hacked before, and what were the results? Will you push your kids to house hack when they are older?

Thanks for reading!

Erik

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Comments 16

  1. Great job with the purchase and management of your property Erik. I am currently a landlord too and own a rental property with my buddy. I started my housing hacks in my thirties and I wish that I had the knowledge, motivation and maturity to do this when I was in my twenties.

    In my opinion, if you are willing to put in the effort to learn and invest in real estate, you can be very quite well off after ten years of investing. Half of my $1.2M net worth can be attributed to investing in real estate over the last 10 years.

  2. This is one of those opportunities I wish I knew about when I was younger. It’s hard to do such things when you have a wife and two kids. Then it’s more single rental properties if your so inclined.

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  3. We’re planning on entering the real estate market within the next year or two, depending a bit on whether the market starts to cool off here in Denver. Since we have no desire to have traditional roommates, we will be looking to purchase a duplex or triplex to have separate tenant spaces. Your story is a perfect example of house hacking and I wish I’d have considered it long ago. Thanks for sharing!

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      A duplex or triplex is certainly the way to go. Would you consider moving out of Denver? I know there are lots of areas you could get a triplex for around $100,000 (it wouldn’t be glamorous, but would get you in the game)

      1. Like anything in life, we’d definitely consider moving if we didn’t think we could make it work. The most “affordable” duplexes I’ve seen in my limited research here will push $500k, but the rental market is hot enough to support those levels and still earn us a discount over what we pay now in rent.

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  4. What a great read. I’m always amazed at how creative people can be with their finances. House hacking is something I wish I thought of when I was younger. There were plenty of opportunities had I known that this was a thing.

    Looks like its worked out very well for you Erik. Were there ever any instances where the house kept you tied down? I guess it could always be turned into a full rental. Would that ever be your plan?

  5. Erik! So exciting to read this, I was smiling from ear to ear the whole time.

    I did the same thing in Nashville. I bought a duplex with an FHA loan and lived totally free for a year while living in the other unit, then refi’d into a conventional loan, through forced + market appreciation.

    About a month ago, I closed on a quad, with another FHA loan (after the refi paid off the first one) that I’m house hacking (totally free again…thank you, rental market!) as well, and have the duplex fully rented now. I’m positive cash flow on both properties and have a decent amount of equity in the duplex. 6 units, 5 rented, and living for free. Can’t beat it!

    It is UNREAL how quickly you can save/pay off debts when you don’t have to fork over a mortgage each month.

    Hats off to you !

    As others have mentioned, this strategy works best with no kids. I’m 24, single and don’t have any little ones, so it’s worked pretty well so far. It does take a mental toll after awhile, not having ‘my own’ place yet, but it is definitely worth the sacrifice.

    Cheers !

    – Mark

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      Hey Mark, thanks for stopping by. I’m smiling ear to ear reading your comment 😀

      That’s amazing you have 6 units and you are in your mid-20s. Minneapolis isn’t the best spot for rentals because of the prices, but I’m looking at different places in the Midwest because there are definitely opportunities. You will be doing very well for yourself in a few years! Also I’m looking forward to reading more on your blog.

      Have a good one,

      Erik

  6. House hacking is a great way to reduce your housing expense or either get rid of it entirely. It’s also a great way to get a start in real estate investing. I live in NYC where house hacking isn’t really possible…some people maybe “rent hack” to reduce their rent but it’s still probably high compared to the Midwest!

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