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 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
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:
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):
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!
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!