House hacking is without a doubt the best financial decision you’ll ever make.
Why not live for free and get rich in the process?
In this article, I explain everything you need to know to use this super powerful wealth-building tool.
I even tell you how long it’ll take you to become a millionaire with house hacking! The first step is to understand how house hacking works.
We go through that using an example of a triplex. But keep in mind, it's something you can do with a single-family home as well.
Then we go through all the numbers and details using a four-plex listing from Zillow.
We discuss how much rent you could expect and what the expenses would be. It becomes clear how easy it is to live for free.
Start with question “is it cheap or is it expensive.”
Not “is the price going up or down.”
Defining House Hacking
House Hacking is the practice of buying a property that has multiple units to rent, living in one of the units, and collecting rent from the other units to go ahead and pay the expenses.
Let's say there's a triplex for sale. So you would come in as a very savvy, sophisticated investor with a big smile on your face, and buy the entire thing.
Then, you rent out unit number two and three, and you live in unit number one. Each month, you will collect rent from the two individuals living there, and out of this rent money, you will pay the expenses.
Here are some expenses you might want to think of:
- Insurance, and
- Taxes, all paid by your renters.
What ends up happening is you actually live for free. If not making positive cash flow, just by buying this asset and house hacking it.
And it doesn't just apply to multifamily with duplexes or triplexes. You can buy a single-family home and rent out each individual room nightly, maybe on Airbnb, or if you want to take it to that next level, you could even do a hotel or a motel.
In 2014, I was very close to buying a small hotel-casino in Puerto Rico. I was going to take the entire top floor and turn it into an awesome penthouse.
I was going to live in the penthouse and just sit and collect all that money from the casino and those nightly room rentals.
This just goes to show you that you don't have to be a newbie to take advantage of house hacking. You can do it at any level.
Here is a real-world example of a property that found on Zillow last year. It's was a property in a place where I love to invest.
I've got several rental properties in Kansas City, Missouri. That property is located in Blue Springs, which is a really nice suburb.
They were offering a fourplex, which you can see in the pictures below, and they were asking $400,000. Now, of course, I would want to negotiate that, but let's just say that I pay $400,000 for that fourplex.
Going back to our previous example, you would want to live in unit number one, and rent two, three, and four.
You can rent each unit out for about $850 a month, and you can see based on that Zillow listing, that we're right in the ballpark there.
So you'd be collecting $2,550 a month in rent from your three tenants.
Now, thinking about the expenses there…
The mortgage payment for this property of $400,000 is roughly going to be $1700, at your mortgage payment.
I'm getting to those numbers by assuming you'll give a 20% down payment, and get a 30 year fixed rate loan at 5%.
I'm not 100% sure that you can do a 30 year fixed on a fourplex, but we'll assume that you can, for this example.
So, your mortgage would be $1700, your property taxes right around $375 a month, $200 for the property insurance, and then about $200 for maintenance. That brings us up to $2,475.
So you can see in this specific example, you're not only living for free. You're actually being paid about 100 bucks a month to live there.
And if you look at the fine print on that Zillow listing below… You'll see, in 2016, this thing sold for $165,000.
That is crazy. Granted, the listing went for sale, then it was removed, then it went back on the market.
And this means that there's something really, really wrong with the property. As an example, a really bad roof, or a foundation problem.
But the bottom line is they got it for $165,000. And even if you were to put another $100,000 into it, which would have taken care of almost any problem you can imagine, you'd still only be in it for $265,000.
So, if you rework the numbers at $265,000 you would be hugely cashflow positive, if your mortgage payment was only about $1000 a month.
This is to show you that if you really do a lot of digging, you can just get some smoking deals, and you can take house hacking from something that's a good investment to something that's an absolutely spectacular investment.
You may be saying to yourself, “Okay, George, I get it, I get it. I see how I can live for free with house hacking, but how is it going to help me get rich?” I'll explain it to you in the next section.
How To Get Rich With House Hacking
1. Invest the money that you save
The largest expense that most Americans have is the rent or mortgage payment.
So if you can take that money and invest it instead of giving it to someone else, over time, you're going to be very wealthy.
Let's assume that your monthly housing cost is $1000. Well, if you can take that each month and invest it. At even a decent return of let's say 7%, over 28 years, those $1000 a month are going to be over one million dollars.
2. Build equity
Remember, your renters are paying you every single month, and you're taking that money to pay off your mortgage.
So a part of that mortgage payment, every single month goes to the principal payment.
So at the end of 30 years, you own the house, and your renters have paid for it.
You own an asset that's valued at, let's say $400,000. You can take that, put it on a depreciation schedule of around 28 years, and you can take that amount, that prorated amount, and you can deduct that from your taxable income every single year.
Remember, if inflation goes up at, let's say 3% to 5% per year, you're adjusting your rents accordingly. Which means your rents are going to be going up.
So at year one, if you're at a break-even, if you're just living for free, every single year that you adjust those rents up, that's going to be more money in your pocket.
How Long Does It Take To Become Millionaire With House Hacking?
I'll use the same example of that fourplex that we looked at before. And let's assume that you're putting aside $1000 a month from your income that you can put into investing because you don't have that monthly housing payment.
I'm not going to give it to you yet, but during the span of a mystery number of years, you would have made $686,000 roughly from your investments.
Your tenants would have built about $200,000 of equity in your asset, as shown in the image below.
You would have saved about $50,000 in taxes, assuming that you're making about $50,000 – $60,000 a year, and you would have made about $70,000 as a result of inflation from bringing up those rents.
Also, keep in mind that I haven't even talked about appreciation or leveraging the equity in the asset that you have.
The bottom line here is that the numbers are extremely conservative.
So how many years will it take you?
You ready? Drum roll, please!
It will take you approximately 23 years.
What are you waiting for?
Get out there, get rich, live for free, and start house hacking.