You’re Never too Good to House Hack

Fundamental Principle

If you’re seeking an extraordinary life, consider making unusual decisions.

Our Story

In late May 2020, it was becoming increasingly clear that the global pandemic known as Covid-19 was here to stay. We had both been working from home since early March, with no plans to return to the office in 2020. We had also essentially become shut-ins, with friends and family confined to screens for the foreseeable future. With Diane (a severe asthmatic) in the high-risk category, we were taking every possible measure to ensure we remained healthy and safe.

We were renting a lovely 1,145 square foot home in Santa Clara, CA - relatively adjacent to our Silicon Valley jobs with Atlassian (Diane) and Facebook (Nick). It was a lovely home with a great yard for the dogs, three bedrooms for our gym/office/bedroom, in a nice neighborhood near parks and restaurants we enjoyed. The catch? Our rent was $4,000 a month. This did not, of course, include utilities - so our housing cost each month were closer to $4,400/month.

Pre-Covid - we were happy with this arrangement. We knew our housing costs were astronomical, but they were necessary to maintain the high-paying, highly engaging W2 jobs we both enjoyed. We were pleased to have found a single-family home for rent with a yard - a rarity in the Bay Area - and genuinely considered ourselves lucky. The single best perk was our proximity to Diane's sister and brother-in-law who were expecting their first child.

Then hit Covid.

Santa Clara was now the epicenter of the Covid-19 outbreak in the United States.

We stopped going out to our favorite restaurants - and while we appreciated access to takeout, it wasn't the same.

With Diane's fragile health and her sister expecting, the proximity to family became irrelevant.

The jobs we loved and our generous salaries were decoupled from our physical location.

With our lease up for renewal in July, we decided to explore options for a rent deduction with our landlord. After all, the rental market was plummeting and we were now paying well above the market rate.

When we called our landlord to make the ask in late May, we were met with a surprise. He and his wife wanted out, and our call put them over the edge: they were selling the home before the Bay Area housing market fell even further.

With no interest in looking for a new home in the Bay Area during the peak of the Covid outbreak, we made the tough decision to leave entirely and choose a lower-risk location. In looking at our existing rental portfolio in Indiana, we were leased up - and didn't have an immediately viable option.

Just five months earlier (in an entirely different world), our agent brought us an interesting property with two houses on the lot. We were intrigued, as the home was in Hamilton County and was a prime example of the A-class direction we were considering taking our portfolio. The lot was three acres, and we saw a few different directions for increasing the cash flow on the property.

After nearly a year on the market, the sellers decided to drop the list price from $400,000 to $350,000 - which was still more than we were willing to pay. We offered $290,000 and agreed to their counter of $300,000 - finally getting under contract in February 2020. Hindsight being 20-20, February of 2020 was an unusually difficult time to secure traditional financing. Capital markets were drying up, and our business lenders refused to lend for a mix of reasons - ranging from the complexity of the property to their inability to get funding.

We ended up extending the contract several times as we sought traditional lenders - five turned us down and one "fired us" - tired of the complexity associated with our transactions. Others struggled with the appraisal due to the lack of comps for two detached homes on a single lot.

By mid-May, Nick had about given up on the property and we planned to drop out of the contract. We would have lost our earnest money, but we didn't see another path through at the time. When our personal situations changed, Nick decided to give it one more go - the property was ideal for our situation (fenced yard for our golden retrievers, revenue-generating with two homes on the lot, and just enough square footage for two people working from home full-time). Nick found a great FHA lender via Bigger Pockets, and we were finally able to move forward.

And so - we took the leap. We put the majority of our treasured possessions into self-storage ($280/month) and shipped the bare essentials to Indiana in a Pod. We packed a suitcase each and our favorite driving companions and began our three-day drive to Indiana.

We spent our first month in a gorgeous Airbnb hosted by a friend and fellow investor. We quickly started to fall in love with Indiana - the nature, the community, and the food all surpassed our expectations. Diane was surprised to learn that there was more than just corn in the midwest! 😂

We spent that first month in frustrating negotiation with the sellers who wanted an indefinite, free rent back on one of the two homes (the far nicer of the two). Our agent came to the rescue in negotiating reasonable rents for a definite period - but still months longer than we were comfortable waiting to settle in. While this forced a temporary lifestyle sacrifice (our kitchen is tiny and the home is a single bath), it also meant better returns in renting out the nicer, larger home.

Flash forward to today. It's below forty in Indiana, and these two Californians are hanging in just fine. We enjoy looking out on our neighboring woods each morning (and the deer who call them home) and our Airbnb has enjoyed full occupancy since its first week on the market. We've enjoyed being close to the investor community in Indiana, as well as our incredible team. Our 1,100 square foot home is far from dreamy - but it also more than meets our needs (Diane finally scored her own office!) Best yet - our mortgage for both homes is $2,000/month - and so far, our net income from the Airbnb next door is $2,800/month.

The longer term potential for this property is enormous. In the near term, we're planning to:

1.  - Parcel the properties separately to force appreciation (appraised values reflected below)
2.  - Convert the detached garages on the property to Airbnb studios

And in the short-term, our $4,000/month housing expense is now a -$800 dollar housing expense (Diane refers to the gap as "The Italy Budget").

A Few Tried & True Principles

Wondering about the takeaways?

(1) Solve hard problems. Your best returns take work and time, and many people will tell you "no". Persistence leads to outsized returns.

(2) You're never too good to house hack. We could live within our means in much nicer homes in Indiana (we've seen some incredible open houses) but have made the short-term tradeoff for tomorrow.

(3) Real Estate investing isn't cookie cutter. In this scenario, we're looking at a BRRR/House hack/Airbnb and we're also looking at parceling the properties to force appreciation. The most creative person in the room gets the outsized return.

Before you decide house-hacking isn’t for you - try one simple question. What life could you lead with a negative housing expense?