My House Hacking Story (2 Successful House Hacks)

Over the last three years, I have been working hard on building my real estate portfolio. One of my main strategies was to house hack my primary home purchases and use the advantages to accumulate rentals on the cheap. I quickly realized house hacking was the best way for me to purchase a rental property with the least cash out of pocket, and reap all the benefits of cheap living! I have done this twice now with two properties in Phoenix, and have been fortunate enough for both deals to work out well. 

I wanted to share some of my journey and highlight the two deals I've house hacked so far. I couldn't recommend this strategy more, and I plan to continue house hacking for as long as I can and build a great rental portfolio. Check out my story below!

My first purchase was completed in May 2015 on a duplex in Phoenix, Arizona. I picked up the property for $110,000, which turned out to be a steal a couple years later. The property was well within my budget, so I felt comfortable taking a risk knowing I could easily cover the expenses if I had vacancies. The property was also available at a discount due to the repair and renovation it needed. It definitely didn’t fit my criteria in terms of an area I wanted to live in, but I knew this area would be solid as a rental property. I believed the area would continue to improve as it was on the fringes of a highly desirable area of Uptown/Central Phoenix, where a ton of young urban professionals were moving in. It was also right next to major transportation and freeways to get around the city easily, which made me believe the neighborhood would become desirable within the next five years.

I made the decision to sacrifice and live in a worse area than I could afford because I wanted to make the best investment. I knew that short-term sacrifice would pay off huge for me in just a couple years’ time, so the choice was a no brainer for me. Did my friends and family tell me I was crazy for moving into a transitional neighborhood? Hell yeah. It didn’t bother me one bit. I knew that as long as the area was safe and not in the ghetto, I could make it work. That turned out to be possibly the best decision I’ve ever made in my investing career. Let me break down this deal for you in depth and walk you through my entire process.

Investment Criteria

It’s extremely important to do all of your research and understand what it is you’re looking for in an investment. Don’t be that person who just says you want to do a house hack or buy a property but never do your homework. Before I closed on my duplex, I spent nearly a year researching and refining the criteria for what I was looking for. I went in depth and wrote down the desired zip codes, type of property, price ranges, condition of property, number of units, and the rents I wanted to get per month for my price range. I wrote it all down in a Word document and kept it updated—that way I could communicate what I was looking for to realtors, advisors, and anyone willing to help me out.

Here is an example of my criteria for this deal:

Area: Phoenix, Arizona. Specifically, zip codes of 85016, 85018, 85008, 85006, 85014, 85015, and within a half-mile radius of those zip codes

Price Range: $100,000-$225,000

Type of Property: 2 to 4-unit residential property, single-story, block or frame construction, shingle roof

Condition of Property: Value-add proposition; looking for a property that needed some work and updating to force appreciation and purchase at a discount to market. No properties with foundational problems, sewer/city problems, and no unpermitted additions.

Rent Range: Needed to be able to cover all expenses when fully rented. If I needed to move out, I wanted the security of knowing the property could sustain itself and cash flow without me needing to cover expenses out of pocket. I want to achieve monthly cash flows of at least $100 per door.

Research

Now that my criteria were defined and I could fully explain what I was looking to buy, I entered the research stage. The main objective here is to understand your market and the properties in your criteria. Try to take a wholistic view instead of just laser focusing on the type of property you’re looking for. Pay attention to trends in your area like unemployment, housing inventory supply levels, appreciation, and interest rates. You want to be comfortable with the market and be optimistic that it’s headed in a positive direction.

Researching for a specific property is the part that will take the most work. It took me an entire year of researching and looking at properties before I found the right one. I knew what I was looking for and what I wanted to pay, and I wasn’t willing to compromise. If this is your first deal, I would suggest adopting a similar mindset. The last thing you want to do is buy into hype and purchase something because you are just dying to do deals and get in the market. There are a lot of people who bought in 2006 who can tell you horror stories about buying in the real estate frenzy.

My first step was to have my realtor set up an MLS alert for properties in my target areas. This allowed me to quickly find out about new deals as well as study the trends and prices for comparable properties. I also reached out to my network to let them know what I was trying to accomplish. Since I had a clear plan and specific and tangible goals, people were willing to help and keep an eye out for good deals for me. I then got involved in the online community at BiggerPockets. This is a great website for like-minded real estate investors, basically Facebook for real estate people. I was able to meet a couple local Phoenix investors my age who had also house hacked and pick their brain for advice. Consistently networking and having conversations both in person with my realtor and team and with a larger online community was a great tool to guide me in the right direction.

The next step of my research was analysis. I literally analyzed over 100 different properties that came through on the MLS. Even if I had no interest in them, I ran the numbers and analyzed every property I could. I found a spreadsheet template online that I could input the details of each deal, and it would calculate the profit and loss, the cash flow, and an estimate of value based on cap rate. Continually analyzing these deals gave me a deep understanding of the market and what constituted a good property. It was tedious work, but it prepped me to recognize and identify my duplex as a potential target when it appeared on the MLS. It’s a practice I still do today to stay sharp and learn as much as I can.

Prequalify for a Loan

Fun fact: most realtors and sellers won’t give you the time of day until you have a prequalification for a loan in hand. My realtor had a strong relationship with a lender and gave me an introduction. My lender was willing to help and answered every question I had about the mortgage process, and I still use him today because of it. My prequalification let me know how much property I could afford and what kind of PITI (principal, interest, taxes, insurance) I would likely have. A prequalification is another item that lets people know you’re serious and are ready to buy.

The Property

The property I bought was a duplex in the 85006-zip code of Phoenix, Arizona. It was a single-level block construction property with a shingle roof. The lot was just over 8,000 square feet, with a large paved parking area in the front and a small artist studio/storage room in the back. It definitely wasn’t in the most luxurious area, but I saw it’s potential due to its proximity to major highways, jobs, and all the hot neighborhoods surrounding it. Both units were two-bedroom/one-bathroom at about 750 square feet and rented for $550 a month. It was listed on the MLS for $140,000 but had been sitting for a few months because it needed a lot of repair work and investment.

Negotiations

I saw major potential in this property and had a strong feeling I could get a good deal. I felt that the property would easily be worth $140,000 if it was fixed up, but nobody would close on the deal in its current condition. It also was on the market for a couple months, so I was hoping the seller might be willing to negotiate. The fact that he wasn’t improving the property or making necessary repairs also told me that he wasn’t willing to invest any more money and wanted to get out of the deal and move on. These suspicions were confirmed when I toured the property and met with the seller’s realtor.

I initially offered $125,000 for the property. The seller countered at $135,000, to which I countered again at $130,000. That was my best and final price, and I knew the numbers would work at $130,000. The seller agreed to my price and we went into escrow. Seems like a simple negotiation, right? NOPE.

During the due diligence period, we had a thorough inspection completed. I also got my dad involved to inspect the property since he is a licensed general contractor. We were able to bring in his subs to inspect the roof, plumbing, electrical, and HVAC systems. The inspections led us to discover the property needed a lot more work than anticipated. The roof was completely shot and needed to be replaced, the plumbing was all rotten galvanized piping and needed to be replaced, and each unit needed about $10,000 of work. That meant the deal and my numbers no longer made sense at a $130,000 purchase price. I would have to invest too much to get the property to a rentable condition and risk having negative equity.

Luckily for me, I knew how to use this situation to my advantage. The major repairs needed didn’t scare me at all because I had a team in place to remedy these issues. I also had bids in hand and knew exactly how much money needed to be spent to get everything up to standard. Instead of walking away from the deal, I doubled down and went back to the negotiating table. I discovered that this property had fallen out of contract a month before, probably because all the extra work scared the would-be buyer away. This provided me leverage to bring the price down, as I was willing to bet the seller didn’t want to go through the hassle and stress of having his property fall out of contract for the second time.

I decided to send a revised offer for $110,000. This was a bold move and a huge reduction to ask for. I knew it needed to be handled with finesse, so I came up with a plan to present my reasonings. My first step was to highlight and discuss the major points from the inspection report. I called out the big-ticket items like the roof, plumbing, and repairs needed in the units. I explained how much work needed to be done and showed the proof right in the inspection report. I also had our subcontractors bid out each repair and break everything down in a line item estimate. This showed the seller the $20,000 reduction I was asking for was a specific and calculated number. My repair estimates actually showed that there was $30,000 in major repairs needed. My strategy was to offer to take on $10,000 of the repairs to keep the deal fair and only ask for $20,000 off. The idea here was to show good faith and how I wanted to achieve a win-win situation.

The seller initially balked at my offer. They said they would just relist the property and sell it to someone else for the $130,000. I didn’t buy that for a second and called their bluff. My realtor canceled the contract and killed the deal within an hour of the seller’s agent rejecting my offer. This panicked the seller, and within two hours I had a new signed contract from the seller for $110,000. The best part was, since I could use our own construction crews and workers, all the repairs were actually only going to cost me $20,000. I got the seller to pay for my entire renovation of the property!

Renovations

This was a difficult renovation process and I might not recommend this to first-timers. I used the skills and advantages at my disposal which was our contracting company. I was able to redo the entire roof, plumbing and sewer system, and all exterior work in the first month. After that, I renovated both units and got them rent ready. I was moving into the front unit, so I put a little too much money into it and over-improved for the neighborhood. I could have spent $5,000 less and achieved the same result. Take notes of my mistake here and don’t let emotions get the best of you. Only improve your units to maximize resale and rental value for the market and neighborhood, even if you’re going to live in the property. The entire renovation took me about ten weeks. The total cost for all the work done came out to just over $25,000.

Rents

When I purchased the duplex, each unit was only paying $550 per month in rent. I knew that was way too low for a two-bedroom apartment in that area. The rents were low because the previous owner wouldn’t invest in the property, and the units were run-down. He was happy to keep rents low and collect some cash while spending as little as possible. My projections were that each unit could get between $650 to $750 per month in rent once the rehab was completed. I was able to raise the rent in the back unit to $650 a month when the tenant renewed their lease. Today, that unit is still rented to the same tenant for $700 a month, and they have never missed a payment.

Since I moved into the front unit, I wasn’t able to rent it out and maximize my cash flow. I did, however, have a second bedroom that I wasn’t using. I was able to rent that bedroom to a friend and he paid me $450 a month (utilities and Wi-Fi included). All told, I was collecting $1,100 a month in my first month of living in the property. I have since moved out of that property into my new house hack. The front unit is rented for $750 a month, bringing my monthly gross income to $1,450 a month for the duplex.

Financials

Here’s a breakdown of the financials of the deal and the numbers at purchase vs. today:

Purchase Price: $110,000

Down Payment/Closing Costs: $7,000

Renovation Costs: $25,000

Cash Invested: $32,000

Mortgage: FHA owner-occupied mortgage, 3.5 percent down, 30-year fixed rate mortgage @3.75 percent interest. I want to note that I refinanced my mortgage in December of 2017. I was able to refinance into a conventional investment property mortgage, eliminate my PMI payment, and take out $10,000 in cash. I was able to do this because of all the appreciation the property achieved. My new PITI is $775.

Monthly PITI: $675

I’ve also included a spreadsheet below to break down the profit and loss and cash flow for the property at today’s numbers.

State of Property Today

Today the property is fully rented and occupied to great tenants. I was able to increase the gross rents to $1,450 a month and boost my cash flow. I also completed the refinance on the property, which freed me up to do my second house hack. My monthly cash flow is around $450, representing a 16 percent cash on cash return. The property now is fully stable and is currently worth between $200,000 to $220,000. That’s an insane amount of appreciation. It’s definitely not typical, but this was not a typical deal. While it wasn’t an easy process and took a lot of hard work, saving, patience, and sacrifice, it clearly paid off better than I could even dream. 

House Hack 2: The Gemini Property

Fun Fact: If you have two single-family detached residences on the same property, it’s called a twin home or Gemini property. I’d never heard of a Gemini property in real estate before I bought one. I think they are a pretty rare type of property that not everyone is familiar with.

This is my second house hack, currently a work in progress. This is a step up in price and investment from my first house hack. It’s a natural progression that I feel very comfortable with and excited about. I just bought this property with my brother in May 2018 and am still in the renovation phase as of this writing.

The Property

The Gemini property is also located in Phoenix, Arizona. Luckily, we were able to afford to house hack in a much nicer part of town this time. The location is in an area called Arcadia Lite, which is full of bars, cool restaurants, breweries, and lots of jobs and transportation. It’s an area a lot of young urban professionals move to after college. The crazy thing about this property is that it’s not just one single-family detached home, but two. That’s right, one property, one piece of land, two houses. The layout is set up so that the main larger house is in the front of the property, along with the driveway and front entry. It looks like a regular single-family residential property fat first glance.

The second single-family house is in the back of the lot, lined up directly behind the front house. It’s set back about 25 feet from the back-perimeter wall of the front house. The access to the back house is to the right of the front house, where you drive down a gravel path to the house. It’s a great setup that allows the back house to be hidden and feel like a separate property. The space in between both houses is large, inviting, and can act as a common backyard/courtyard space. We plan to create a beautiful backyard oasis, utilizing all the space to create common amenities like a firepit area, outdoor living space, and a bar and grill.

The front house is three bedrooms, two bathrooms, and about 1,300 square feet. The back house is two bedrooms, two bathrooms, and about 1,100 square feet.

The Deal

We closed on a final purchase price of $283,000. My brother and I got an FHA owner-occupied mortgage and only put 5 percent down. This was about a five-month process from our first offer to the close. Our first offer was made in January when the property came back on the MLS for $295,000. A bidding war occurred, and we were outbid, even after offering over list price at $305,000. Lucky for us the back house and property needed a lot more work than most people are willing to take on, and the buyers canceled the contract. This presented a huge opportunity to get a deal on this property. We were able to come back to the negotiating table and send another offer at $280,000. We explained in detail the large amount of repair work needed and how the property was not worth the list price. Apparently, this was the second time the property had fallen out of contract, so our timing couldn’t have been better. After about a month of negotiation, we settled on $283,000. This gave us enough of a discount to afford the repairs needed and give ourselves the potential to force appreciation and gain equity.

The Rehab

I won’t lie to you dear reader; this was not a cheap rehab. In all, my bro and I spent about $30,000 renovating and repositioning this property. It was a step up for me in expenses and complexity, but we had a great plan and we executed it well. Our experience and construction knowledge were huge to make this vision happen. The main work for this project was all related to the common areas, backyard, and the back house. Fortunately, the previous owner had done a remodel on the front house in a nice contemporary style, so we didn’t have to spend much cash there. We updated a few cosmetic items in the front house and had it move-in ready within a week of closing.

The back house on the property was an entirely different story. The house had never been renovated or upkept and had all kinds of repair issues. It was also a straight-up ugly house, with a huge arched entryway/patio area that looked dated and blocked all the light. There was a rat infestation and electrical code issues in the kitchen. It was not a beginner project, and the difficulty of the rehab on this house scared away many potential buyers, which was a boom for us. We made the decision to take care of the front house and the yard first, so we could move into that house while the back house was rehabbed. Our yard and common area work consisted of completely regarding the landscape as well as planting new trees, bushes, and bringing in ten tons of rocks. We also laid down about 1,000 square feet of pavers to create a beautiful courtyard area between the two homes, complete with a firepit. To top it off, we hung exterior string lights between the houses to light up the courtyard at night.

The back-house rehab took about six weeks and ate up about 75 percent of the entire budget. We completely redid the kitchen with all new cabinetry, appliances, countertops, and lighting. We opened up two walls (one in kitchen, one in master bedroom) to create an open concept. We also had to replace all the flooring, doors, baseboards, and outlets and switches. After a lot of drywall repair and painting, we had a beautiful remodel complete on the inside. Everything was clean and simple and improved right on par with comps in the neighborhood. On the exterior, we completely redid the front façade and look of the home. We extended the roofline overhang and built a contemporary looking horizontal fenced entryway. I honestly don’t think that the previous owner would recognize his property if he came to visit it today. It’s important to note that despite the big expense and scope of the project, we didn’t go over budget. I factored in the rehab costs into the deal, and I was confident the rehab would add a ton of value and forced appreciation the property. I believe our hard-earned investment was money well spent, and we will achieve a great ROI when we sell down the road.

Our Plan to House Hack

The best part of this deal is the ability for both my brother and I to capitalize on a unique situation. Since my brother and I both wanted to invest in a property but didn’t want to share a house, the Gemini property solved our problems. The plan is for my brother to move into the front house and rent the two empty bedrooms to friends. I will then move into the back house and rent spare the bedroom to a roommate. In our area, we can rent these empty bedrooms for $550 per month each. That is a total of $1,650 in rent coming in each month. Each renter will also pay their split of the utility, water, and internet bills, greatly reducing the costs for my brother and me. All told, every month, my brother and I expect to only have to pay an extra $300 to cover the PITI and all expenses on the property. That means we get to each live in our own beautiful house in an amazing area for $150 per month each! It doesn’t get much sweeter than that. To top it off, my brother and I will get to receive all the benefits of homeownership, such as mortgage interest deductions, depreciation, and the equity we are creating in the property. We are extremely excited to make the place our homes for the next few years and enjoy the low living expenses. Check out the chart below where I break down the numbers a bit better.

It was important to me that this deal worked not only as a house hack, but that we also had a solid exit strategy in place. It was important to make sure I could rent out both houses on the property and cash flow every month if we were to move out. Luckily, this deal also works great as a traditional rental property investment. Our total expenses as a rental would be about $1,950 per month. The front house can rent four about $1,500 a month today, and the back house can rent for $1,200 a month, totaling $2,700 a month in gross income. Factoring in maintenance, vacancies, and other expenses, I expect the cash flow to be between $600 to 800 per month. That would generate a greater than 15 percent cash-on-cash return on our investment.

The cash flow potential opens up multiple opportunities for my brother and me. We could turn the property into a traditional rental and rent out both houses, and you can see our cash flow potential in the chart above. There is also a big vacation rental potential here due to the location and the property’s uniqueness. I could easily see renting out both houses and creating a little short-term vacation rental business or living in one house and renting out the other. Last, we could sell the property and turn a sizable profit. There is enough equity in the deal thanks to our tough negotiation and value-add strategy to make a double-digit return. Selling the property in mint condition, fully turnkey ready would appeal to both investors and homeowners. The important takeaway from this is that we came up with an exit plan that gave us multiple options. We can choose which route to go when the time comes to move out and do what’s best and most profitable in the market conditions at the time. I can tell you it feels amazing to have so much flexibility and options for my primary residence, and it gives me a lot of comfort.