I'm going to be graduating from college next year. One thing I've been investigating is this idea of house-hacking. That is to say, buying a duplex, triplex, or fourplex and living in one unit and renting out the others. I'd like to ask some questions here as well as layout a gameplan.
Essentially from my understanding, you can purchase a house-hack rental property using an FHA loan. Meaning you only have to put 3.5% down on the property. Practically speaking I could purchase a $400,000 asset for $14,000 dollars. This seems like an incredible way to control a large asset for very little money. I know you can also qualify for a much larger loan by counting 75% of the potential rents to qualify for a higher loan.
I'm currently 20 years old, turning 21 in May. I've always had this goal of retiring early. I want to unplug from the Rat Race as early as possible and start traveling and enjoying my life before maybe settling down with a family later on. I think a house-hack would be the best way to achieve this goal for a couple of reasons.
Reasoning:
1) I have to live somewhere regardless. And renting is a waste of money because no wealth is built. With the goal of early retirement renting isn't an option. To the extent I'm going to purchase a property, I might as well purchase multifamily and either get paid to rent or live for free.
2) Using multifamily through an FHA loan will allow me to get way more leverage than anything I've found. If I purchase a $400,000 quadplex for 3.5% down ($14,000) and the property appreciates 3.5% next year, that's a 100% return on appreciation alone. Not including depreciation, tax benefits, and the money saved not paying rent.
3) Experience with a house-hack will, potentially, allow me to purchase more rental property down the line if I desire. I'm not sure if I want to do real estate, but I definitely would like a relatively risk-free experience, and I think house-hacking offers this. Housing prices are fairly stable historically, and to the extent that I need to live somewhere, I might as well gain both experience and purchasing an asset while doing it.
4) In this ever-increasing technological society we live in, I might not be living in the same place for 30-years like previous generations. Having multifamily will allow me to rent out the unit I once lived in and move much quicker than if I living in a single-family home. It offers a lot more flexibility than a single-family home. I also believe as society develops over the coming years people will need to be more mobile, and the demand for single-family houses will fall, while multifamilies will perform much better. A generation loaded with student loans and other debts can't afford to purchase houses. Making the market for my units a lot larger.
5) Protection during a downturn. If the economy were to fall and I lose my job, I'm actually in a better position owning an multifamily than I will be owning a single-family. I'll have renters covering part of the cost, allowing me to survive downturns longer if I were to lose my job. I could get a parttime job and probably survive.
This is my rationale for my house-hack. I'd now like to delve into my sort of plan. Remember I'm not set on real estate as my sole investment. I have a Roth IRA I opened at 19, and will continue to contribute to that. I view real estate more like the best opportunity to pull out of the rat-race as early as possible.
Plan:
1) I believe a fourplex offers the best opportunity for a house-hack. My reasoning for this is fairly simple, generally having more units under the same roof lowers costs. I'm also yet to read of anyone who's made money living in a duplex house hack or a triplex house hack. It offers more flexibility during economic downturns, and I've read a couple people who started with a duplex house hack and regretted not doing a fourplex.
2) Early retirement is my main goal. If I purchase a fourplex rental property for $400,000 dollars. Assuming the 1% rule, or even .8% per month, the property would rent for anywhere between $38,400-48,000 per year. My plan would be to live in one unit and most likely rent a room in my unit as well, further increasing the likelihood I'd either be getting paid to live or live for free.
3) Once the property was paid off, I could essentially retire. With just property taxes, insurance, and property management I'd still be netting at least $30,000-$35,000 per year, again depending on the rent. It would net this much once I move out of the unit I occupy.
3) I wouldn't retire initially once the property was paid off. Instead, I would rebuild my 9 months of mortgage payments (I'm conservative and like to be able to survive economic downturns). I'd also make long term investments in the property, such as tankless water heaters, granite countertops, wood floors, stainless steel appliances, new plumbing, new roof, and any other long term or "bones of the house". Things that would lessen the chances of calls from a good property management team, long term fixes that would last 30+ years at least, and increasing the value of the property increasing rents.
Recap:
Once the property is paid off with extra payments, I'll build up 9 months of mortgage payments as a safety net, make long term investments in the property that will simplify management and increase rents, and then most likely hire a property management team and buy a van and travel for a while.
Justification:
Now, I know there's a lot of people (especially on bigger pockets) that are going to say. "Why would you pay it down early?" "You're using other people's money." "You could get a greater return buying stocks." "Interest rates are at historic lows."
All of these are probably true. From a mathematical standpoint, I know leveraging to the hilt is better than purchasing with cash (unless of course, you lose the properties in a downturn as so many did in 2008..). But I get the point.
My main argument against this is it doesn't fit my goals. My goal is early retirement, not even maximum return. I want to escape, not get rich. I can focus on getting rich after I travel a bit and live in my pimped-out van.
It also doesn't fit within my long term goal. I'd like a family, and having a paid off fourplex will let me live in a nice single-family house with a lot of stability coming from having a paid off rental.
Anyway, if you have any recommendations lemme know! Also, any book recommendations would be nice. I'm currently reading the book Set For Life by Scott Trench. I've also read Rich Dad Poor Dad, by Robert Kiyosaki.
