We hear about it all the time on Bigger Pockets and for good reason. House Hacking is a fantastic way to get the snowball of real estate investing rolling. A term created by Brandon Turner, although he probably stole it from David Green; house hacking is when you buy a home for yourself and rent out the rest of the rooms.
It works in most markets and often allows the house hacker to live for free. But what if you could take it to all the way to financial freedom. Here is my story.
Education
It started with the podcasts. Then I started reading some of the Bigger Pockets books like “How to invest in Real Estate” and “Set for Life”. I read “Rich Dad, Poor Dad” and “The Richest Man in Babylon”. I began to realize that this wasn’t some pipe dream or get rich quick scheme, it was a very real path that people were taking to put themselves in positions to have enough passive income to leave their jobs and live life on their terms. House Hacking, like anything, required knowledge and education.
My two favorite quotes during this initial education phase were:
- What’s the worst that could happen if you try this and fail? You are right back where you started, working a job till you are 65 and have enough income or pension to retire.
- If you can live like no one wants to for a couple years, you can live like no can for the rest of your years. (corny, but so good).
Mentor
I knew if I wanted to scale my house hacking and eventually replace my income, I would need a good exit plan for each house. I discovered student rentals and the great cash flow they provided. I lived by a college and one day I saw a flyer taped to a light pole, ruined by rain. It had a number I couldn’t read. So I went the next light pole hoping there would be another flyer. There was and this guy was renting 6 homes out to students. I wanted to do what he was doing. So, I called him. I told him his flyers were ruined and that I wanted to buy him lunch to learn what he was doing. His reply? “I’m too busy for lunch, but I’ll show you my properties”. Fast forward a couple months and this “too busy for lunch” guy, Mark Hirleman, is my realtor and mentor.
House number 1
Listed on the MLS as a three bedroom home, Mark called and said I think this one has potential. We had agreed that we needed 5 bedrooms so that we could make more cashflow with house hacking and later with the exit plan of student rentals. So I was a little confused, but open minded. When we toured the house there was actually 4 bedrooms (one was just non conforming). There was also this awkward two car tandem garage. Where if you drove through one you could get to the second garage at the back. Weird. Mark said "here is your fifth bedroom". With his help drawing the plans and finding a contractor, I turned that second garage into a 200 sq ft studio apartment with a kitchenette and a full bathroom. I paid for the conversion with a 20K personal loan at 10% for 10 years from my Father (my own father, gouging me at 10% interest). This garage now nets me $1450/month on average on AirBnb.
I bought the house for 260K and 5% down. The rest of the house I rented for $600 a bedroom for a total of $1800/month.
That’s an income of $3250 a month ($1450+$1800) and a mortgage of $1550. After budgeting for some expenses and also adding my $500 in rent avoidance I was netting $1,902/month in additional income + savings. That is a 139% return on my down payment and closing costs ($16,369).
$1902 X 12 = $22,833
$22,833/$16,369 *100 = 139%
House number 2
That cash saved up quick. In a year I had saved enough to buy a second home.
I rinsed and repeated.
This home had three bedrooms, a second family room, and a two-car garage. I converted the second game room into a bedroom by adding a closet ($1,000). And I converted the two-car garage into a separate 400 sq ft studio kitchenette ($25,000). I funded this from three different $10,000 personal loans. I know had 5 rooms. I rented three rooms for $600 and the studio for $1,000. For a total rent of $2,800. And once again I lived for free (saving me at least $600 in rent).
Financially Free
I’m cheap. Like annoy my friends and girlfriend cheap. My yearly expenses, that I started tracking three years ago, average about $18k a year.
House number 1 – Now makes me $3800 (I moved out and rented my bedroom for $600)
House number 2 – Makes me $2800
Subtract Mortgage and Expenses
House number 1 – makes me $1,952
House number 2 – makes me $458
For a total of $2,410 x 12 = $28,920/year
Expenses/year - $18,000-20,000
Real Estate has been a game-changer. Its created a ton of options for me.
