#1 House Hacking ContributorPosted If you can reduce your living expenses by house hacking its a win. What I mean is if your payment towards the mortgage (and budgeting for future expenses) is about what you would pay towards rent then there is high probability that it will be a better investment than renting and waiting.
If rates go down it will put upward pressure on home prices.
#1 House Hacking ContributorPosted The best wealth building strategy I have found! Great work @Angie Castro
#1 House Hacking ContributorPosted @Johnny McKeon seems WAY high for right now. I would shop.
#1 House Hacking ContributorPosted Hmmm. Maybe ask investors in your area who they are using for their CPAs. Then ask one of those CPAs for a second opinion.
If you do not qualify as a real estate professional I don't think you can deduct losses against your w-2 income. I believe you can carry those loses forward to next year though.
I'll DM you a blog I did on other great tax strategies I've used for my house hacks in Colorado Springs.
#1 House Hacking ContributorPosted @Danny Sanchez If you have the money for the downpayment you may already be set. Here is why I say that. You should look into finding a down payment assistance loan on your primary house. In Colorado Springs, I work with lenders that will offer a 0% loan on almost all of the down payment. If you could find that in your area then using the 3.5-5% you saved for the down payment as a reserve fund would be more than enough.
You could also get a home warranty for the first two years for a couple hundred bucks. This will protect you while you wait to build up your reserves to a higher amount.
The reserve amount will also depend on inspection. How bad were the large items that might need to be repaired in the future (roof, furnace, sewer line, etc).
#1 House Hacking ContributorPosted @Graeme Harris in Colorado Springs I have converted single family homes to units with mother in law suites. This is completely legal here. I imagine there are rules around that in your area. I would talk to the local planning department and see what they have to say.
I have also rezoned a single family property into a zoning that supported a duplex. That is quite a nuanced process and is unlikely to work in most scenarios though. But still possible and worth asking the planning department if you are already there talking about issue number one above.
#1 House Hacking ContributorPosted Interest rates and high purchase prices are pushing a lot of people away from buying. Most are turning to renting, but is that the best move right now? Will House Hacking prove to be better than Renting over the span of the next 5 years? That's what this blog is all about. To effectively evaluate the financial implications of renting versus house hacking, we'll dive deep into the numbers and walk you through how we calculated them. We'll also make sure to address the opportunity costs associated with Renting and House Hacking.
Here are the numbers we are going to use in this blog. They are very realistic numbers for what you would experience as a house hack buyer or renter in Colorado Springs.
Buyer - Buying a 450k home at a 6.625% interest rate with a 5% downpayment ($22,500). The home has 5 bedrooms and you are renting out four of them for $600 each ($2,400).
Renter - You are paying $1,200 in rent for a decent 1 bedroom apartment in Colorado Springs. You just signed a year lease. According to Apartments.com the average rent of a 1 bedroom apartment in Colorado Springs is $1,308/month and only 662sqft.
When you rent you are giving up a lot of the benefits of owning. We will start with those. Then we will talk about what you give up when you House Hack. Focusing purely on the numbers.
Opportunity Cost of Renting: No Appreciation
Let's start by understanding the concept of appreciation in the context of real estate. Appreciation refers to the increase in a property's value over time. Since 1993 (the oldest median sales price data from Pikes Peak Association of Realtors) homes have appreciated at a rate of 5.38% per year. (Median price in Jan. 1993 $88,775. Median Price in Jan. 2023 $450,000). For that reason, we will assume a smaller 4.5% for the annual appreciation of real estate in Colorado Springs.
To calculate the total appreciation value at the end of five years, we use the formula:
Future Value = Present Value × (1+Appreciation Rate)^n
For a property with a purchase price of $450,000 and an annual appreciation rate of 4.5%, the value after 5 years can be calculated as follows:
Future Value = 450,000 × (1+0.045)^5 = 560,781.8719
560,781.87 - 450,000 = 110,781.87. This is the amount of value you are expected to gain in the next 5 years. This is a very real value that you can cash in on by selling the property or pulling a HELOC and reinvesting.
Appreciation details and assumptions:
While real estate appreciation is not guaranteed, historical trends can offer some predictive insight. It's essential to recognize that all investments carry assumptions and risks, but informed decisions are based on historical data and trends. We showed above how we got the 5.38% annual appreciation and we chose a more conservative number of 4.5% annual appreciation.
One of the unique advantages of real estate investment is leveraged appreciation. By putting down a small percentage of the property's value (e.g., 5%), you control 100% of the property and benefit from 100% of the appreciation, despite the bank financing the majority of the purchase.
What do I mean by that? Let me set up an example here. Let's say you bought a $100,000 house for 5% down ($5,000) and the home appreciates 5% in the first year. After year one the home is now worth $105,000. Your home is worth $5,000 more and you only invested $5,000. That is a 100% return on your downpayment of $5,000, in just the first year. That is the power of investing in real estate. You get to keep all of the appreciation. Even though the bank gave you $95,000 to buy the home, they get none of that appreciation.
Opportunity Cost of Renting: No Loan Paydown
When you own a property with a mortgage, part of your monthly payment goes towards paying down the principal which reduces the amount of the loan. For a $450,000 property with a 6.625% interest rate, the principal reduction over 5 years can be calculated using an amortization formula, revealing a significant amount of equity built through loan paydown alone.
Take a look at the table below. This is pulled from an amortization schedule of the loan from the $450,000 house at 6.625% interest rate. You can find an amortization calculator easily on google. In the first five years you will pay the loan down $26,742 (the total of the rows in the "Principal" column). That number grows as the years go on and you pay more principal and less interest.
Now what about that interest number? You'd say "that's a lot of money going to interest every year". And you'd be correct, but your house hacking tenants will be paying for most of that. Furthermore, you can deduct the interest payments against your rental income. Something you can't do with rent. We will factor in those large interest payments later in the blog.
Opportunities of renting: Put your down payment in another investment
With any investment you have to consider your opportunity costs. In other words, where else could you have put your money and would that have performed any better for you?
Alternatives to using your cash to buy a Home:
S&P 500 Index:
Assumption based on history: For the last 100 years this index fund has average annual returns of 10.13%. This sounds good, but as I will illustrate later in this blog, it pales in comparison to real estate.
Details: The stock market is known for its volatility. The high returns come with significant risk. For example, 1995 saw a 37.20% increase. But 2002 saw a 21.97% decrease. 2022 saw a 19.44% decrease. 2023 saw a 24% increase.
U.S. Treasury Bonds:
Assumptions: A very safe investment. It comes with its own assumptions, like any investment. The assumption here is that the US government will continue to be a government and will not default on its loans. Seems pretty safe compared to other investments.
Details: They are considered safer, but typically offer lower returns compared to stocks and real estate. Currently around 4-5% interest annually. And it doesn't compound.
Overall numbers after 5 years of renting:
Assuming rent increases at 3.5% per year you will be paying $1,377/month in 5 years from now. Over the span of 5 years you will have paid $77,220 towards rent.
However, you're $22,500 downpayment invested into the S&P index fund at our assumed rate of 10.13% compounded annually will be worth $36,236.48
Leaving you a net living cost of $36,236.48 - $77,200 = ($40,963.52)
Overall numbers after 5 years of house hacking:
Expenses include: Principal, Interest, Taxes, Insurance, Repairs/Maintenance, and Private Mortgage Insurance.
You will have paid $164,239.76 towards your principal and interest
You will have paid an estimated $20,914 in property taxes and insurance
You will have paid $5,400 in private mortgage insurance
You will have paid an estimated $10,859 towards repairs and maintenance
For a total expense of: $164,239.76 + $20,914 + $5,400 + $10,859 = $201,412.76
However, here are the positives to your net worth: Appreciation, Loan Paydown, Rent payments from Tenants
You're home will have appreciated to an estimated value of 560,7812 an increase of $110,782
You will have paid down your loan by $26,742
Your tenants will have paid $154,439 in total rent
The total benefits add up to: $110,781.87 + $26,742 + $154,439 = $291,962.87
House Hacking net worth boosters minus expenses = $291,962.87 - $201,412.76 = $90,550.11
(The home equity for year five is calculated using the downpayment + appreciation + loan paydown)
House Hacking Vs Renting
House Hacking net worth after 5 years: $90,550.11
Renting net worth after 5 years: ($40,963.52)
Leaving you a net worth benefit of $90,550.11 - ($40,963.52) = $131,513.63
Here is a screenshot from our calculator on the difference in monthly payments between Renting vs House Hacking
The winner is clear. As rents continue to rise, renting will only cost you more money every year. House Hacking provides significant financial benefits through appreciation, loan paydown, rental income, and tax savings. The decision to rent or house hack should be informed by all of these factors, considering both the risks and the historical performance of the real estate and rental markets. We have an amazing rent vs house hack calculator that will do all of this math for you (pictured in graphics above). You can even change the assumptions for several factors (rent appreciation, home appreciation, rent payments, etc) if you think mine are too aggressive. Download the free calculator here.
After seeing these numbers our client's often want to house hack, but are concerned they can’t afford the downpayment or qualify for a mortgage loan. They often do qualify and I bet you could too. Here is how!
Concerned about downpayment. We work with downpayment assistance lenders that can give you a 0% interest loan to cover your downpayment. You only have to bring $1,000 to buy the home. If we negotiate seller credits you may even get paid to buy a home! You pay the down payment assistance loan back when you sell or refinance your home. It's free money in the meantime. You can't beat that!
Concerned about credit? - You can qualify for a loan with a credit score above 500. Credit scores can actually be improved quite quickly. If you need to improve your credit score, we can introduce you to a credit repair program we work with
Extra thoughts:
1. I did not include the cost to sell in this scenario because in this scenario we are imagining holding the property for longer than 5 years.
2. Extra benefit towards house hacking:
Down Payment assistance - If you make less than 150k you can qualify for down payment assistance. This is a 0% interest loan for almost all of the downpayment required. You don't have to pay it back until you sell or refinance your house. Let me say that again 0% interest loan.
3. This doesn't include the potential tax benefits.
Total mortgage interest over 5 years = $137,497. This is deductible in proportion to the % of your home that is used as purely a rental (the bedrooms). Let's assume the 4 bedrooms are 25% of the square footage of your home.
Let's say you make $80,000/year and you are in the 22% tax bracket.
This will reduce the amount you have to pay on taxes over five years by: (Mortgage interest) x (tax bracket) x (the percentage of home used as rental) = $137,497 * 0.22 * 0.25 = $30,249.34 in tax savings.
https://www.irs.gov/publications/p936
https://www.irs.gov/help/ita/can-i-deduct-my-mortgage-related-expenses
#1 House Hacking ContributorPosted @Nick Kramer, you should talk to !
Thanks for the shout out @Jon Schwartz.
@Nick Kramer I would be happy to connect. I have scaled to five house hacks in Colorado Springs myself and would be happy to walk you through how to make that happen. We can sit down and run the numbers with my House Hacking Calculator as well to show you what's possible with multifamily and other house hacking strategies in the Springs!
#1 House Hacking ContributorPosted I wonder if your criteria may be a little unrealistic for the current market.
In Colorado Springs (and most other markets) House hacking is tough to cashflow in year one (with current house price run-ups and interest rates) for a couple reasons:
1. You are living in one of the rentable units
2. You are only putting 5% down so your loan amount is much larger and therefore your mortgage payment.
I would consider your net worth ROI. What I mean by this is considering how much your down payment returns to your net worth (appreciation, loan paydown, tax benefits, AND rent avoidance). Don't forget to include rent avoidance in your numbers! You have to live somewhere.
You may need to lower your return or cashflow expectations so you can get into a house hack that will allow you to avoid throwing rent money away every month. You know this, but don't forget all the other ways real estate makes you money. Paying down your mortgage and owning an asset that will appreciate over the long term.
If you are paying close to what you pay in rent to cover PITI and expenses then owning a house is a much better financial decision than renting.
Thank you for this reply! I will be sure to re-run my numbers based on this information. Just did another report and found it to come out around $3600/month for a $400k home after HOA, utilities, CapEx, and more costs. After finding more accurate comps a rough figure of $2200 arose for whole house rental in the area. Ultimately I would like to put what I would pay in rent into equity, as well as have the freedom to move and house hack another property after 2-5 years. This negative cashflow, which I realize is fine for house hacking, could hurt my freedom to move long term as I would be forced to cover the difference from rent collection, however the question arises: Is it worth subsidizing $1400 in mortgage payments so that tenants can pay me $2200 once I move out? You also mentioned write offs, I am not sure how this factors in specifically and wonder if you could speak to that, as well as how much I will pay in taxes for rent collection. Thank you for your reply that gives me a lot of food for thought!
@Rob Trufant I just DM'd you a great blog on my website. It talks all about why house hacking is a great investment even without cashflow and why you shouldn't give up one great investment because you can't immediately scale to the next one.
#1 House Hacking ContributorPosted I hope this helps. It has worked well for me in finding my tenants in Colorado Springs:
Not being able to find tenants is one of the biggest fears beginning house hackers have when they first get started. We will guide you through the process of reducing risks and saving time in your quest to find the perfect tenants. We understand the anxiety that comes with vacancies, but with the right strategies, you’ll be well-equipped to attract reliable tenants. So let’s dive into the world of finding tenants with confidence.
Fears:
The number one fear among house hackers is the inability to find tenants, which can significantly impact your ROI and rental income. However, it's important to remember that this fear stems from the unknown. Once you've experienced the successful rental of your first house hack, this fear diminishes. In reality, finding tenants is quite easy, especially if you follow these steps to reduce your risk of vacancy:
Living in a growing city in a desirable location increases your chances of finding tenants. In addition to that, the current housing shortage creates a demand for affordable housing, making renting rooms even easier to do. Be willing to adjust the rental price if necessary to attract potential tenants.
Implement the following steps to increase your chances of finding suitable tenants and minimize vacancies.
Generating Interest and Attracting Potential Tenants:
Making the Listing
Take professional photos! You can use them every time you need a new tenant. If you can’t afford professional photos you shouldn’t be house hacking.
Make sure your listing description includes the following items:
To maximize your reach and find potential tenants, utilize various platforms, including:
Responding to Inquiries
Once you create an awesome listing you will start to get inquiries. While you may receive numerous inquiries from individuals casually browsing listings, focus your time and energy on serious prospects. Make them earn your attention by demonstrating genuine interest.
Ask them an easy question back to see if they are interested. I usually start with something like this:
“We require a 550+ credit score as well as a current job paystub or a co-signer who meets these requirements. The move in date is August 1. Does all that work for you? “
If they answer “yes” you are on to the next set of screening questions. I use this: “I have a couple questions for you to make sure it’s a good fit for you. Please answer these. Then we can go from there: “What is your Job? Only you? Pets? Move in date? Estimated length of stay? Any questions for me?”
Based on those answers you can decide if you want to set up a showing with them.
Before we talk about streamlining showings, I want to share a hack with you during the initial screening phase.
Prepare templated questions in advance to streamline the process and utilize text replacement features on your smartphone for efficiency. For example, all I have to do is type “rental1” in my iPhone and it will replace it with that first reply. I type “questions1” in my iPhone and it replace it with all of the questions I want to ask.
Setting up showings:
Do as many as you can in a one or two hour block. Tell potential tenants when you are going to be showing the house and make them work around your schedule. I like to schedule 15 minutes showings back to back and get several qualified potential tenants to come during the same window. While we are there I make sure I get a feel for the tenants and how I would get along with them. Tell them you will send them an application with background check, credit check, and eviction history. Ask them if there is anything that might come up on their reports that they want to let you know about?
Choosing the tenant:
When you are house hacking there is no fair housing laws. You can pick who you want to live with. I would recommend deciding based on these criteria:
Getting Leases and admin stuff set up
Use e-sign technology to get leases signed. I like Doc Hub and you get 5 free document signatures a month.
Once the lease is signed set them up with software you are going to use. The best software I’ve found for managing tenants are Apartments.com (formerly COZY) or Rentredi.
Personally I use apartments.com. With Apartments.com I can automate rent payments, have the security deposit paid, and have tenants upload their proof of renter’s insurance.
Challenges of living with other roommates and renting by the room
When living with roommates there are always challenges. More often than not it is enjoyable and a great way to make new friends. Here are some of the challenges I’ve faced with rent by the room house hacking:
Dishes!! People not doing them is annoying. Set up a chore list. Set an expectation that no one leaves their dishes in the sink. Create a chore list and if someone misses make them buy the house beer or do everyone’s chores the next week.
Drama between tenants. Facilitate conversation and get people to talk like adults.
Tenants not paying on time. Require autopayment set up in the lease. Use Apartments.com to do this. Have a lease in place that gives you some options if tenants aren’t paying on time. Enforce the late fees every time to incentivize on time payments.
You can do this!
With the outlined steps and strategies, you can overcome the fear and stress associated with finding tenants for your house hack. With these steps you can reduce your risk and your time. Remember that living in a growing city and providing affordable housing will attract potential renters. By creating an appealing listing, responding to inquiries efficiently, conducting effective showings, and choosing the right tenant, you’ll minimize vacancies and maximize your rental income. Additionally, setting up leases and utilizing software platforms will simplify administrative tasks. With these tips in mind, you’re well on your way to successful house hacking. Don’t be discouraged—finding tenants is an achievable feat!
And remember to declare your rental income on your taxes so you can use that income to help you qualify for the next house hack!
I don't know where I'd be with you Ryan, Lol
Love the automated text prompts and pre-screening questions.
haha! Thanks @Benjamin Sulka. Also I don't know if I mentioned it but I use text replacement with the iphone. I type "Rental1" and it plugs all of the first response into the message box. Saves me a ton of time copying and pasting. Super easy to set up in "Text Replacement" in the iphone.