There is a relatively unknown concept in many circles that is a powerful wealth-building tool that many of us know the fundamentals of but few use to supercharge their decent to financial freedom. This concept is called “house hacking” and gives you the ability to live rent-free or subsidize a good portion of your rent, allowing you to save or invest what would normally be paid to a landlord or mortgage company.
Now before you write this off or think that this is some scheme to get you to pay money to some “guru” who for a large fee will show you some secret program that unlocks the “golden goose”; let us assure you that it is a lot simpler than you think and can be accomplished with relatively low money. Ready to cut your rent significantly or possibly even get paid to keep a roof over your head? Then let’s take a dive into the different types of “house hack” opportunities.
1. The small multi family strategy:
Many people, myself included, have lived in small multifamily homes such as duplexes, triplexes, and fourplexes. As long as the structure is under five units for lending purposes it can be classified as a single family home which is great for those who were considering purchasing but also wanted to create some passive income. The key here is the government has a program specifically called an FHA loan which allows you to put as little as 3.5 % down on a home with some qualifications such as decent credit (around a 650), a job, and other criteria most people who are serious about purchasing a home could generally meet. An example of using this strategy would be John is looking to buy a duplex and uses the FHA loan to do so. Now we will use simple numbers but the numbers aren’t important as long as you grasp the strategy. John finds a duplex that sells for 100,000 and puts the 3.5% or $3500.00 down and is ready to move in. Using the FHA program John gets a conventional fixed rate 30 year mortgage and after his mortgage, expenses, and property taxes John is in for around $725.00 a month. John then runs an ad on Craigslist, finds a nice elderly woman to rent the other side of the duplex for $750.00 a month, and manages the property himself. What John has essentially done here is remove not only all of his rent expenses but has been paid $25.00 dollars a month to put a roof over his head. Now look further down the road. If John meets his dream girl and decides to move on and rent the unit he was living in to move into a bigger place with her, and assuming he charged the same amount for his unit, John would be clearing hundreds of dollars in cash flow monthly off a $3500.00 investment. This would allow him to funnel that newfound cash flow into more deals, investments, or whatever he likes. A good book for small-multifamily properties is Larry Lotis’s Investing in Duplexes, Triplexes & Quads.
2. The live in flip
Assuming you don’t like the idea of living with anyone else or being a landlord don’t fret we have another option for you. You can also “house hack” by purchasing a fixer upper home and remodeling it along the way while living in it, forcing the value of the home to go up. Keep in mind that if you live in that said home for 2 years and sell it after that time period; you are not required to pay any capital gains taxes on that money at the end of that period. An example of this would be using a FHA loan to purchase a $200,000 home, which would require you to put down 7,000 to get into. While you and your family are living there you make upgrades at your convenience such as kitchen or bathroom remodeling, paint, carpet, etc using either your own skills or paying professionals to do so while not overdoing the remodel but forcing appreciation. At the end of the two years, the house that you initially moved in that was worth $200,000 after the upgrades and being that you bought it in a decent community is now worth $300,000. You sell the home and after closing cost walk away with a check for 60 to 70k. Now remember your initial investment was the $7000.00 down payment you saved, your time and effort of making small but efficient improvements, and any contractors you may have paid to do work you couldn’t or didn’t want to do yourself. If done wisely, economically and efficiently you can literally supercharge your wealth building and write your own check every two years snowballing that money into bigger and bigger deals.
3. Other creative ways
You can rent out rooms in your existing home, Airbnb, or any other multitude of creative strategies to get you going. The key here is to start thinking outside of the box and use your living quarters as a cash-producing asset that will ultimately be a tool to set you down the road to financial freedom. The FHA loan is only one loan product you can use there are a variety of programs such as VA loans, first time home buyer loans, agricultural loans etc. Your focus should be wherever I live I should be getting paid to live there whether that is cash in the short term or in the longer don’t cheat yourself out of living for free.