The following post is by MPFJ staff writer, Jeff. Jeff has been writing online about finance related issues since 2009, and after a lot of soul searching in 2015 has crystallized his goal of financial independence and blogs about his journey to freedom at zerotofi.com.
If you’re like most people, the biggest expense that you’ve got on a regular basis is your mortgage or rent. The standard rule of thumb on this expense is no more than 33% of your monthly gross income, but think about what it would do for your budget if you could reduce it to 15% of your monthly gross income or 7.5%, 0% or even turn what used to be an outflow of money to an inflow of money. If this sounds good to you, you might be interested in house hacking.
Note: House hacking is not for everyone, as it requires making some sacrifices. Read on to see where you fall.
What is house hacking?
House hacking is simply trying to get your rent or mortgage line item as low as possible or turn it into a positive number. You can do this in a handful of ways, but the most popular are done by purchasing a home and renting out your spare rooms, or purchasing a multi unit property and renting out one of the units.
Getting started house hacking
First, you’ll need to make sure that you’re comfortable with everything that house hacking requires. Being a landlord isn’t for everyone, and not everyone feels like living with roommates when they are almost 30. If you dont mind those things and are interested, read on.
Multi Unit Property House Hacking
If you’re looking to go this route, the basic premise is the following: you buy a duplex or tri-plex (both of which you can do on an FHA loan if needed). You’ll live in one of the units, and rent out the other of the units. The renter(s) will cover most or all of your mortgage and that will leave you with either a small amount to chip in to top off your mortgage payment, or potentially money left over. You can fix up the unit that you’re living in and then move into the other unit and fix it up and rent out your old unit or move into another place all together, and increase your cashflow.
Once you’re out of the first property, you can rinse and repeat, or just keep that for extra cashflow as time goes on. Let the renters build the equity in your home and you can use the profits to pay your own rent in a new place or for whatever you please.
The key here is to get a good multi unit that will have the renter(s) covering most/all of the mortgage when you are living in it, so when you move out that unit that you were occupying will be bringing in rents that are pure profit.
Lets take a look at some make up numbers here:
- Duplex Purchase Price: 110,000
- Loan Amount: 100,000
- Interest Rate 4.25%
- Monthly Payment (Including PMI) 575
- Unit 1 Rent: 600
- Unit 2 Rent: 0 – you will be living in it.
As you can see, once you move out of that second unit, you’ll be able to make some major progress in terms of free cash flow and really drive your housing costs into positive territory from the near 0 that they are while you’re living in one of the units.
Renting Rooms
This works the same as a multi unit, though it’s only one house. You buy a larger house than you need, and rent extra rooms out. If you price them well, you should be able to easily cover your mortgage payment with the rent income that you should be collecting.
Of course, this means that you’ll have to be living with roommates and not everyone is interested/willing to do that.
For the right person however, house hacking can really throw rocket fuel on any financial goals that you have such as paying off debt, saving extra money or anything that you want to do in the future financially.
How about you all? What do you think of house hacking? Are you willing to give it a try?
Share your experiences by commenting below!
***Photo courtesy https://www.flickr.com/photos/dejavu_/23189113561/
