Hacking Your Housing Costs
Fundamental Principle
House Hacking is an incredible strategy for building wealth, and lowering your personal housing costs, when pursued with care and diligence.
Our Story
Our first home in Laguna Hills, CA.
In 2016, we were engaged and arranging our wedding - but being the planning types - we were also considering our future, and looking to put down roots in South Orange County. We had both saved aggressively in our first several years of post-graduate employment (and thanks to our parents and scholarships, were student-debt free). That said, we had chosen one of the higher cost-of-living markets in Southern California - and were always a little disappointed when we looked at homes in our price range.
Unbeknownst to Diane, in the months leading up to the wedding, Nick had been scouring Zillow for duplexes or homes with additional dwelling units (ADUs) - which are pretty rare in Orange County. When one came on the market the day before their wedding, Diane was not interested in going to tour it (she had a few other things on her mind).
We had particularly resourceful agents, however, who did a walk-through of the home while we were on our honeymoon. It might have been the Mai Tais talking, but from the beaches of Hawaii, the house looked incredible - and we committed to seeing it upon our return. Luckily, it also fell from $700,000 (outside our budget) to $649,000 (the top of our budget) while we were enjoying paradise.
When we walked the house, some of its quirks (which the agents had artfully skipped in their video) came into full view - and Diane, disappointed, was hesitant to make an offer. Nick was further along in his real-estate education, and outlined the significant benefits to “house hacking” - and eventually Diane was sold.
In November 2016 (one-month after our wedding), we closed on the house for $640,000 (inspection concessions brought the price down another $9,000), and we got to work making the ADU rent-ready.
While Diane scrubbed floors and lined cabinets, Nick listed the 2-bed/2-bath unit on Zillow and set us up with an application and background-check service. In January, we had two incredible tenants move in - and we started benefitting from the five wealth-building benefits of real estate.
Loan Pay Down
We rented out our ADU for $1,750/month, and our overall mortgage on the property was $3,300. Each month, we benefited as our tenants helped us to pay down that loan.
Cash Flow
While we didn’t benefit from an overall decrease in our cost of living (we were previously paying $1,600/month to live in a tri-plex, which though a nice home, came with an obnoxious landlord), we did significantly upgrade our lifestyle and home for nearly the same monthly housing cost.
Appreciation
The house needed some significant help, and we invested about $70,000 into the property - including a new roof and solar, a completely re-landscaped and re-paved backyard and patio, and a re-landscaped front yard. Three years later, the house has appreciated by $110,000.
Taxation Benefits
The primary tax benefit on this home was the mortgage interest tax deduction.
Inflation Hedging
While hard to quantify, we are absolutely paying back our loan with cheaper dollars and benefiting from inflation hedging.
*Bonus - Access to Capital
We were eventually able to take out a Home Equity Line of Credit (HELOC) on the property, bringing us to 90% LTV and enabling us to purchase additional out of state rental units.
*Bonus - Wealth of Friendship
We’ve had some incredible tenants in this home, and during the years we lived there, we enjoyed their company during backyard barbecues and walks with our dogs.
Moving On
It was with a lot of gratitude for our first home, and somewhat heavy hearts, that we chose to sell the house in 2020. We are currently under contract, with a sale price of $750,000.
Nick and Diane moved out of the area in 2018, pursuing new jobs and a better climate for Diane’s severe asthma. After a year in a cooler climate, Diane’s health significantly improved - and it became clear we wouldn’t be moving back to Southern California, as much as we missed our family and friends.
While we were comfortable managing a California property locally, we had significant concerns in remotely managing a property in such a landlord-unfriendly state. We also believed we could better deploy that capital, as we’ve become far more sophisticated investors in the past few years.
Why We’re Not House Hacking … Right Now
While we thought we knew high housing prices, we had a rude awakening in exploring the Bay Area. We made the choice to relocate, primarily driven by great job opportunities, but we don’t foresee this state as our long-term home.
In evaluating options, we considered looking for a duplex or home with an ADU - but we chose to rent, as we believe the Bay Area market is already overinflated. Both our W2 incomes are tied to Silicon Valley tech companies, so we chose to mitigate our risk in the event of a tech sector crash.
The Logic of House Hacking
The benefits of House Hacking are some of the most straight forward, and simple to understand in real estate investing. In sharing your housing cost with tenants, you immediately subsidize your mortgage (or generate cash-flow, if your home is paid off). While some advocates of House Hacking preach eliminating your housing cost - you don’t need to swing for that particular fence to find value.
If you’re looking for creative ways to reduce your housing cost, there are a few routes you can pursue:
Buy a traditional home, and rent out rooms
Buy a duplex/triplex and live in one unit, while renting out the rest
Add an ADU to a traditional home
Buy a house that already has an ADU attached
This is one of the easiest paths to beginning in real estate, as you can secure easy and inexpensive financing with Fannie/Freddie loans - often for low money down. As outlined above, not only do you reduce your personal housing cost, but you also benefit from the five key wealth drivers of real estate. If you’re lucky, you might even find that you benefit from some new friendships along the way - and over time, you can likely draw funds out of the house to further your rental portfolio.
Pitfalls of House Hacking
Tenants
When we rented out our attached ADU, we were incredibly selective. We intentionally offered the units for below-market, as we wanted to ensure we found respectful, safe tenants. As it happened, we were incredibly fortunate and found exceptional tenants who became friends.
Tenant relationships are a top priority when considering house hacking, as the safety and well being of your family are at stake.
Due Diligence
It’s critical, especially if you’re relying on the ADU to help cover the mortgage (as we were), that you have a solid understanding of the market and rents. If you make overly aggressive projections when it comes to rents, you may find yourself in a tricky situation.
Zoning/Permitting
It’s common sense, but it’s worth stating. Even if the house is being advertised with an ADU, take the time to fully understand your city’s zoning laws and ensure the ADU is fully permitted.
Some Final Thoughts
We would not be at this stage in building our rental portfolio had we not started with a house hack. If you’re at the right stage of life, where house hacking is something you and your family can explore - we couldn’t recommend it more.
If you’re just starting to consider this first step - we highly recommend Set for Life by Scott Trench. It was a game and mindset changer in our journey, and we hope it will be in yours.
