How to buy a house and live mortgage free
**aka all about House Hacking as an investment strategy **
Welcome to the new subscribers and welcome back to the returning crew to In Pursuit of Financial Freedom. In this newsletter I discuss all the things Financial Freedom aligning with the four themes: Savings, Multiple Revenue Streams, Debt Management and Retirement. I talk a lot about real estate and some alternative investment vehicles and opportunities. If you aren’t following along the journey, might I suggest clicking below.
**Originally posted on The Property Column Blog where I help home buyers and sellers with their home journey. I thought this forum would enjoy this post as well… I added some more tips for renters looking to HACK **
How much would you love to not have to pay mortgage bills every month? What about rent?
When I was renting it really bothered me that I was giving away my hard earned money every month to someone else. I wanted the money I was paying to go toward building equity not to line someone else's pocket. Long story short, I ended up buying a house.
Now that I own a house, let me be clear... paying my mortgage bill to the bank on the first of every month feels a whole lot like paying a rent check.
The question changed from how do I not pay rent to how do I reduce the cost of my mortgage every month?
There are definitely a few creative answers to this question. Most people would think in order to reduce their mortgage bill they would need to contribute a little bit more each month to pay down the principle. Good idea, this does reduce the total amount you pay over time, but wrong. The point here is to pay less not more. Especially as a real estate investor, I want to have as much cash on hand as possible to pay for my next investment. If you aren't looking to be an investor having extra cash on hand is still a good thing for vacation, for emergencies etc.
My answer to this problem is unconventional and probably very unpopular with the masses (that's why I love it!) Not everyone will like this idea or will want to try it. That's okay, it's not for everyone. However, I implore you to think outside the box and think about how you could make it work for you in your situation.
House Hacking
Haven't heard of it? House Hacking is a real estate investing strategy where you rent out a portion of your primary residence to create income and offset the cost of the mortgage and other expenses such as insurance, taxes, utilities etc.
As a home owner, I made the strategic decision to rent out my spare bedrooms to roommates. I have a three bedroom home and there is only one of me. There is a master with en suite and two additional bedrooms that share a second bathroom. I partnered with my boyfriend on this property and we split the cost of the mortgage and expenses in half (this is one way to reduce expenses - partnership). We rented one of the spare bedrooms to our friend/roommate. We have a third bedroom that is now listed for rent on Furnished Finder which is a website primarily for travel nurses and medical professionals seeking furnished short term leases.
If both spare bedrooms are rented, we would cover close to 85% of our mortgage costs. That significantly reduces my overall cost of living, allowing me to save more every month for my next investment.
You think I would stop there? Of course not. There is more. In addition to the spare bedrooms, there is also a full unfinished basement. Enter my next project. We are going to update the basement and turn it into a separate studio apartment and rent it out to tenants.
Quick math: I'm estimating that it will cost about $30,000 (plus or minus a few thousand) to finish the basement including all exterior work, interior updates, converting to natural gas, adding an electric meter, installing a bathroom etc. If I rent out the property for $1,200 (plus or minus $100) a month or approx. $14,400 a year. That is almost 50% cash on cash return... aka I would earn the money I spent on renovations back in two years. That is a great investment. Not to mention the rental income will cover over half of my mortgage related costs.
Renting out the basement to tenants will allow me to further reduce my mortgage and monthly expenses. If I have both bedrooms rented plus the basement rented, I would be turning a profit every month and my costs would be covered completely. Will I ever do this? More than likely not. I think it would be a little too hectic to have that many people in this one house. My goal is simply to reduce my costs. I am OKAY with not making a profit on my primary residence.
Trust me though it is 100% possible to House Hack and turn a profit depending on the investment and the expenses. For instance, if I were to live in my finished basement apartment and rent out the upstairs section of my house, I would cover my mortgage, expenses and turn a profit. A 3 bedroom 2.5 bath rental in my area would rent for over $3000 a month. Which exceeds my mortgage expenses by almost $1,000. See, you just have to be creative and think outside the box.
Speaking about thinking outside the box; here is a list of ways that you could creatively House Hack and reduce your expenses:
rent out a spare bedroom in your house to a long term or short term tenant/roommate
rent out additional space in your home like your basement
put a spare bedroom on airbnb
build an accessory unit or apartment on your property if you have extra land and rent it out
rent a piece of land to someone to leave their camper or tiny home
rent a piece of land on Hipcamp or another camping website to people looking to camp
rent out your house when you are on vacation on Airbnb or another website
buy a small multi-family home and rent out the other units to tenants
as a renter you can sublet other rooms in your apartment for more $$ and reduce the cost of your rent (make sure subletting is okay w/ your landlord first)
explore airbnb arbitrage as an option as a renter (make sure you aren’t violating your lease first)
sublet or airbnb your own room and go stay with a friend or family
Final Thoughts…
House Hacking is definitely a sacrifice, you give up some privacy and comfort at the cost of extra income/reducing costs. It isn't for everyone. For me, house hacking my immediate space, my two spare bedrooms, will not be permanent but temporary. Renting out my basement will be more permanent because it gives me more privacy. Eventually I may even rent out the entire house and move elsewhere. I also really like the idea of renting out on Furnished Finder because it allows me to rent out on a short term basis. If it doesn't work out then I am not stuck in a year long lease with someone who is a terrible roommate. Renting to friends may be a good in between strategy, I caution you though make sure you are compatible roommates first.
If there is a will there is a way. Before jumping in I highly recommend weighing the pros and cons and running the numbers. There is a lot to consider related to taxes and insurance. Reach out to me for more info before getting started.