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Long-time readers of this blog (thank you!) know that we retired at 31 to travel the world by doing the exact opposite of what our parents have been preaching—not buying a house. Given that the average single-family home cost over a million dollars in Toronto, instead of getting into massive amounts of debt, we rented. With all the money we saved from not owning a home, we shoved it all into the stock market, built a diversified portfolio and the rest, as they say, is history.
The only real-estate we own are REITs (Real-Estate Investment Trusts), which lets us earn income from the rents of commercial properties passively. Since freedom is my biggest priority, passive investments like REITs and low-cost index ETFs are hugely attractive to us.
Buying a home to live in, in most cases, is expensive to own, time consuming to maintain, and not an investment.
That being said, real-estate CAN be a very good investment, as we’ve seen from Paula Pant and other real-estate investors who made it to FI with real-estate investing. But those who jump into it blindly and amass a large amount of debt without understanding the risks, thinking it’s going to be easy money, are going to get screwed.
And because this blog is about financial education and not getting screwed, today, I want to introduce you to my friend, Craig, a Chautauquan, who has been able to do well with real-estate investing in Denver to give you the low down how not to be a Home Boner and be a smart House Hacker instead.
I met Craig at Chautauqua last year in Greece and he immediately impressed me with his hustle. He spent a year living behind a curtain in his living room so he could rent out his bedroom on Airbnb to get cashflow. He also earned extra side income by driving for Uber. It may not be glamorous, but if you’re willing to sacrifice and be a badass like Craig, House Hacking can be an interesting pathway to FIRE.
We met up again this year in May in Chiang Mai and had a grand old time eating out at night markets, swimming in the pool at my condo, and getting $10 massages. Craig’s reaction to Chiang Mai was “hey! If I move here right now, I’d already be FI!”
He also told me all about House Hacking.
Coined by Brandon Turner, the VP of BiggerPockets.com (one of the biggest real-estate communities online), house hacking is the strategy of buying a multi-family rental property, living in one of the units and having your tenants pay your mortgage and expenses with the other units.
So, without further ado, here’s Craig to tell you all about his book and how he learned to MathShitUp and to find the house hacking deals.
1) Why did you decide to house hack?
I decided to house hack because I saw it as the most efficient way to achieve financial independence. With the low down payment and wealth generators of real estate, almost every house hacking deal garners returns of 100% or more.
2) How many properties do you currently own and how much cash flow do they generate?
3 properties that I have house hacked. Each of which cash flow me about $1,000 per month.
3) What are the 4 metrics you use for choosing a rental property?
- monthly payment – The total monthly payment you will need to remit to your lender. This includes principal, interest, taxes, insurance, and private mortgage insurance (PMI). PMI is used on all loans where you put down less than 20%.
- monthly rent – The total rent you will receive either from your roommates (rent by the room strategy), your tenants (traditional), or your guests (AirBnb).
- reserves – These are all of your anticipated monthly expenses. It is one number that includes vacancy, capital expenditures, repairs, etc. The larger and older the house, the more these reserves should be.
- net worth return on investment – This is your return metric. It takes all of the wealth generators that real estate provides: cash flow, rent savings, loan paydown and appreciation. Divide the sum of that by your invested amount and you obtain your net worth return on investment. In other words, how much your net worth grows in relation to the amount you spend. In math terms it looks like this:
(Cash Flow + Rent Savings + Appreciation + Loan Paydown) / Money Invested = NWROI
4) Can you tell us about the American 1031 exchange for deferring capital gains?
Yes so the 1031 exchange allows you to sell a property and rather than pay capital gains tax on the proceeds, you can funnel those proceeds into a larger like-kind property. For example, if you purchased a house for $300,000 and five years later sell it for $400,000, you can take the $100,000 gain and use it towards a down payment on another property that is over $400,000. If you do this, you will avoid capital gains taxes.
5) I’ve heard some horror stories from my real-estate investor friends about nightmare tenants that nearly destroyed their property. I really enjoyed the thoroughness of your chapters about tenant vetting. Can you go over the two rules-of-thumb you use to vet tenants?
Rule 1: Have them fill out the application as best as possible. Call the references. Landlords, employers, etc.
Rule 2: Background/Credit check. I always like to see a credit score of 600 or more. Background check needs to be clear. A DUI or a misdemeanour I may let by.
6) You mention to be aware of the Fair Housing Laws when accepting/rejecting tenants. Can you tell us about that? What are the consequences of not following the Fair Housing Laws?
In most cases, if you do not follow the fair housing laws, the following will happen:
i. You will pay a hefty fine
ii. You may have to accept the tenant anyway
iii. There might be bad blood between you and your tenant
iv. In extremely severe scenarios, jail time may be necessary.
7) Can you tell us about the tool you use to ensure tenants pay their rents on time?
Cozy.co. It’s a great and FREE tool. You put your lease terms on the site, the tenants set up their bank accounts and you put the payments on recurring. Then every month, it automatically deducts from their bank account and goes directly into yours.
8) When you talk about getting a loan, you say “just because you qualify for a 1.2 million property doesn’t mean you should. Make sure the rents will provide the cash flow.” And “Be careful, in many markets, properties that are above 400K will be difficult to house hack.”
As someone who’s more risk adverse, I appreciate the honesty in this. Having lived in Toronto, I’ve seen real-estate investors accept $0 cashflow or even negative cashflow in exchange for speculating on appreciation.
How important is it to generate cashflow? Would you ever accept negative cashflow in exchange for appreciation? Why or why not?
When you are first starting out, cash flow is imperative. You simply do not know what a market is going to do so betting solely on appreciation is foolish. If you are cash flow negative and are forcing appreciation through a rehab, that is a different story.
If you get a property that cash flows, it is theoretically impossible to lose on the deal. You will be able to hold on to the property forever. So whether the market appreciates or depreciates, you can hold on.
The only time it is okay to accept a negative cash flowing property in exchange for appreciation is when you are financially independent and the negative cash flow from the asset does not remove you from being financially independent. Once you hit financial independence, you can take those small monthly hits in exchange for a HUGE appreciation play.
9) Since it’s difficult to generate a good cashflow for properties over $400K, how does house hacking work in expensive cities?
In expensive cities, it is harder to do. Though, it can be done.
If the rent by the room strategy doesn’t work, you might be able to AirBnb by the room? Other options include creating a co-living space like Brett Fink did in his case study.
Either way, if you are going to purchase a property in an expensive city, you will benefit from renting out part of it. It may not fully cover your mortgage, but it will definitely help. Maybe rather than paying $3,000 for a mortgage, you are paying $1,500…. That wouldn’t be too bad.
10) Can you house hack using rentals? (tell us about the case study of Brett Fink you mention above)
Yes – you absolutely can. The only downside to this though is you only get the cash flow wealth generator. It is not your property, so appreciate won’t affect you. Neither will any loan paydown or tax benefits.
My friend Brett rented a large single family house in San Francisco. It had 7-bedrooms. He rented the house from his landlord for $6,000 per month and he turned it into a co-living space. He put 2 bunkbeds in each room and charged $1,200 per bed! After paying the landlord and funnelling money make the co-living space an awesome place to live, he was making about $7,000 per month!
That story is a bit extreme. Another, more dialed back option would be to rent a three-bedroom house or apartment. Then rent out the other two rooms separately. For example, if you rent out a 3-bedroom for $1,200 from the landlord and can rent out the other two rooms for $600 each. You will be living for free. I doubt the first landlord you ask to do this will comply, but if you keep asking, you will eventually find someone!
11) In order to house hack, you need to live at the property for at least 1 year. What are the consequences if you don’t?
It is mortgage fraud and you can go to jail for 5 years.
The only way out of this is extenuating circumstances. Such as you move for a job, death in the family, etc.
12) What are the trade-offs of doing house hacking using long term rentals versus short-term Airbnb rentals?
1. Get to pick your tenants
2. Steady income
3. Have security deposit in case of any damages
4. Less day-to-day work
1. If you pick bad, you may have to evict.
2. Tends to use appliances a lot. More wear and tear.
3. Get comfortable
4. Not as profitable
5. Lots of work, once a year.
1. Very profitable
2. If there are bad guests, you just wait a few days
3. Don’t use appliances much
4. Consistent work throughout year. Once systems are in place, very little work needed.
1. Need to furnish
2. Subject to government regulations.
3. Non-steady income
4. Reviews dictate your life
13) And finally, what is your favourite thing about house hacking? What is your least favourite thing?
Favorite thing is how quickly my net worth grows as a result of house hacking. That opens up a lot of opportunities and allows me to do the things I love (i.e. travel) without my wallet feeling it too much.
Least favorite thing is doing showings when there is a vacancy. People are super flaky!!
So there you have it. Have you ever house hacked before? Would you ever house hack?
Check out Craig’s book from BiggerPockets here:
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