Welcome, Future Early Retirees.

Wouldn’t it be nice if there was a way to massively reduce one of your biggest expenses? Introducing house hacking. One of the best ways to reduce your housing costs. In some cases, it can reduce your housing costs to zero and even generate you additional cash. This is especially useful in high cost of living areas where it is challenging to keep your housing costs down.

In today’s newsletter:

• What is house hacking?

• Why is this worth doing?

• How to get started

• Things I found interesting

• Hands off investing with Acorns

• Financial Tools

What is house hacking?

House hacking is a technique in real estate for those who want to buy a house but want to keep their housing expenses low. You get the benefit of someone else (the tenant) paying off your mortgage while also enjoying the house yourself. Here's a more detailed breakdown house hacking:

1. Purchase a Property with Multiple Units: The most common form of house hacking involves buying a property with multiple living units. This could be a duplex, triplex, quadplex, or even a single-family home with additional living spaces like a basement apartment or a detached guest house.

2. Live in One Unit: The owner occupies one of the units/bedrooms as their primary residence. This detail is crucial because it often allows for better financing options, like FHA loans in the U.S., which require the buyer to live in the property for at least a year. These loans typically offer lower down payments, which can be as low as 3.5%.

3. Rent Out the Other Units: The remaining units are rented out to tenants. The income from these rentals is used to cover part or all of the mortgage payments, property taxes, insurance, maintenance costs, and sometimes even utilities.

Key Takeaways:

• House hacking is a technique people use to buy a home but also keep their housing expenses low.

• Buy a multi-unit property and live in one unit, utilizing financing options like FHA loans that favor owner-occupants with lower down payments.

• Rent out the additional units to tenants, using their rent to offset or completely cover your mortgage and other property-related expenses.

Why is this worth doing?

Income Generation: By renting out the additional units, homeowners can generate rental income, which can help cover or even exceed their mortgage payments. This additional cash flow can create much needed relief.

Reduced Housing Costs: House hacking allows homeowners to substantially reduce one of their biggest monthly expenses, sometimes even living rent-free. This enables individuals to allocate more of their income towards savings, investments, or paying off debt.

Equity Growth: As property values typically appreciate over time, homeowners benefit from the potential increase in equity. House hacking accelerates this process by leveraging rental income and tenants' contributions to building equity.

Enhanced Loan Opportunities: House hacking can also open up financing opportunities, such as FHA loans, which often require a lower down payment compared to traditional mortgages. This makes it more accessible for aspiring real estate investors to enter the market.

Key Takeaways:

• Renting out extra units can cover or surpass mortgage costs, providing additional income for savings or investments.

• House hacking can significantly lower or eliminate personal housing expenses, freeing up funds for other financial goals.

• Homeowners gain from property value appreciation and can access better loan terms like FHA loans, easing entry into real estate investment.

How to get started

1. Educate Yourself:

• There are numerous resources available that delve into real estate investing and house hacking specifically. Look for books like "Set for Life" by Scott Trench, which discusses house hacking among other financial freedom strategies.

• Podcasts like BiggerPockets Real Estate Podcast often cover house hacking with real-life examples and tips.

2. Financial Planning:

• Understand your credit score, savings, and how much you can afford for a down payment. Tools like my loan repayment schedule can help estimate what you can afford.

• If you are not in a position to start looking today, put together a plan of how you may be able to in the future. You can read one of my previous posts on how to master you money here.

• Before you start looking, get pre-approved for a mortgage. This will show sellers you're serious and give you a clear budget. Look into FHA loans or other low down payment options ideal for house hacking.

3. Identify the Right Property:

• Look for areas with good rental demand, potentially near universities, business districts, or areas undergoing revitalization.

• Decide if you want a single-family home with rooms to rent, a duplex, triplex, or quadplex. Each has its pros and cons regarding privacy, income, and management.

• The 1% rule is a good guide where the monthly rent should be about 1% of the purchase price, though this can vary greatly by market, so don’t get down in the dumps if there are no houses like this.

• Run the Numbers: Calculate potential rental income, expenses (mortgage, taxes, insurance, maintenance, vacancies, etc.), and see if the numbers make sense. There are online calculators and spreadsheets designed for this purpose.

• Think about the property's appreciation potential and how easy it would be to rent out in the future if you decide to move.

• Keep your safety in mind: No investment is worth putting yourself in danger. Research the crime and drive around the area at night to get a feel for neighborhood.

5. House Hacking Strategy:

There is more than one way house hack. Here are some of the common strategies.

• Traditional: Live in one unit while renting out others.

• Live-In Flip: Consider buying a place that needs minor renovations which you can do while living there to increase its value.

• Short-Term Rentals: Platforms like Airbnb or Vrbo can be more lucrative than traditional renting but require more management.

• Room Rentals: If you're in a single-family home, renting out individual rooms might be your strategy.

6. Legal and Zoning Check:

• Check zoning laws, HOA rules if applicable, and local rental regulations. Some areas might have restrictions on short-term rentals or the number of unrelated tenants.

• What rights do the tenants have? Some state laws favor tenants to the point where they could go months without paying rent, whereas others are much more landlord friendly.

• Ensure you are compliant with all housing codes and regulations. This why it is best to get the house inspected BEFORE you close on it.

7. Tenant Management:

• Learn how to properly screen tenants. This includes credit checks, background checks, and previous landlord references.

• Have a solid lease agreement that outlines all terms clearly.

8. Prepare for Management

• Set Aside Emergency Fund: For repairs and vacancies.

• Decide on Self-Management or Property Manager: If you're not keen on dealing with tenants directly, consider hiring a property management company, though this will eat into your profits.

Key Takeaways:

• Utilize resources like books and podcasts to learn as much about house hacking as you can.

• Find properties in high-demand areas and use the 1% rule as a benchmark for rental income potential. Always run a financial analysis and have the home inspected before closing

• Be conservative in your projections, if there is anything I have learned about home ownership, it is to expect to pay more than you planned to.

Things I Found Interesting

• Self-learning AI makes NFL picks for every 2024 Week 1 game

• Nvidia’s earnings report shows the problem of being priced for perfection

• 25 of the Happiest Jobs

• NASA cuts 2 from next SpaceX flight to make room for astronauts stuck at space station

• The gift of education: Getting friends and family to contribute to your kid’s 529 account is ‘pretty darn cool’

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