For many millenials, the American Dream of home ownership is quickly an illusion. About 8% less millennials own homes than do older generations when they were between the ages of 25 and 34 (the age of millennials now). There are a variety of reasons for this dip such as student loan debt and stagnant wages, but the question remains: is the American Dream of home ownership dead?
Most people see the value in building equity through real estate, but think that the barrier of entry is too steep. They argue that they don’t have 20% to put down, houses are too expensive, or that the monthly payments would kill them, so it’s cheaper to rent. What if I told you that these people are wrong?
There is a powerful way to become a homeowner that will save you money on living expenses: house hacking. Stop renting and start living the American Dream.
A house hack is the act of buying a property that qualifies for a single family loan (up to 4 units), living in one unit (or room), and renting out the rest of the house. There are enormous benefits to this method that will help you build wealth while lowering your living expenses.
The first major benefit is the low barrier of entry–you can get a conventional loan for as low as 3% and an FHA loan for 3.5% down. There are other loan options as well, but these are just some examples. Although you will have to keep PMI (private mortgage insurance) on the loan, it’s still far cheaper than putting 20% down!
When a property is considered your primary residence, there are numerous tax benefits. Since I’m not an accountant, I won’t get into specifics, but just know that you can write off things to reduce your taxable income.
Appreciation is another major benefit to home ownership. Although not always the case, real estate has traditionally appreciated (gained value) over time. It’s not a guarantee, but it is a great added consideration. Some years it might be less, some years it might be more. Put plainly, if you bought a house for $100,000 and your house appreciated by 5% in year 1, your house would now be worth $105,000 meaning that you made $5,000 by doing nothing. Pretty cool, right?
Over time, you will also build equity in your property. Each time you make a mortgage payment, the loan gets paid down and you begin to own more and more of your property. This can serve as leverage for future investments or simply help reduce the amount you owe over time. The best part? In a house hack, your tenants pay for it (see below).
If you are a savvy house hacker, you can decrease your living expenses to practically 0. By having tenants pay you rent, you will be able to cover part of, all of, or more than (meaning you can actually make money while living for free) the mortgage. Even if you still have to pay money out of pocket, you are probably saving money because the average American spends about a third of their income on housing. By reducing this cost, you will be saving more money!
Check with your lending surrounding this, but in most instances you need to live in the property for one year as a primary residence before leaving. After this, you can repeat the process with another home while holding onto (or selling) your other house hack.
There are several ways to approach house hacking. The one I’m most familiar with is my own personal story. This is not the only approach to House Hacking, but it will give you an idea of how it works.
When it was time to move out of my parent’s house I was left with two choices: pay rent or buy a house. After some investigating, I realized that renting an apartment in Boston was as expensive if not more expensive than having a mortgage. I saved up about $25,000 knowing that I was going to put a significant amount of that towards a down payment in the range of 5% of a property.
Around the time I decided to buy my first house, I was reading articles on BiggerPockets.com and learning all the terms I thought I needed to know. Although I didn’t learn about house hacking at the time, I did learn about flipping houses. Now, I didn’t want to rehab entire houses, but there were some concepts that stuck with me when it came time to buy my house.
I fell in love with the idea of finding a single family house where I could force appreciation. This meant targeting a house that needed some cosmetic updating (nothing structural) and could be purchased at a discount. If I did this, I would be able to do updates that increased the value of the house rapidly.
The other component of my strategy was to have a roommate. I knew I didn’t want to pay my whole mortgage by myself so I was going to have someone live with me. If I’d wanted to decrease my payment further, all I would’ve had to do is get more than one roommate. I didn’t want a cluttered house, so anything less than rent was fine with me.
Finding an agent and mortgage broker is kind of like answering the question: “which came first the chicken or the egg?” I’d say I went the less traditional route and found a mortgage broker first (usually first timers rely on agents to then recommend brokers). It took me looking into 3 brokers before I found one that could speak in layman’s terms to me. Then, I got my pre-approval materials together and received a pre-approval of $400,000.
Next, I found agents (a team) who had experience flipping houses. They were also familiar with the south coast, the part of Massachusetts where I was looking to buy. They set me up with a search in my price range and off we went.
There were some really nice houses on the market in towns I was looking at, most of them were going for over asking. These towns have good school districts (for resale I love having this in my back pocket) so families jumped at any opportunity they got. After a bunch of disappointing open houses, one of the agents I was working with said that there was one more in the area that I MIGHT like, so I went to look.
Right away, I knew I’d found the right house. The house was in a beautiful neighborhood a minute or two from a major highway, but was clearly the ugliest house on the block. It had an overgrown lawn, a broken above ground pool, hardwood floors with paint spilled all over them, the ugliest kitchen you’ve ever seen, and even ugliest paint on the walls. It was love at first sight.
All the aforementioned “flaws” the house possessed enabled me to get it under market price with no other competitive offers in sight. Right away, I began updating the house using some extra money I’d put aside so that the house was livable. One flaw after another, I began to fix up the house. Fast forward two years to when I sold the house, it sold for about $40,000 more than I paid for it (part luck, part forced appreciation).
When the house was livable, my significant other and I moved into the house. We split everything 50/50 so it wasn’t exactly free, but it was what I wanted at the time. I don’t have any tenant screening or horror stories I’d like to share at the moment, but I’m sure they exist.
There are plenty of people who can attest to the value of solid leases. It’s extremely important that you have a paper trail in the event that something goes awry. It’s also important to take screening seriously, especially in a tenant friendly state.
This process can be done over and over until significant wealth is built. I’m currently in the market for another house hack and I hope that you see the value here, too.
This post is intended to be a launching point into the beauty of house hacking. From here, you need to do your research and have your ducks in a row. I highly recommend reading The House Hacking Strategy by Craig Curelop. In addition, be sure to look into websites such as BiggerPockets that have an abundance of material surrounding the topic.
As you’re doing your research, be sure to save up for a down payment and begin to reach out to mortgage brokers with general questions (don’t do a pre-approval until you’re ready to buy). In addition, you want to have an agent in the pipeline that understands the house hacking concept and knows what to look for. A great agent opens up doors to lenders, tenant screening advice, deals, and so much more.
If you’re a millennial who’s sick of paying rent or wants a low barrier way into investing, I can’t say enough about house hacking. If you do your research and follow the advice in this post, you will be living in a house in no time!