BiggerPockets Real Estate Podcast - 352: Bonus Audiobook Excerpt: The House Hacking Strategy

Episode Date: October 19, 2019

Prefer to listen, rather than read? Here's a sample of the audio format of "The House Hacking Strategy: How to Use Your Home to Achieve Financial Freedom," by BiggerPockets' own Craig Curelop. In it, you'll hear: An overview of the "unfair advantages" house hacking offers A breakdown of varying house hacking techniques A real-life case study illustrating the above You can find the full audiobook here bit.ly/househackaudible. And don't forget, Audible is running a special deal for BiggerPockets Real Estate Podcast listeners! If you're not yet a member, go to http://www.audibletrial.com/biggerpockets to get a free Audible book and a free 1-month subscription. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Stay tuned and be sure to join the millions of others who have benefited from BiggerPockets.com. Your home for real estate investing online. Hey, what's going on, everyone? It's Brandon Turner and, of course, David Green. And we have a third guest here today, Mr. Craig Curl up. How you fellas doing? I'm doing wonderful. I'm pumped, man.

We're about to talk about one of the most powerful forces in the universe. We are. At least Craig is technically going to talk about it. Or the person you hired to speak for you, Craig. Is that right? That's right. That's right. I'm just kidding.

No, because today on this bonus episode, we're just going to launch it quick. We're going to actually play a segment from the audio book of the brand new house hacking strategy. The House Hacking Strategy by Craig Curlup. And Craig, can you tell us about what people are about to hear today? Yeah. So basically, we're going to dive in here about the difference between house hacking, buying a home, like a traditional home buyer, and renting,

and seeing how that will impact your financial position over the long term. And just to see how, just to actually show you how powerful house hacking is compared to the other options that you have. Very cool. And of course, this is actually like a, this is an excerpt, excerpt. I don't know how you said that from the audiobook, which people can get by going to biggerpockets.com slash house hacking. Is that right? Yep, that's right.

Good. And they can listen to the audio book there. You can get it in the ultimate package, which gives you the digital, physical, shipped to your house, audio and all that good stuff by getting the ultimate package. And yeah, I'm pumped for this book launch. So anything you want to say before we jump into it? Let's do it. All right, here we go.

And this is, again, the house hacking strategy. excerpt from Craig Curlop. Let's get into some of the differences between house hacking versus renting versus purchasing a home the conventional way. We will run through several examples with Joe, a renter, Mary, a conventional buyer, and Sally, a house hacker. To illustrate my point, I need to lay down a few basic assumptions. Each individual has the ability to purchase a $300,000 house with 3.5% down. Each person has $10,500 in savings. Each person can pay their mortgage payments or rent through their income without going into their savings.

Rent and property value increases at 3.4% per year. We understand that everyone's situation is different. However, most of the variables will be the same to isolate the different strategies so you can see the financial impact on each within this example. Renting Meet Joe He's a great guy with a banking job in downtown metropolis. He makes great money and receives excellent benefits. And to be closer to work, he lives in a large apartment complex close to the office.

He has $10,500 saved up and is paying one. $1,500 in rent with utilities included. This includes a gym, outdoor pool, a nice lounge area where he and his friends can hang out. Joe enjoys renting because he did not have to pay a significant sum of money for a down payment. Just $3,000 for a security deposit and the first month's rent. However, what Joe may not realize is that during his first year, he will pay $18,000 in rent while building a new. little wealth in the process.

Assuming a 3.4% increase in rent each year, he will continue to fail building wealth through his housing. Instead, he is paying down his landlord's mortgage. Over a 30-year period, Joe will pay about $915,000 in rent while paying $0 equity to himself. He began with $10,500 that he invested in the stock market. which is now worth just under $265,000. By renting and investing that $10,500 in the stock market,

instead of using it for a down payment, it has resulted in a negative $650,000 net worth impact. While Joe is living a fine life now, he is not establishing himself for financial success in the future. Homebuying Let's visit our friend Mary. She has been renting for years now and has had enough. She is sick of giving one-third of her paycheck to her landlord every single month.

She has $10,500 in savings and decides to use that as a down payment on a property of her own. She understands that she will need to move out to the suburbs. However, it's much quieter there. She has more space, and the house is large enough for a family. She plans to be here for a while. The purchase price on the house is $300,000. Because Mary is going to live there, she takes out an FHA loan, so she only needs to put down $3.5%, or $10,500.

Mary is aware of all of the added expenses that come with owning a home. Outside of the mortgage, which includes principal, interest, taxes, and insurance, she understands that she also needs to budget for repairs, maintenance, and other homeowner expenses. After all expenses, Mary ends up paying $2,400 per month for her and her family to live in this new home. While Mary is building equity in her home from paying down the loan and appreciation, the equity built does not quite exceed the expenses she is paying to live there. While still much better than Joe's situation during a 30, year period, Mary's net worth impact will be negative $285,000. House hacking.

The third stop on our journey is to our friend Sally's house. After months of renting and paying off someone else's mortgage, she concludes that she is fed up with paying for any housing costs whatsoever. She does not want to pay rent. She does not want to pay a mortgage. She wants to live for free. Sally is a working adult, though. She cannot just start living in her parents' basement, nor does she want to live under a bridge. They say that it's impossible to live for free. If she decided to listen to everyone else, she would be like Joe or Mary, who are losing hundreds of thousands of dollars on their living situation over the course of 30 years. Fortunately, Sally ignored the naysayers.

Rather than accepting the common notion that she cannot live for free, she looked for ways to make this a reality. Sally discovered that she could purchase a one-to-four unit property with only 3.5% down. In her area, these properties ranged from $250,000 to $400,000. With an average of $15,000 down, she could have her own property. To remain conservative, Sally purchased a $1,000. a five-bedroom, three-bathroom, single-family home for $300,000.

She put 3.5% down so her down payment was only $10,500. Her full mortgage payment, including PITI, was about $2,000. Rather than pay the mortgage herself, Sally decided to rent out the other four bedrooms to friends. They each paid her $750 a month for a total of $3,000. She was then living for free while making $1,000 over the mortgage. She set $400 per month aside for reserves and went on to reinvest the remaining $600. Sally completely eliminated her living expenses and is now making $600 per month on her living situation. So how does this look over the course of 30 years?

Like Mary, Sally is building equity in money. her home through appreciation and paying down the loan. However, as we discussed in the previous chapter, she also benefits from the cash flow savings and tax benefits. In the first year, Sally will make $7,200 above all her expenses, not including her rent savings. If we assume Sally pays $650 in rent, $7,800 per year, prior to purchasing this property, her cash flow or the amount she could save would be $15,000 in her first year, and that would increase as her rent would have been raised, but her mortgage payment stays the same.

When factoring in all of the wealth builders of house hacking, cash flow, loan down payment, and appreciation, Sally's total net worth impact will be $2.6 million over the course of 30 years. In case you skimmed that, let me repeat. that figure. 2.6 million. That is more than what most people save in an entire lifetime. And even if they do, they would have had to work 40 years to accumulate that amount. This is just purchasing a property, saving on living expenses, and watching it appreciate over time. In this example, we assume that Sally lives in this house hack for the entire 30 years. Of course, this is not

realistic. Sally is required to live in the house hack for one year. However, after that year, she will have saved enough whereby she can rent out her first house hack fully, more cash flow, and do it again, and again, and again, the snowball accumulates. If she househacks three or four times in three or four years, she will be setting herself up to be a multi-millionaire in the next 10 years. House hacking strategies. If you are reading this with kids in the room, or if it seems impossible to do what our friend Sally does, don't worry. There are many different forms of house hacking, and I am sure that one will work for you. Each of these strategies is a form of house hacking, and they fall on a spectrum of least to most profitable, which correlates

almost exactly with the least to most work or lifestyle change. One, renting out an additional dwelling unit. Ben Lobovich, an active user on bigger pockets and a friend of Brandon Turner's, calls this luxury house hacking. You either purchase a property with an additional dwelling unit, or you build one yourself. It helps if the unit can have at least a small kitchenette or an operative bathroom and a comfortable bed to sleep in. Then, you guessed it, rent it out. You could rent it full-time or on Airbnb. Municipalities are becoming more and more strict with their short-term rental laws,

so do your homework and look at your city's short-term rental laws before purchasing a property or putting your own property up for a short-term rental. If short-term rentals are okay in your city, you can put it up for rent. This way you and your family enjoy your own personal space in the main house, while your guests enjoy their own space in the guest house. Since you are still occupying the vast majority of your house, it is considered the least profitable and aggressive way to house hack. But it can still significantly offset your mortgage while you and your family enjoy the main house.

2. The traditional house hack. The most popular is still the traditional house hack. This is when you purchase a two to four unit property with a low-down payment residential loan. The 3.5% down FHA is popular in. in Denver, but there are others, especially if you are a first-time homebuyer. You live in one unit, perhaps with a roommate, and rent out the other unit or units. The rent from your roommate, plus your other units, should either cover the mortgage or come close to covering the mortgage. When you move out and rent the unit that you used to live in,

the property cash flows nicely. This strategy works in most lower-priced markets, but it is almost impossible to find a deal where you will fully cover your mortgage in the higher-priced markets. However, you do not need to totally offset your mortgage to still reap a lot of the wealth-generating benefits of house hacking. Even offsetting your $3,000 mortgage by $1,000 a month is still $1,000 a month in savings. 3. Renting by Room This is a strategy that one of my good friends has deployed, and it is working magnificent. The idea is to purchase a large single-family home that has at least four bedrooms and two bathrooms

and then live in one bedroom while renting out the others. You can typically get significantly more income when you rent by the room. Purchasing a single-family home, especially as a first-time home buyer, opens up potential financing options. At the time of this writing, I know they have one, three, three-point-five and five percent down-loan options on single-fifference. family homes. The low-down payment with the increased rental amounts really boosts your cash-on-cash returns. We have not even approached appreciation yet. Single-family homes are known to appreciate more quickly than multifamily homes. This is the case because both investors and non-investors are interested. With more demand comes higher prices, not to mention that non-investors

will typically pay a premium given that they are looking for a home, not a deal. 4. Calling the living room home and renting out the rest. Seriously. They call it a living room for a reason, right? This is my current strategy. As someone who lives in a city where price points are relatively high, it is increasingly difficult to find a property ideal for a traditional house hack. This means I had to get creative. With this strategy, I rent out the upstairs unit like a traditional rental. However, this was not enough to fully cover my mortgage.

I decided I would put up a room divider and a curtain to section off a portion of the living room and call it my bedroom. That's where I rest my head, and I am happy with the situation most of the time. Since I am not occupying my bedroom, I can now rent out on Airbnb. Though this might not work for everyone, it works for me. It allows me to cash flow anywhere between $250 and $750 per month after reserves, depending on the seasonality of Airbnb. 5. Living in a trailer or RV and renting out your primary residence. My friend, neighbor, and colleague has taken house hacking to the next level.

He purchased a stationary RV for $1,500. He places the RV in his parking space where he resides while fully renting out his one-bedroom apartment on Airbnb. This strategy is for the hustler who is clearly willing to do what it takes to achieve early financial independence. This makes a lot of sense for the young and single individuals looking to eliminate their housing expense. 6. Live-in Flip. Bonus strategy. The live-in flip is a strategy that infathing Mende Jensen, co-host of the Bigger Pockets Money podcast, is famous for promoting. This is when you purchase a property with that same owner-occupied loan with the intention of living there for at least two years, fixing it up, and then selling it.

Notice that you need to live in the house for two years for this strategy. This reverts back to that section of the tax code we discussed that says, if you live in a property for two of the last five years, you can then sell it without paying capital gains tax on the first $250,000 of capital gains, $500,000 if you are married. This is a huge benefit to real estate investors. Let's run through a quick example. Haley purchased a property for $200,000. The property was livable but needed some cosmetic updates.

Over the course of two years, she replaced the floors, bathrooms, and kitchen, as well as repainted all of the walls to give it a new look. Along with natural appreciation, Haley increased the value of her home from $200,000 to $300,000 in two years. She can now sell her property for a net gain of $100,000 and pay zero taxes on the gains. This strategy works great for those who are handy and not afraid to put some sweat equity into the property. Also note that it can be used alongside any of the aforementioned house hacking strategies. While you are renovating the property, you can rent out the space that is not being renovated,

so you are still living for free. That brings us to the end of this chapter. The foundation has been laid. Next, we are going to start building on that foundation with everything you need to know about house hacking. This has been the house hacking strategy, how to use your home to achieve financial. Freedom, written by Craig Curlop, narrated by Clifford Ponder, copyright 2019 to Craig Kerloop, production copyright 2019 to Bigger Pockets Publishing. You're listening to Bigger Pockets Radio, simplifying real estate for investors large and small.

If you're here looking to learn about real estate investing, without all the hype, you're in the right place. Be sure to join the millions of others who have benefited from biggerpockets.com. Your home for real estate investing online. Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K.

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