Today I want to share with you my #1 strategy for building wealth and passive income streams through real estate investing.
Most of you have seen my blog posts, heard me on our webinars, or maybe even on a podcast, talking about how our cash flowing rental portfolio funds our ideal lifestyle. But there’s a not-so-secret strategy that Travis and I started with that made us just shy of $1,000,000, which helped us build the rental portfolio that we have now.
This is House Hacking.
You may have heard this term “house hacking” before, but I want to share with you some real-life examples of how my family has used this strategy to build wealth and fast.
House hacking is a real estate investment strategy where you buy a property to live in, typically for one or several years, and either rent the property out or resell with intent to profit. For example, in a single-family home, you would rent bedrooms or an ADU to tenants. For two- to four-unit properties, you do not have to have roommates but rather live in one unit and rent the remaining units to tenants. This approach allows you to significantly reduce your housing expenses. Then eventually, you would move out and fill your unit or portion of the house with tenants creating a cash flowing rental property.
The other way to house hack is to do what is called a “live-in flip”. By living in the property, you earn tax-free profits.
By living in the property and making the purchase as an owner-occupant, you are able to purchase using a lower down payment, allowing you to eventually purchase more properties and accelerate the process of building wealth and passive income streams.
My husband and I have used several minimal-down loan options, as you will see in the examples below. One thing to note, even though we chose minimal down loan options for our house hacks, we maintain an overall rental portfolio loan to value of 50%. Meaning the loan balances across all of our properties are 50% of the current value. This is one way we conservatively manage risk.
Putting minimal down was a very strategic decision. Once I ran the numbers and figured out that we would be better off investing our capital into high-return high cash flowing rental properties instead of our primary residence, we never looked back and I’m a big believer in this strategy. Yes, even paying private mortgage insurance often made sense for us and our approach.
Now, let me share a few examples of the different ways we have house hacked primary residences.
House Hack #1 Newer Single-Family Home
We purchased this property in February 2009 for $210,000 using the zero down USDA loan with the seller paying all closing costs. We understand the benefits of buying properties separately in order to maximize the ten each conventional loan, so my husband Travis put this property in his name solely.
The mortgage payment was roughly $1,300. We lived there for one year, renting the house out for $1,295 in 2010. Unfortunately, we were cash-flow negative for the first 18 months after we moved out. Eventually, we were renting the house out for $1,375. We eventually sold this property in 2017, realizing an almost $75,000 profit.
House Hack #2 1970’s Duplex
After Travis’s purchase, it was my turn to buy next, and I chose a duplex so that we could live in half and have the other tenant pay for a majority of the mortgage payment. I purchased this duplex in December 2009 for $196,000, I used the real estate commission to cover the required 3% FHA down payment requirement, and the seller paid all of our closing costs.
We spent the next three months renovating the property to the tune of $14,000. The new mortgage payment was $1,300 and the tenants next door paid $800.
Years later, we still own this property, and after rent increases and a refinance to remove private mortgage insurance (PMI) and to lower the interest rate, we net nearly $10,000 a year on this property. I estimate the cumulative cash flow from the ten plus years of ownership to be around $80,000 and we now have over $200,000 in equity, all from living in one unit for one year.
House Hack #3 Live-In Flip
In early 2010, I learned about the foreclosure auction, where you bid on distressed mortgages directly from the bank. Houses that did not sell become bank-owned properties. For investors willing to take on a little risk, there were some really great deals to be found.
After two house hacks, I promised my husband we could buy a “normal” house. But with two small stipulations! Only if we could buy it significantly undervalue and only if the rent potential would cover the mortgage if we ever needed to move.
We found this house in early 2011, and our winning bid was $292,000 cash. Within a few months, we refinanced the property at a new appraised value of $465,000 allowing us to recoup any initial investment.
We sold this property for $615,000 in 2017 and netted a cool $250,000 in tax-free income due to the capital gains exemption for primary residences.
House Hack #4 Shop House
We were not finding the right next primary residence, so we agreed to do one more purchase with the intent to convert into a rental, and this house fit the bill. I purchased this property in my name in 2016 for $310,000 and 10% down. Our total out of pocket expenses totaling $37,000.
The new mortgage was $1,700, which included monthly private mortgage insurance because the down payment was less than 20%. We moved out one year later, renting the home for $2,400.
A few years later, we rented the detached shop for an additional $500 a month and filed to remove the private mortgage insurance, lowing the monthly mortgage payment by $80.
Thanks to some appreciation and principal pay down by our tenants, we net roughly $1,000 per month on this property, and we have $165,000 in equity.
House Hack #5 Live-In Farm Flip
We’re currently in the middle of a live-in flip right now and have some ideas on how we can create cash flow from this property by renting a tiny house in the back acreage. But for now, our initial investment was minimal. We put $25,000 down yet we’ve created $150,000 in equity through our renovations, which cost us around $30,000.
As you can see, house hacking does not have to mean you sleeping on a couch while renting rooms out to make money. In fact, there has only been one time where we lived next to our tenants. And with that duplex, our units were connected by garages.
Still, think house hacking may not be for you? That’s completely okay, in fact, I have several friends who live in beautiful homes as their primary residence and even enjoy vacation homes, all funded by the cash flow from their rental properties!
My hope is that we’ve gotten the wheels turning and the conversation started about what it would look like for you to start designing the life of your dreams.