House Hacking Using Other People’s Money

Grant Sabatier

Creator of Millennial Money and Author of Financial Freedom. Dubbed "The Millennial Millionaire" by CNBC, Grant went from $2.26 to over $1 million in 5 years, reaching financial independence at age 30.

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MM Note: I am so stoked to feature this guest post on house hacking from Scott Trench, the 26-year-old Denver author, and VP at BiggerPockets. This post provides an overview of house-hacking and financial freedom.

We also had Scott on the Millennial Money podcast where he shares a deeper perspective on house hacking and how to best optimize your three biggest expenses – housing, transportation, and food. This interview was one of the best we’ve ever done – so much info.


Too often, folks focus their energies on cutting back on insignificant parts of their budgets. We’re told to cut back on happy hour, bring lunch to work, and cut out the lattes from Starbucks. We’re told that disciplined saving—of at least 15% of our incomes–is the way towards wealth and early financial freedom.

But, saving 15% of your income is too slow. Sure, you’ll be able to retire in 30-40 years if you do that and invest conservatively, but you can cut decades from that timeline by getting more aggressive. Instead, you should be saving 50%, or more, of your income. And you should do it without cutting back on your lattes, lunches, and entertainment budget.

But don’t take my opinion for granted. Let’s look at the data behind consumer spending, a look at where average Americans are spending their money.

Here is the national average for consumer spending, reflected in a big pie chart:

house hacking

The government (specifically the bureau of labor statistics) provided this data, so naturally, taxes are not included. But moving past taxes we can clearly see where the Average Joe spends most of his money.

Literally, half of the typical American’s expenses come from just two categories – housing and transportation. 33% of total spending is on housing.

While there are probably many areas that you can improve upon with your financial position, the fact of the matter is that most people are beating around the bush when it comes to saving money. Preparing your meals instead of going out to lunch, going on inexpensive vacations, and cutting back on your entertainment budget is fine, but why sweat the small stuff when a third of your spending Is going out the window every month?

What if I told you that you could completely eliminate your housing expenses and live completely for free? THAT will make a real difference in your budget. That kind of change will help you build wealth, and fast.

Enter house hacking.


What is house hacking?


live for freeHouse hacking occurs when you buy a piece of investment real estate, live in one of the units or bedrooms, and rent out the others. It allows the buyer to use other people’s money (tenant rent) to pay down the mortgage and live for free. It also allows the buyer to benefit from potential appreciation.

I bought my first house-hack at age 24. I moved into a duplex that I purchased in foreclosure. The duplex cost $240,000, and I was able to purchase it with a 5% down FHA loan, meaning that I brought just $12,000 to closing— much of my first year of savings out of college.

I moved in and began making the $1,550 monthly payment, including principal, interest, taxes, insurance, and PMI (PMI—a form of mortgage insurance that I was required to pay because I put just 5% down. Someone putting down 25%, $60,000 in my example, would not have been required to pay this insurance). After fixing the place up, I began renting out the other unit for $1,150 per month, and half of my 2 bed, 1 bath unit to a roommate for $550 per month.

At that point, I was collecting $1,700 in rent, on my $1,550 mortgage. After my portion of the utilities and the occasional repair, I probably broke even.

And breaking even (living for free) was GREAT!

While already a strong saver, I was able to substantially increase my savings rate in the absence of a rent or mortgage payment, allowing me to stockpile cash very quickly.

In just 15 months the combination of my hard work improving the property, market appreciation, loan amortization (paying down the mortgage with regular monthly payments), and my rapidly improving financial position enabled me to refinance my loan to remove PMI. My payment dropped to $1,400 per month, and rents rose, so I was able to command $2,600 per month from the property. Nowadays, in a problem-free month, I collect $1,200, just from this one property!

I moved on to purchase another duplex and repeated the strategy. I’m on track to purchase a new rental property house hacking style every 12-18 months. It’s easy to save for the next down payment, even in the expensive Denver market, when you don’t have to pay any rent or mortgage at all, and have thousands of dollars in passive income from the first few house hacks! And, it’s no harder to buy a house-hack than it is to buy a home, financially speaking. Median income earners in all but the top two to three expensive markets in the country can easily save 5% of the median purchase price ($15,000 on a $300,000 property) of a home in their market.

It’s the easiest, most efficient means I can think of to move towards early financial freedom while working a full-time job. In fact, even if you make no other changes to your financial plan, other than buying a new house-hack every 12-18 months, house hacking alone might be enough. You might be able to acquire a rental portfolio capable of sustaining early financial freedom in less than 10 years, depending on the market.


Why don’t more people house hack?


I often get asked about house hacking—if it’s such a great idea, why don’t more people do it? I frankly have no idea why this isn’t more popular, as it seems to me to be an obvious way to easily build wealth, and the most straightforward way to move towards early financial freedom. If you are even an average saver, with solid credit and good job, then this can be done with very little effort relative to the financial benefits.

But sometimes, I hear arguments against house-hacking. Here are three:


Won’t I be responsible for maintaining my property?


Yes, you will. You will be responsible for making sure that everything works well and is well maintained. I’d encourage you to understand that every single homeowner in the world is responsible for this basic maintenance and that folks should not be scared to pick up the phone and call the handyman/plumber/electrician when problems arise or even tackle certain problems themselves! Consider it an extraordinarily high paying job. If you are able to live rent-free in a space that would cost $700 per month otherwise and have to do 1 hour of work every month to maintain your property, that’s $700 per hour!


What if the tenants don’t pay rent or I don’t like them?


This is actually the beauty of house hacking, not a downside! You get to choose your neighbors. Too many folks think that they have to manage tenants. But it’s really much better than that. You get to select quiet, friendly neighbors that will be kind enough to pay down your mortgage for you AND treat your property and you with respect. If they don’t, you can evict them!

Obviously, it’s wise to learn how to properly manage tenants, perhaps by reading a book on the subject and asking local landlords how they handle problems. But, managing tenants well should not be a big problem for folks willing to act reasonably and intelligently. Don’t allow fear of tenant management prevent you from taking advantage of one of the best ways to build wealth while working a full-time job and living your life.


I don’t want to live in a crappy investment property!


Um, excuse me, that’s my home you’re talking about! All kidding aside, buying a house-hack, like buying a home, falls across a spectrum. The guy willing to go into a more up and coming neighborhood might be able to live totally rent free, as I did. But the guy that house-hacks in a more posh neighborhood can still live there for far less cost than others in his market. If he lives in a place with a $3,000 mortgage, and only collects $2,500 in rent, he is still living in a great spot and/or a luxurious space for an exceptionally low cost.

And don’t try to tell me that there are no investment properties in your market. I’m in Denver, CO, and I see deals hit the market every day. That just tells me that you’ve dismissed this idea before even bothering to look.


Why house hacking is so awesome


Buying an owner-occupied investment property and renting out the additional bedrooms and/or units is probably the single most effective hack that a median wage-earner can make to begin moving towards financial freedom rapidly. It takes the largest expense in your life and wipes it out entirely. Why would you bother to remain disciplined day in and day out with the fun stuff in your life, when you can automatically save yourself tens of thousands of dollars per year through the combinatorial benefits of house hacking?

House hacking leaves the purchaser with three excellent options if done correctly:

1.It allows the house hacker to live happily at low cost indefinitely.

2. It allows the house hacker to move away and retain the property as a cash flowing rental.

3. Like every homeowner in the country, the purchase retains the right to sell the property.

Few people have all three of those excellent options. Few people are able to move anywhere they want at a moment’s notice and convert their home into an excellent cash flowing rental property.

There’s a ton of upside to this strategy and little downside. It’s low risk because even if the market crashes, the house hacker (relative to his peers, the renter, and the homeowner) stands a great chance of keeping his head above water just fine. He’s got rent coming in from his tenants to help him offset his payment. His friends that own single-family homes with no tenant assistance will be far more financially devastated than he.

The house-hacker comes out worse financially than the renter only if market rents take a tremendous plunge—it’s a rare historical event when renters see a 25% or greater drop in rents! I know that I would rather be on the side that wins when rents increase than remain a tenant and pray that they decrease if history teaches us anything. In fact, rents in Denver would have to plunge by almost 50 percent before I’m unable to cover my financing payments.

And, house-hackers will almost always come through market downturns better than the homeowners in their local markets.

This is the ultimate low-risk, high-reward way to buy your first or next property if you aspire to early financial freedom and want to accelerate your wealth accumulation.


Did you enjoy this article and learn something new? If you want to learn more about house hacking check out Scott’s book, Set for Life: Dominate Life, Money, and the American Dream and learn how hard work, smart lifestyle choices, and intelligent investing can take you from little to no net worth to early financial freedom in ten years or less.

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    Erik @ The Mastermind Within
    Posted May 13 2017
    House hacking is great! I've been doing it for 2 years now, and brought in about $30k in income! My rent is essentially $400 a month, but I'm building equity at about $500 a month!!! Love this post - thanks for sharing.
    The Savvy Couple
    Posted May 13 2017
    Love the idea of house hacking. We are looking into renting out our house this summer when we are on vacation or away from the weekend. Honestly, anything you can do to reduce your cost of living and increase your income is worth looking into. It's all about building that wealth.
    Krista @ MissCorporateDropout
    Posted May 13 2017
    Damn, I wish I'd thought of this year ago! I was using Airbnb to rent my guest bedroom, and I liked that method because I didn't have people there every night, just the nights that I allowed. On an average month, it covered 50% of my mortgage. I do like the idea of house hacking where I can have a tenant for 12 months to save up money and then purchase another property. Hmm, I have to see how I can make this work with my existing lifestyle. Thanks for the idea! P.S. I love your blog!
    Cath @ Get MoneyWise
    Posted May 14 2017
    We house hack too. Live in half of it and rent out the rest. Sadly though the median house price in Sydney (Australia) is $800K so the tenants rent doesn't fully cover our mortgage but it certainly does help.
    Buy, Hold Long
    Posted May 14 2017
    Interesting read. Thanks for sharing, that's an interesting concept that I haven't heard about before. Cheers
    Posted May 15 2017
    The thing I dislike about this is how much leverage you are using to 'hack' your way up the ladder. Whilst you skirt around the no paying tenants situation in the blog, this does happen. You will certainly be exposed in an economic downturn and ultimately the house of cards may collapse.
    Ms. Frugal Asian Finance
    Posted May 15 2017
    I'm glad it worked out for you. I think two of the biggest fears people for house-hacking are: (1) a big ticket item such as HVAC breaking and (2) being sued by tenants (i.e. tenant falling down the stairs. Of course, these incidents don't happen all the time. But I've found thoughts wondering that far. That said, I don't mind living with someone to reduce expenses. No pain, no gain.
    Scott Trench
    Posted May 15 2017
    Hi guys! Thought I'd jump in and answer some of the comments on here. Thanks for reading and sharing your thoughts. 1) Tenants not paying rent (directed at James): James - you are right to point this out. The difference of course, is that the house-hacker should, most of the time (90%+) have a tenant in there paying rent if they are even close to a reasonable landlord. This is in contrast to the 0% of the time that your regular homeowner might have a tenant paying rent. The correct way to house-hack, in my opinion, is to buy a property with a mortgage that you could afford without the tenant rent, and use the tenant rent to vastly enhance your savings. As for the 5% down being not enough, you are right that one could probably be even ore conservative with their living situation by house-hacking with 25%. I felt that it would take way too long to save up 25%, and that I was being a responsible and conservative buyer with my first place, even though I used 5% down FHA financing. Readers and listeners will have to determine for themselves what the responsible thing is in their situation. 2) Ms. Frugal Asian Finance - Of course, everyone that invests should get some insurance to cover tenant problems and unexpected huge expenses. You are right that those are rare, but so are $250K medical problems. That's what insurance is for.. HVACs and other large big ticket items (real estate investors call these "capital expenditures) are part of the game. The key is to have a large cash position available AFTER the purchase to account for these. If you aren't prepared, you no longer describe these items as "capital expenditures" and instead have a "disaster." This is true for ANY home purchase, and is no more or less likely in a house-hack than in a single family property. Thanks! I'll check back in for additional questions!
    Posted May 19 2017
    I am considering buying my first rental property for a two-family that is in foreclosure next to us, but I am reluctant to do so because 1) my wife has a large amount of student loan debt; 2) I guess I am afraid in part that it won't work. I know what I am doing with investing, but not the house hacking. Any advice?

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