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The Pain-Free, Proven Way to Achieve a 200% ROI, Build $1.5M in Wealth & Earn $300 Per Hour

Scott Trench
9 min read
The Pain-Free, Proven Way to Achieve a 200% ROI, Build $1.5M in Wealth & Earn $300 Per Hour

I’d like everybody to meet Joe. Joe is a pretty average guy earning $50,000 per year and has a little over $10,000 in savings. Joe has also recently begun to take a deep interest in his personal finances and has wisely decided to look into building wealth by tackling his largest single expense: his housing. Joe is not a fan of seeing almost a third of his income go towards his rent, and he wants to carefully consider ways to reduce that expense while minimally impacting his personal life.

Joe has already decided where he wants to live — he’s a young yuppie and wants to live near the nice part of town so that he can be near all the fun things his city offers, his work, and of course, good schools. Within his target living area, he spots an opportunity. A duplex has come on the market, and remarkably, it’s available either to purchase or to rent.

Now, in Joe’s day job, he crunches financials for a well-known real estate investing company — he projects costs and expenses by building spreadsheets. Joe wisely decides to do what no one else in the working world ever seems to do and creates a spreadsheet analyzing the cost of his own housing expenses. Crazy, I know.

Joe’s Financial Model

Joe maps out the financial impact of three different ways, three cases, in which he could live in his favorite part of town and in this duplex. In the process of doing so, Joe realizes that this study is applicable to almost anyone deciding whether to rent, buy or house-hack” (buy, then rent out part of the house to others). Joe does his best to think through all the costs, rents and other financial factors that might come into play under each scenario. Again, his goal is to see how he can live for the lowest cost, but still reside in his favorite part of town.

Joe thoughtfully built the spreadsheet in a way that others could easily follow and posted his spreadsheet with all his assumptions to the BiggerPockets FilePlace (click here to download the spreadsheet!). In fact, he even highlighted in bright yellow all of the assumptions that he made specific to this property that he was considering, so that anyone else who downloaded the spreadsheet could change those inputs and see if his conclusions have any relevance to their own situations!

No, people looking at his spreadsheet don’t need to be Microsoft Excel wizards to play around with the numbers, so long as they only change the numbers highlighted in yellow!

With that, let’s talk about Joe’s three choices, or cases.

Case #1: Joe rents half of the duplex as a tenant.

Joe is currently a renter, so this is no big change for him, just a little bit of an upgrade in location.

Joe’s Renting Assumptions:

  • The property is listed at $300,000
  • Monthly rents are 1% of the list price
  • Joe pays 0.5% of the purchase price in rent per month ($1,500 per month) because he only lives in one of the two units
  • Rents increase over time with inflation at 3.4%

In this case, the monthly rents for Joe would come to $1,500 per month, or $18,000 per year in the first year. Joe will build no wealth through this process, and the cost of living is very easy to calculate over time as rents increase with inflation.

Related: BP Podcast 086 – House Hacking Your Way to 97 Units (While Holding a Full Time Job!) with Cory Binsfield

Joe notes that if he pursues this strategy, he does not have to bring money down like he would in a home purchase, and he can immediately put that money in the stock market or spend it as he wishes. His short term cash position will be very favorable as a renter.

True cost of living as a renter in year one: $18,000


Case #2: Joe buys both sides of the duplex and converts it to a single-family residence.

Many of Joe’s friends and coworkers have recently purchased homes. Very few of those coworkers are purchasing half-duplexes or small, reasonable condos. Instead, they purchase the largest and nicest single family homes that they can possibly qualify for. Sometimes, Joe suspects, these folks are actually purchasing a little bit more home than they can afford.

Joe would like to fit in and believes that he too can just barely qualify for (afford?) a mortgage to live in a large, nice single-family residence. In this case, he’d make some minor changes to the duplex by knocking out a wall and removing two doors to make it into a spacious SFR.

Joe’s Single-Family Residence (SFR) Assumptions:

  • The property is listed at $300,000
  • The seller will cover the costs needed to convert the property into an SFR (this might be compared to Joe buying a typical nice-ish American SFR)
  • Joe will put down the FHA minimum of 3.5% of the purchase price ($10,500)
  • Joe’s fixed interest rate will be 3.5%
  • Joe’s taxes are 1% of the property’s value
  • Joe’s insurance is 1.5% of the property’s value
  • Joe pays monthly FHA mortgage insurance, which comes to 1% of the initial loan amount
  • The property will appreciate with inflation at 3.4% per year
  • Joe will spend an average of $250 per month maintaining his home
  • Joe will claim standard tax deductions and not itemize interest or PMI

Based on these assumptions, Joe realizes that purchasing the house and living in it as a homeowner is going to require way more cash than renting. He will have to put down $10,500 and will pay at least $29,000 in the first year in cash expenses for his mortgage, taxes, insurance and upkeep. His cash outlay as a homeowner is close to $39,636.

At the same time, however, Joe is benefitting from average appreciation of about $10,200, and roughly $5,608 of his mortgage payments will go towards paying down the loan — that contributes to his net worth. He also didn’t “lose” $10,500 when he used that towards his down payment; it simply goes towards the equity in his property. These items offset his cash outlays and give him equity in the property.

True cost of living (factoring in equity) as a homeowner in year one: $13,441

Case 3: Joe “hacks” his housing — buying both units, living in one, and renting out the other.

Joe has recently heard about this new way to live, whereby he also buys as much housing as he can qualify for, but purchases it with the intent of buying a multifamily (like this duplex) and renting out the other side. He read about this new strategy in this article by Brandon Turner.

He’s intrigued by this so-called “house-hacking” and suspects that it will lower his cost of living dramatically, though he can’t be sure how impactful it will be until he runs the numbers. He understands that his friends and coworkers will think he is slightly odd to live in a smaller space than he could afford, so the financial impact of this decision will have to be substantial.

Joe’s House-Hacking Assumptions:

  • All homeowner assumptions from Case 2 apply to the duplex
  • Joe will collect $18,000 per year or 0.5% of the property value per month in rent for half the duplex
  • Rents will increase each year with inflation
  • Managing tenants in the other side will cost $100 per month above and beyond the normal homeowner expenses of $250 per month, including vacancies

Based on these assumptions, Joe sees that house-hacking will cost him $40,836, including the down payment in the first year, but that these cash costs will be offset by $18,000 collected in rent. In total, Joe’s cash outlays (net of rent) for living will be $22,836 next year.

Further, like the homeowner, Joe also benefits from appreciation of $10,200 and $5,608 in principal reduction, and, of course, his $10,500 down payment does not count as lost wealth either.

True cost of living as a house-hacker in year one: negative $3,368 (he builds wealth!)

Joe’s Conclusions

In just the first year, Joe’s model tells him that living as a house-hacker will result in building about $21,500 more wealth than the renter and about $16,800 more wealth than the homeowner. That’s a huge amount of money, considering he earns a $50,000 salary!

Assuming he averages 5 hours a month managing his tenants next door (likely a very conservative estimate), that comes out to $280 – $360 per hour for any efforts that a house-hacker would have to put in over a renter/homeowner. Joe is unable to think of anyone who will pay him that kind of wage per hour… even if he is a legendary financier!

In an effort to visualize the wealth building impact this decision will have on him and his family over a longer period of time, Joe projected out and graphed the long-term impact of his three choices:

Cash Outlays

Net Worth

Over 30 years, Joe’s model tells him that this decision’s financial impact is almost beyond belief. Living as a house-hacker will result in about $1.5 million more wealth than renting and about $850,000 more wealth than living in both sides as a single family home. Yes, not losing wealth can be counted as building wealth in the case of housing, which for most people is a fixed expense.

Interestingly, Joe notes that becoming a homeowner is a losing investment. That’s contrary to what most Americans think. True, it is less bad to own a home than to rent over time. But Joe will still lose close to $300,000 in wealth over 30 years just by living in his nice single-family residence. Plus, look at his cash outlays! His bank account will look way worse as a homeowner (less cash in the bank, more tied up in equity in his home) than if he were to just keep renting for the next 25 years!

But the results are clear. House-hacking is so far and away the financial winner that it isn’t even a comparison.

Costs of House-Hacking

Now, Joe’s a pretty smart guy and doesn’t forget to consider the subjective costs of house-hacking. He knows that as a landlord, he will have to screen, vet and address the issues that come up with his tenants. As a renter or homeowner, he won’t have to do that. He also acknowledges that he will be responsible for maintaining his house as either a homeowner or a house-hacker. That is definitely less convenient than remaining a tenant and making the landlord do all of that. Finally, he acknowledges that house-hacking is going to be slightly less awesome than living in a single family home with twice the available square footage (he’ll only live in one of the two units, instead of a huge SFR, which might have twice as much living space for him).

Joe considers those expenses, but he dismisses them systematically. He understands that dealing with property management issues will be way easier for him than for any competing landlords or property managers — those guys actually have to get in their car and drive both themselves and their equipment to their rental properties, while his tenants are right next door!

He also accepts the duties that come with homeownership by reasoning that he has no more responsibility in managing his home than any of the almost 75 million homeowners in the United States. Lastly, living space is a matter of priority. Joe reasons that since his unit would rent for $1,500 per month, and that this is almost twice the average national rent, that he can still live very luxuriously, even in his favorite place in his favorite city. Living luxuriously, instead of living really luxuriously, is the price he will pay for the $850,000 he will make in his sleep over the next 30 years.


Joe’s Next Steps

200% ROIJoe is a pretty savvy financial analyst and recognizes a good investment when he sees one. Joe immediately stops goofing around with the stock market, mutual funds, retirement accounts or any of that other hogwash. A 200% return on investment is available! After all, you can be sure that any financier like Joe would consider an approximately $20,000 increase in wealth on a $10,000 down payment a 200% return on investment.

In fact, as a finance nerd, Joe will probably end up spending less time managing his property than he did ridiculously attempting to pick stocks. There is just so clearly nothing else he can do with his money that is even remotely close to having as large a financial impact as house-hacking will.

Joe’s going to house-hack. Are you?

Related: The Boring (& Completely Effective) Way to Build Wealth: A Case Study For Young Investors


Conclusion: Taking the Next Step (More Financial Math!)

Joe couldn’t help himself and had to factor yet another piece of the puzzle into his equations. You see, since the renter and the house-hacker are spending less cash on their living situation than the homeowner, they have the opportunity to invest that cash in something else, like the stock market.

If we extrapolate that every available cash dollar available, over and above what the SFR homeowner has, is invested immediately in the stock market (at 11.5% long-term returns), the picture changes in an interesting way:

The renter actually has a leg-up on the homeowner from a cash position and has more cash to invest in the stock market. This lessens the true wealth gap between the renter and the homeowner and suggests that given the transaction costs of homeownership, that it may be better to rent than to buy in the short-medium term.

The homeowner has the least amount of cash available, and most of their wealth is tied up in their property. This results in less opportunity to invest and makes owning a home even less favorable.

The house-hacker has the lowest net cash outlay over time (although not in year one compared to the renter, given that a down payment is involved), and thus their net worth accelerates over the long term as they plow that extra cash flow into other investments. The differences, calculated in this manner, can be seen below and exaggerate the conclusions drawn previously:

Net Worth Reinvested

Looking to set yourself up for life as early as possible and enjoy time on your terms? Scott Trench’s new book Set for Life, slated for release April 23, 2017, is now available for pre-sale! Whether you’d like to “retire” from wage-paying work, become less dependent on your demanding nine-to-five, or simply spend time doing what you love, Set for Life will give you a plan to get there. This isn’t about saving up a nest egg. It’s not about setting aside money for a “rainy day.” Set for Life is an actionable guide that helps readers build the accessible wealth they need to achieve early financial freedom.

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Investors: What do YOU think? Is house hacking clearly the best financial choice, or are their other factors of this argument not considered here?

Let me know your thoughts with a comment, and let’s start a conversation!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.