Luxury House Hack Update: What I Think of This Strategy After 12 Months

Luxury House Hack Update: What I Think of This Strategy After 12 Months

7 min read
Ben Leybovich Read More

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As most of you know, one of the last real estate projects I got myself involved with has been my casita house hack. We’ve recently hit one full year in operation, so I thought, why not do a bit of an update for you?

For those few who do not know what I am talking about, I should probably do a little review. But before digging in, I must ask where you’ve been and what’s been keeping you away from BiggerPockets?!

How It All Began

Anyhow, it all started toward the end of the 2016 school year. My wife Patrisha and I were on our way to pick up the kids after school in Lima, Ohio. We were crossing the street on our way from the coffee shop, and she turned to me and said, “We have to move.” I mean, it was a kinder-sounding voice than your typical staff sergeant, but much authoritative. It was not an invitation to consider the issue. No, it was more like, “You have a nice life and a pretty wife, and if you’d like to keep it that way, figure it out.”

To tell you the truth, I can’t blame Patrisha. I was ready, too. In fact, I stopped buying property in Lima around 2013, specifically because I felt, either consciously or subconsciously, that as a family we were going to need to move in the not-so-distant future. As a matter of fact, the last property I bought in Ohio was that Symphony 10-unit. I’ve written about it on this blog—and, as a side-note, for a no-money-down deal, it ended up pretty sweet!

But I’ve digressed. Once school was out that year, we packed up the Tesla and traveled with the kids for a few months, trying to figure out where to go. Phoenix MSA was at the top of my list and had been for a while. But Phoenix constituted a very serious cross-country move, and before taking the plunge, we thought we’d look at what was available closer. After all, we do have a lot of family in the Ohio area.

Related: 3 House Hacking Mistakes I Made (& How I Could’ve Prevented Them)

We knew that one way or another, we wanted warmer weather and good educational opportunities for the children. However, we wanted nothing to do with humidity, and so Florida was out. We looked at North Carolina, where the Research Triangle offered a lot. We also considered Atlanta. In the end, though, I realized that as we were traveling and experiencing all of these places, I was subconsciously stacking them up against Phoenix, with its palm trees, blue skies, and almost nothing property taxes—not to mention the Basis schools.

Patrisha and I wanted a change. And, in the end, recognizing that moving to Charlotte or Atlanta would be just as much work as moving to Phoenix, we realized that if Phoenix was what we truly wanted, then it’s what we needed to do. And we did.

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Looking for Real Estate

Just this weekend, we were lucky to have family from Ohio at our house. One look at our house, and they correctly identified the reality that a comparable house in a comparable location in Columbus, Ohio would cost the same or more. And it would involve a property tax bill of about five to seven times as much. This means that as high as Phoenix SFR market is, it is very difficult to call it inflated still in 2018. Houses are not any more expensive here than in Columbus, Indianapolis, or Cincinnati, but Phoenix is experiencing population growth those other places cannot imagine.

Having said this, I really didn’t care if houses were inflated, at intrinsic value, or cheap. I had my own criteria, and it was this:

Our primary in Lima was costing us about $1,600 per month, all in. Upon arrival to Phoenix, we wanted to stay at the same burn rate, and this in and of itself wasn’t a problem. The issue was that we weren’t looking for a small house in a nothing market like we had in Lima. If we’d wanted that, we’d have just stayed where we were. We left because we wanted to upgrade our lives. So, we wanted a great location, convenient infrastructure, and a house that wasn’t huge but large enough to enjoy—with a pool.

What I described above would have cost more no matter where we bought. Quality costs more. But the fact remained—we weren’t comfortable increasing our burn. So, what do you do?

Casita House Hack

We were faced with three choices.

  1. Accept that scaling up would come with additional burn.
  2. Scale down our primary situation.
  3. Create some kind of rationale that would synergize that which is a home with that which is an investment.

Following a lot of market research, we ended up buying a nice house in South Chandler. There are many interesting attributes to this house, but most importantly, there is an attached casita.

Imagine a house shaped as a horseshoe put on its side. In the back are the main quarters—3-bedroom, 2-bath. Protruding forward is the pass-through laundry room, which leads into the garage. Attached to the garage is the casita, which is a bit under 250 square feet. The interior space inside the horseshoe, separating the main house from the casita, is a courtyard.

Related: Why I’m Not House Hacking (& the Strategy That Will Cover More of My Rent)

Upon purchasing the house, the first thing we did was to upgrade the casita. Think of it as a bedroom, with a bath and a kitchenette, staged with very nice furniture, under-the-counter fridge, microwave, Keurig, some cups, glasses, and forks, and a bottle of red (that’s a nice touch, don’t you think?). There is a private entrance and a very quaint courtyard with some wrought-iron sitting. Very nice!

Expectations

I expected to generate about $14,000-$16,000 of cash flow (after fees) annually from the casita. I figured I’d be able to book about 240 nights or so. Basically, I was hoping for about $1,200 per month.

My PITI (principal, interest, taxes, insurance) on this house is about $2,200 per month. With $1,200 to offset the PITI, I figured we’d be living in a very nice place for around $1,000 per month, and considering that it cost us $1,600 to live in our Ohio home, $1,000 for what we have now would have been a straight up gift.

T12

We placed our casita on Airbnb and VRBO (to learn more about how to rent your place and list for free on VRBO, click here) in February of 2017. The first booking came in within two hours of our listing going live. It was truly a pinch me please kind of a thing. I’d never done short-term rentals prior to then and had no baseline for my assumptions, aside from research. But research is not the same thing as experience, and that first booking was a trip.

Today, about 13 months later, I am able to tell you that while we did better than we needed to, we did not do as well as we’d hoped. We did not generate $14,000 of cash flow, only $12,000. There were a couple of reasons for this.

Bookings

We were not able to book 240 nights—or even 220 nights. We’ve had so many relatives and friends spend time with us (which is really nice, by the way, and our friend Darren Sager is a regular now) that we only booked 179 nights. Depending on how you look at this, there is an opportunity here in that we can certainly shoot for more bookings and therefore more income. I am not sure we want to sacrifice time with friends and family, though—especially considering that the casita already does enough to lower our cost of living below what it was in Lima.

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Rates

When we first went live, we kept our rates very competitive. We needed to get some 5-star reviews before we could start pushing rates.  Our rates are about 15%-25% higher now. I think that based on our current ability to command higher booking rates we should be within striking distance from my original underwriting of $14,000-$16,000, without the necessity of booking more stays.

Helping Out

For about a month last summer, we had a student of mine stay with us. Cody is a CFFU student who had started investing by purchasing his first duplex. But called to inform me that he was done with the snow, got a job offer in Phoenix, and was going to be relocating. He asked for help, and I made him one hell of a deal for his stay in our casita for a month, while my wife helped him buy a house hack of his own on the North side of town. Last time we talked, Cody is living it up in Desert Ridge, frequenting eateries in Scottsdale. I live vicariously.

I was very happy to help, but the deal I made him did cannibalize some of the casita income and compressed the revenue. More than likely, we will see this uptick in 2018. Still, I was very happy to help a good kid!

Conclusion

The way I see it, real estate is a tool. The whole point of buying rentals is to create diversified non-W2 revenues. But why? Why is everyone chasing this goal? The fact is that we want to create these revenues in order to improve quality of life for ourselves and people we love.

What we’ve done here is to simply combine several principles into one action. Instead of buying a rental over here and using the cash flow to enable a nicer house over there, we bought a nicer house which happens to have a rental within. The main distinction is that the house really is nice and requires totally no compromise, which brings me to my last point.

Important to underscore is the notion that all of us reach a station in life where if you are not living, then what the hell are you doing?! A traditional house hack, while an acceptable solution in early adulthood, requires you to compress your lifestyle because it’s good for your wallet. That’s no fun, especially when you know you can have both—a wise financial move and upscale life.

While 80 percent of BiggerPockets has no idea what I just said, 20 percent just nodded their heads. Hell yeah!

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So who’s on board with luxury house hacking?

Comment below!