Landlording & Rental Properties

Luxury House Hacking: How to Have Your Cash Flow, Equity Appreciation—and Live for (Almost) Free, Too

Expertise: Mortgages & Creative Financing, Personal Development, Landlording & Rental Properties, Personal Finance, Real Estate News & Commentary, Real Estate Deal Analysis & Advice, Real Estate Investing Basics, Business Management, Commercial Real Estate
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New Luxury Home Exterior Detail: New House Front Door and Covere

The main idea behind house hacking is to offset the burn of home ownership, making it possible to live for free or almost free. Mechanically speaking, this can be accomplished either with equity appreciation, income, or both. In my mind, there are a couple of ways to look at house hacking:

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  • Equity House Hacking
  • Cash Flow House Hacking
  • Blended House Hacking

The equity house hack relies on equity appreciation, either organic or forced, and often the easiest way to perceive this is as a live-in fix and flip. You move into the house while you fix it up, and then you sell it for more—a flip. But, as is the case with any flip, there is no income component here.

A cash flow house hack is just the opposite, meaning that all of the emphasis is placed on the income, with total disregard for equity growth.

This is a lengthy discussion—and not appropriate for this article—but I’ve learned that healthy cash flow always rests upon healthy equity appreciation, and healthy equity appreciation always rests on healthy cash flow. It’s not me saying so—it’s the IRR. The main reason for this is that most of the OpEx and CapEx is not a percentage, but is a fixed number. For more on this, please read this article Serge and I wrote a while back.

I knew, therefore, that while offsetting my burn was most important to me, there must also be an appreciation component. Not only that, but I am rather risk-averse, and instead of asking, “Will I win,” I wanted to ask, “How will I win first?”

For this reason, I needed a blended house hack, with significant income potential and substantive rationale for appreciation.

Luxurious white kitchen and living room in a big house

Related: The Tax Implications You MUST Understand Before House Hacking

Asset Class

I chose against multifamily. The competition for multifamily is fierce. You’ve got investors. You’ve got BiggerPockets-style house hackers. Both are willing to pay more than I think property is worth, specifically in a location I’d find attractive for my family. Besides, as has been discussed in the previous articles in this series, we weren’t looking to compress our lifestyle, and living in a 900 square foot apartment next to, under, or above a tenant is not exactly how you 10X your lifestyle. We wanted comfortable and luxurious.

So, multifamily was out.

But this seemingly left us with the single family asset class, which wasn’t going to work on the income side of the house hack equation. What now?

Multi-Generational Floor Plan

The idea is simple. Looking at the demographics of the Phoenix MSA, we realized that this was where young people came to work and older people came to retire. Combine the two, and the notion of a floor plan capable of accommodating both is not so far fetched.

He is coming down for a job. He’s got his wife and kids with him. His dad has passed away, but his mom is coming along. She will be living with them, but she needs privacy.

They call it a “multi-generational floor plan.” Imagine a main house with 3, 4, or 5 bedrooms and 2 or 2.5 baths—and a guest house, which may or may not be physically attached to the main house, but has its own bathroom and its own entrance and sometimes a kitchen/kitchenette. In the Midwest, we called this a mother-in-law suite, but in the Southwest, they call it a casita.

In my household we call it “cha-ching!”

Think about this, guys. The casita, in order to be any good, has to be designed for maximum privacy. Most often, what this means is that if it is attached to the house, it is attached by way of a garage wall, but doesn’t share any walls with the main house. Try doing that in a duplex.

There are other advantages. First, this is still considered a single family residence, which means the best financing terms for a mortgage. Second, the pool of buyers for a house like this is infinitely larger than for a duplex. Whenever you buy anything, you owe it to yourself to understand your exit. This type of footprint has lots of exits because the casita is actually very multi-purpose—you can do a lot with it. But most importantly, you will typically not find these in entry-level locations. These are well-located and well-amenitized homes. Think upscale—a world apart from that duplex your 24-year-old BiggerPockets friends are living in.

Related: Life Hacking in Pursuit of Financial Freedom: How I Add $1,500+/Mo to My Income

My Financial Guidelines

This is actually pretty simple. Upon leaving Ohio, we sold our house. It cost us about $1,350 per month to live in that house. We built it in 2006, and it was a fine house, but without the “finer things.”

I essentially wanted to scale up in the new location, but I wanted to keep my burn at $1,350 per month. I wanted to be in South Chandler because this is where the twins’ school is. But I think it’s fair to say that this submarket is one of the most desirable within a county with county-wide population growth at almost 2% each of the previous two years.

I wanted the pool in the backyard. I wanted the fireplace. I wanted the granite and travertine. I wanted mid-2000 or later construction. I wanted 11-foot ceilings, solid-core doors, and tile on the floor. I wanted high-grade Andersen windows and sliders. I wanted a big kitchen with stainless. I wanted a designer master shower in travertine.

Guys, this is all about the lifestyle. We were moving to live it up, not compress. I wanted it all, and I wanted it in a hot market—but I wanted it for $1,350 per month.

We Found the House!

We made a ton of offers on a ton of houses. I looked at all options, and then we found it.

The house was listed for around $380,000. It is in an area that ranges between $320,000 and $575,000. Patrisha had her license by then and represented us in this process. The first offer was $300,000. I am pretty sure I pissed some people off. I did not get a counter. 

The house sat for about a month, and the ask was lowered. I came back with a higher number. In the end, we went under contract at $355,000.

This is a 2,400 square foot house. There are 3 bedrooms, with 2 baths in the main house, within about 1,800 square feet. There is a room above the garage that makes for a brilliant office for both my wife and me because it is so private and quiet. There is a 2-car garage, a pool in the backyard, and a casita that is attached to the house by sharing a wall with the garage, but it is across a 25-foot courtyard from the main house, making it totally sound-proof and separate.

This casita is the rental, you guys. And because of the great location and the remodel I did, in spite of only being about 234 square feet, it is a very viable rental.

Again, there are a lot of specifics to fill in, but for now, let’s look at the results.

key-performance-indicators

The Result: We Are Living Almost for Free!

We chose to go the short-term rental route. I’ll outline the rationale in the following article. As of this writing, the casita has been operational for about 6 months. We’ve got about $9,200 of cash flow (after fees) on the books. I am projecting that we will finish the year with about $15,000-$16,000 of cash flow.

My PI (principal and interest) on this very nice house is $1,708. All in, my burn totals about $2,050, plus or minus $50 per month. In the book, I go through the complete underwriting of all of the numbers, which took a lot of thought and market research. A very reasonable (and conservative) expectation for our average monthly cash flow is right around $1,300. Some months will be less and some much more. But on average, we should net $1,300 per month.

With this $1,300 rental subsidy against the PITI, our monthly burn delta should average plus or minus $750.

It’s All About Life Design

Guys, you can have anything you want, as long as it makes money!

My family and I are now living in a much nicer home, in a much more economically diverse town, in beautiful and sunny Arizona, where we have blue skies, palm trees, and sunshine almost every day of the year, for 50% of what it cost us to live in Ohio in a town you’ve never heard of and in a house half the size. We’ve 10X-ed our lives and yet cut our burn!

Conclusion

A few points to underscore and focus this conversation:

  1. You cannot rent a remotely decent apartment for $750 in Chandler, AZ.
  2. My tenants in Lima, OH are paying $700+ for my 2/1 apartments, and that’s Lima, OH!
  3. We came to Arizona looking to improve our family’s quality of life while keeping our burn down to $1,350 (same as it was in Lima). I am not sure, but I think $750 burn is better than $1,350. We are living in beautiful Chandler, AZ in a house almost twice the size, with a pool, granite, travertine, and all the rest for practically 50% of what it cost us to live in Lima, OH. Think about what we’ve done.
  4. As real estate investing goes, I've been playing the game for 11 years now, having bought my first property in 2006. I currently still manage a portfolio of rentals in Ohio. I promise you, this casita house hack is by far the easiest and most pleasurable cash flow I've made in real estate, ever!

Consider how difficult it would be to replace this $15,000 of cash flow with an investment property. Think it through with me:

  • In order to end with $15,000 of cash flow, the NOI would need to be at least $45,000, but probably more like $50,000. Out of that, you would pay about $2,500 per months of debt service to end up with $15,000 of annual cash flow. Consider what this would take to buy.
  • Capitalized at 8% (if you can even find an 8 cap today), this means you’ll pay over $550,000 for that NOI of $45,000.
  • You’ll most likely have to make a 25% down payment, which is almost $140,000.
  • And, you’ll have to manage that beast.

By contrast, this casita came with my house. It was free, people! There was literally no added cost. It is 234 square feet and easier to maintain than any other piece of real estate I own. It required no additional down payment aside for the 5% I put down on a conforming Fannie Mae note. Why? Because I am an owner-occupant and this is not a multifamily but is a single family dwelling. Best kind of financing you can get!

It produces the same income, but with much less headache than the multifamily. You choose!

And if you make the right choice, you 10X your life with luxury house hacking!

What are your thoughts on this strategy? Would you consider trying it? Why or why not?

Weigh in with a comment.

Ben has been investing in multifamily residential real estate for over a decade. An expert in creative financing, he has been a guest on numerous real estate-related podcasts, including the
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    Jeremy Lee from Irvine, California
    Replied over 2 years ago
    I’ve been considering this but for actually having my in-laws living with us “as intended” lol. What are your thoughts on finding something that’s zoned R3 or R4 though where you could build out? That would be pretty expensive, I’m guessing. BTW: This is in Southern California, where everything and anything is overpriced, so if you have any SFH with a guest residence, you’re probably going to be overpaying for it whatever way you look at it.
    Jose Torres
    Replied over 2 years ago
    Great article! Dumb question; would doing a VA loan with nothing down be better on a house hack? What are the advantages or disadvantages??
    Jose Torres
    Replied over 2 years ago
    Great article! Dumb question; would doing a VA loan with nothing down be better on a house hack? What are the advantages or disadvantages??
    Jose Torres
    Replied over 2 years ago
    Great article! Dumb question; would doing a VA loan with nothing down be better on a house hack? What are the advantages or disadvantages??
    Chrissy Ertz Real Estate Agent from Philadelphia, PA
    Replied over 2 years ago
    I thought this was great. I had not considered going this route until now. Multi family units are so hot in Philly right now it is hard to find them. This is another viable option for me.
    Chrissy Ertz Real Estate Agent from Philadelphia, PA
    Replied over 2 years ago
    I thought this was great. I had not considered going this route until now. Multi family units are so hot in Philly right now it is hard to find them. This is another viable option for me.
    Alli
    Replied over 2 years ago
    I really liked the article it backed up what I was thinking to do very soon. This is certainly not a new idea but I liked the way it was told and how a person used real estate to improve their lifestyle, nothing wrong with that!!! A single family home with a “casita” (BTW this word is not new and trendy! It means small house in Spanish!!!) Since Arizona is near a Spanish speaking border could this be the reason that the Realtors may in fact use this term, just like in Hawaii they use the word “lanai” … Jee wiz people!!!! Some of the people on this site seem to take everything so literal, this is a BLOG maybe you should only click on the articles that seem pertinent to you! If its not your thing then dont ruin it for the rest of us! If you have that much time on your hands to read and comment on every post that is not in your investing style, then you have way too much time on your hands!
    Shaun Sliker
    Replied about 2 years ago
    If I were to want to try this in my area, how would I know that my little casa would even rent out successfully enough as a short term rental before I’m already in the property?
    James Rutan from Indianapolis, Indiana
    Replied almost 2 years ago
    If your big goal is to own a large luxury house there is a way. What about this! You find a gorgeous McMansion big enough for 2 families. You split the PITI via a 3rd party ‘loan manager’. ( Conversly if 1 family qualifies for the loan and sells 50% of the future value of the property to the 2nd family on payments.) Now, both families get to live in a luxury home for 50% off, build equity, and reap all the other benefits in of REI. It’s like a condo in a sense. One could still rent out the casita for added benefit. The only downside, You just have to find a family willing to live separately under the same roof as you.
    Kevin Miller Investor from Cardiff by the Sea & Baja CA
    Replied over 1 year ago
    But you’d have to live in AZ in this scenario, hard to gain upside in lifestyle in AZ. Love to see this example in SoCal at the Coast.
    Charlene McNamara Rental Property Investor from Nevada City, CA
    Replied over 1 year ago
    We’re doing this now and have several times in the past with other homes, first time in 2001. We go back and forth between having short term and long term renters in the small house. There are reasons both options are desireable. Right now we cash flow about $500/Mo renting the Airbnb halftime, meaning it pays our mortgage, plus taxes and insurance AND then we have $500/Mo in cash flow, which could easily be $1000/Mo if we rented it FT. So we’re beyond living here for free, we’re getting paid to live here! 2800 sq ft house 330 sq ft. Studio space ADU. It’s been such easy money we converted a large bedroom that had an exterior entrance, separate bath and separate sink into another rental. That one has a long term renter, which brings in even more money. These have brought us much more money than our other traditional investment rental properties AND have been much easier to manage. I’ve never understood why more people don’t follow this approach.
    Deborah Smith Accountant from Chandler, AZ
    Replied over 1 year ago
    Hi Neighbor! I’m in south Chandler too, in a “next-gen” community as well. Welcome to AZ!
    Spencer Keane Investor from Austin
    Replied about 1 year ago
    I looked into this option too, but doesn't Maricopa code state you are not allowed to rent it separately?
    William Spencer
    Replied 8 months ago
    This is a cool way to live in a nicer home for less. But where’s the evidence that a casita offers better/more exit strategies than a multi family? How do you reconcile these two points from your article?*: 1. I chose against multifamily. The competition for multifamily is fierce. You’ve got investors. You’ve got BiggerPockets-style house hackers. Both are willing to pay more than I think property is worth[…]. 2. [Instead, I chose a casita...T]he pool of buyers for a house like this is infinitely larger than for a duplex. Whenever you buy anything, you owe it to yourself to understand your exit. This type of footprint has lots of exits because the casita is actually very multi-purpose—you can do a lot with it. In the 1st point, your argument against multi-family homes is basically that there’s a sellers’ market for them, complete with a plethora of purchasers willing to overpay. So how do you then argue in the 2nd that casitas are a better choice w/ better exit strategies because *you* view them as more versatile? Besides your opinion of them, what supports this point? Thank you. * (slightly edited for clarity)