The ROI on the First Year of My House Hack: 82%
Man! That old saying is true. Time really does fly when you’re having fun. It’s crazy to think that I closed on my first house hack a couple years ago—an up/down duplex that sits five blocks north of Denver’s largest park and 1.5 miles away from the BiggerPockets office.
However, this is not your typical house hack. Because of the high price points of Denver, a traditional house hack—where you buy a duplex, rent one unit, and live in the other—would not quite cover my mortgage. I went into this saying I wanted to completely eliminate my housing expense, so I had to get creative.
While I rented out the top, I also made a quasi-bedroom out of my living room by sectioning off a portion of it using a curtain and a room divider. This allowed me to Airbnb the bedroom, while I slept behind the curtain (not as bad as you think).
Now, I was more than covering the mortgage, but by how much? What was the purchase price? Mortgage payment? How were the returns? Was it worth sleeping behind a curtain for a year?
These are the questions this article is going to answer. Was this house hack a success—or a failure?
For this house hack, I deployed a different strategy than most. The top half is a full-time rental and the bottom half is a private room Airbnb. After the first 12 months, I netted $37,145.37 in total rental income.
As for the expenses, I have had 12 mortgage payments for a total of $27,225.68, utilities over the past year of $1,239.92, reserves of $3,000, as well as repairs that have included plumbing $1,922 and some minor issues $150. Note that I am not including vacancy or property management for this year, because vacancy is already built in to my income number and I did not use property management.
Taking the income of $37,145.37 and subtracting the expenses $30,653.49, we get a net income of $6,491.88. Remember, I was living for free. To factor that in, I estimate that my rent sleeping behind a curtain in the living room would run me about $400 per month, or $4,800, per year in Denver. Add that back, and my total cash flow is $11,291.88.
The second wealth generator of real estate is loan paydown. Over the course of the year, my principal balance has been reduced by $7,255. This makes my overall return $18,546.88.
This does not even account for the other wealth generators, like tax breaks AND appreciation. These are much too complicated for the scope of this article, so we are going to assume $0 for both.
Here is a look at the numbers in a more digestible format:
So, How Is the Deal?
While there are many different metrics used to assess a deal, one of the primary metrics used to determine the health of an investment is called a return on investment, or ROI. This indicates how much your investment pays you back within an annual period for every dollar you put in. The higher the ROI, the healthier the deal.
For example, if I made a $100,000 investment that paid me $1,000 per month, the ROI would be 12 percent.
$1,000 x 12 months = $12,000
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$12,000/$100,000 = 12%
Make sense? Now, let’s revisit the duplex.
My total return from cash flow and loan pay down is $18,546.88. The property was purchased for $385,000. With a 3.5 percent down FHA payment, my initial investment (including closing costs) was $18,619.99.
Since I decided to convert this property to an Airbnb, we need to account for the $4,050.50 I spent on Airbnb furnishings. That brings my grand total invested to $22,670.49.
Dividing the amount of cash flow and loan paydown by the amount invested ($18,546.88/$22,670.49), I get an annual return of 82 percent.
Remember, this is considering only two of the four wealth generators of real estate. I did not get an appraisal and I am not an accountant, so it’s tough to say for sure. However, after considering appreciation and tax benefits, there is a high probability that the return is well north of 100 percent.
Where Am I Now?
After exactly one year, I moved out from behind the curtain and converted it into a full rental. I now have my second house hack, which is a single family home just outside of Denver. I live in one bedroom and rent out the others. Yes! I have my own bedroom. Can you believe it?!
So was sleeping behind a curtain worth it? It definitely took some getting used to, but after the first couple weeks, it really wasn’t that bad.
House hacking, for me, has turned out to be more than just a way to save exorbitant amounts of money. With Airbnb guests coming in all the time, it has taught me to stay positive and friendly, even when I’m in the worst of moods. Travelers and vacationers certainly do not care about any trouble going on in my life.
Above and beyond, it has allowed me to be so incredibly grateful for the things I used to take for granted. I did not realize how great it is to have a bedroom. You know, one with a door and lights, and a nice 12-inch memory foam mattress.
I will reiterate it again: I don’t believe there is a better risk/reward trade-off than house hacking. If there is another asset class that can produce 80 percent-plus annual returns with relatively low risk, please let me know. I would love to hear it!
What do you think? Is house hacking one of the best strategies out there?