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BlogArrowPersonal FinanceArrowWhy I’m Not House Hacking (& the Strategy That Will Cover More of My Rent)
Personal Finance

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

Julie Kent
Expertise:
3 Articles Written
tax-changes


Even if you’re only an occasional reader on the BiggerPockets blog, I’m confident that you’ve at least heard the term “house hacking.” If you’re familiar with the concept, please skip ahead.

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In a nutshell, housing is expensive—it's usually the most significant portion of a budget. House hacking is a strategy to cut down on your housing expenses by purchasing a multifamily property, often a duplex, and living in one unit while renting out the other(s). By using the rent you receive from the other unit(s) to put towards some, if not all, of your mortgage, you're essentially living "rent-free." And by utilizing an FHA loan, you can put down as little as 3.5% to get started. Sounds perfect, right?

Don’t get me wrong. House hacking is an awesome strategy that works for a lot of people. But I’ve decided that it’s not the best option for me and my lifestyle. Here’s how I reached this conclusion.

Background

I moved to Denver, Colorado for a job here at BiggerPockets in mid-March from Des Moines, Iowa. I had approximately ~4 weeks to find a place to live in Denver, and not knowing much about the city, I decided to rent.

Current Housing Costs

  • Base Rent: $1,380 (includes pet rent and parking spot)
  • Utilities: ~$140 for water, electric, and internet. I do not have cable.
  • Total: $1,520/month

My lease is up early next year, and as a real estate investor, I've certainly been thinking about purchasing a property in Denver either as a house hack or straight investment. The problem? Property is really, really expensive right now. For example, this 2-bed/1-bath 888 sq. foot duplex recently sold for $410,000 after selling for $210,000 in 2005. Here’s a triplex that sold for $650,000 after selling for $252,200 in 2012. While it’s possible and probable that remodeling could help explain the bump in prices, it’s still really expensive, especially compared to what I’m used to investing in back in Des Moines, Iowa.

great-deal

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

House Hacking Costs

One of the considerations for purchasing a house hack is that you have to be willing to live in half of it (it's a stipulation for a FHA loan.) When I started to look for duplexes or triplexes, I couldn't find anything listed for less than $450,000 that met the "I'd live here" criteria. For the sake of simplicity, let's go with a final purchase price of $425,000. (Note: Yes, I know that I could spend more time networking/scouting for a better deal, lower my living standards or be open to other neighborhoods, etc.)

  • Purchase Price: $425,000
  • Down Payment: $16,000
  • Loan Amount: $409,000
  • Interest Rate: 4.12%
  • Property Tax: 2.0%
  • PMI: 0.50%
  • Insurance: $1,000
  • Mortgage Payment: $2,985

Now, let’s assume that I rent out the other 1-bed/1-bath unit for $1,600. That leaves $1,385 left to cover the remainder of the mortgage, which is essentially what I’m paying before utilities at my apartment.

Option 2

In either scenario, I do not like having to pay $1,300+ for housing. So I thought of another option. I currently have three rental properties in Des Moines, Iowa and wondered if I might be better off just investing in another property there to offset the high cost of living in Denver. Taking a look at the inventory there, I believe I would be able to purchase a single family home (likely a 3-bed/1 or 2-bath) for ~$130,000 that would bring in $1,200/month in rent.

  • Purchase Price: $130,000
  • Down Payment: $32,500 (25% down to keep the rates lower)
  • Loan Amount: $97,500
  • Interest Rate: 4.2%
  • Property Tax: 1.5%
  • No PMI
  • Insurance: $800.00
  • Mortgage Payment: $700.00

Renting out the house for $1,200 month, I will have $500 to put towards my $1,380 rent, essentially bringing it down to $880.

Pros and Cons

I see the major con of renting being that you’re just giving your money away to someone else—I never like that feeling. Having lived in a property that I owned since 2010, going back to renting was really hard at first. But there are benefits! I like having a gym and a pool. I like not having to worry about maintenance headaches. I like not feeling tied down to a specific location. I also love the location that I’m in, and as they say in real estate, location is priceless. We’re two blocks from Coors Field, we have a grocery store across the street, and I can walk to work almost every day to save money on transportation.

Related: Meet Tim: How One Newbie Investor House Hacked a Duplex With No Prior Experience

Sure, the Des Moines market isn't as sexy as Denver, and maybe it won't appreciate as much. I'm losing the possibility to build equity, but I'm also being much more conservative adding a way smaller amount of debt to my balance sheet. Having a vacancy for a few months and covering a $700 mortgage payment sounds a lot safer to me than possibly having to cover ~$3,000 if both units of the duplex were vacant.

Conclusion

Unless I find a killer deal, I don't believe I'll be investing in a multifamily unit in Denver anytime soon. Instead, I plan to invest in a market I'm more familiar with and where I already have established properties. I'll still use the rental income gained to pay my crazy expensive rent in Denver, so I guess maybe it still could be considered "house hacking." 🙂

We’re republishing this article to help out our newer readers.

House hackers and others: I’d love to hear your thoughts on this strategy!

If I’m not considering something that you would, please let me know!

By Julie Kent
Julie is a software engineer, real estate investor, and book worm. She accidentally fell into real estate five years ago and currently owns three rental properties in the Des Moines, Iowa metro. ...
Read more
Julie is a software engineer, real estate investor, and book worm. She accidentally fell into real estate five years ago and currently owns three rental properties in the Des Moines, Iowa metro. She couldn't be happier working at BiggerPockets and looks forward to helping change more lives! In her free time, Julie enjoys live music, watching/playing sports, and spending time with her boyfriend and dog.
Read Less
55 Replies
    Dean I. from Jacksonville, North Carolina
    Replied over 2 years ago
    Where are the other major expenses like CapEx, repairs and maintenance, vacancy and property management? I understand that you are doing your own property management, but maybe one day you wont want to or be able to. The rest of the major expenses can eat up your cashflow very quickly.

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    Frank Jiang Investor from San Diego, California
    Replied over 2 years ago
    You need to back out the principal portion of your mortgage payment from calculations, as well as estimate the tax shield impact of the mortgage on both sides. It’s easily recouped cash inside the year (you don’t have to wait for your tax return) because you can just take more deductions in your W2 income. I understand your mentality that you are being more conservative from a cash flow perspective, but I think it’s important to understand that it’s much easier to build real equity (and thus net worth) in a place like Denver. You address this in your article but I don’t think that’s a message most people are going to take away from the article.

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    Martin Minkus from San Francisco, CA
    Replied over 2 years ago
    I love how you guys think Denver is so expensive. I wish I had housing as cheap as Denver available to me. Living and working in San Francisco has me struggling to figure out what to do. $800k to $900k only gets you a small 1 bedroom. Sure, you could airbnb the bedroom out if you are willing to live in the lounge room. Its impossible to invest in property here where renting is cheaper than buying all over the bay area…
    Mike White
    Replied over 2 years ago
    yeah man, here in Canada, almost all major cities are $450+ for a detached. Vancouver is $1.5M The only places to get houses for $50-$100K have little to no industry and a shit rental market.

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    Kayla Doan from Boston, Massachusetts
    Replied over 2 years ago
    Your article is a stream of consciousness of how I’ve been approaching living in Boston! I absolutely love my little South Boston neighborhood, and finally had to get over the idea of buying here myself – I also didn’t want to significantly reduce my living conditions, or lock in to living with roommates. I’ve been looking in Worcester and Providence for investments, to offset costs similar to your approach. Good luck, please write with how it goes! PS—Denver is amazing. Stay in your neighborhood and love every minute of it. You only live once!

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    Margie Kohlhaas Rental Property Investor from Algona, IA
    Replied over 2 years ago
    I understand your situation coming from expensive living in Santa Barbara and moving to rural Iowa; however, renting is basically throwing your money away. You would be better off investing either in a multi-family complex in Denver or investing in Iowa. I’d take the rental income from your properties to pay part of your mortgage in Denver. Do some research in your area, you might find that Denver real estate is high for a reason and it may continue to go higher instead of lower. It’s a popular place to live and has alot of offer. Investing in your local market might be a good thing.

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    Corey Adams Investor from Joplin, MO
    Replied over 2 years ago
    House hacking has been great for me, I have a roommate that covers most of my mortgage (P.I.T.I) and I just have to pay the difference of $132 a month. I think it’s easy to forget that the only real benefit of house hacking if you’re going to live in a full unit by yourself is there’s no vacancy, and you should have lower maintenance and repairs because of course a homeowner takes better care of their own home. You still have taxes, insurance, CapEx all that good stuff. If you simply rent out the side you would normally live in, say for $1500 and go rent a single family for $2,000 you’re only out $500 a month, plus the occasional vacancy and a little higher maintenance costs. But you get to live by yourself and for an experienced investor with multiple properties I don’t think that’s much of a trade off. House hacking is best when you’re just getting started, or if you want to go full blown F.I. and rent out rooms in your unit as well like Scott Trench and Craig used to. That’s how you live for free in an expensive market.

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    Michael Merry
    Replied 6 months ago
    Sticker shock makes for bad investment decisions. Do you want to own a piece of a company valued at $1MM that is growing at 100% a year or piece of a company valued at $100K growing at 10% a year? Same with Cities, Real Estate, Life. You invest primarily in Real Estate for Equity Growth. Simple. IMHO Denver will crush Des Moines over the next 10 years. Compound your equity growth in cities that will grow. Even with negative cash flow Denver will come out ahead.

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