{"id":91381,"date":"2020-01-26T09:00:06","date_gmt":"2020-01-26T16:00:06","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=91381"},"modified":"2024-02-19T08:00:33","modified_gmt":"2024-02-19T15:00:33","slug":"luxury-house-hacking","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/luxury-house-hacking","title":{"rendered":"Luxury House Hacking: How to Have Your Cash Flow, Equity Appreciation\u2014and Live for (Almost) Free, Too"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">The main idea behind <a href=\"https:\/\/www.biggerpockets.com\/real-estate-investing\/house-hacking-strategy\" target=\"_blank\" rel=\"noopener\">house hacking<\/a> 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:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Equity House Hacking<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Cash Flow House Hacking<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Blended House Hacking<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">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\u2014a flip. But, as is the case with any flip, there is no income component here.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">This is a lengthy discussion\u2014and not appropriate for this article\u2014but I\u2019ve learned that healthy cash flow always rests upon healthy equity appreciation, and healthy equity appreciation always rests on healthy cash flow. It\u2019s not me saying so\u2014<a href=\"\/renewsblog\/2014\/07\/08\/irr-use\/\" target=\"_blank\">it\u2019s the IRR<\/a>. 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<\/span> <a href=\"\/renewsblog\/2015\/03\/03\/why-you-cant-make-money-on-30000-houses\/\" target=\"_blank\"><span style=\"font-weight: 400;\">read this article Serge and I wrote a while back<\/span><\/a><span style=\"font-weight: 400;\">.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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, &#8220;Will I win,&#8221; I wanted to ask, &#8220;How will I win first?&#8221;<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For this reason, I needed a blended house hack, with significant income potential and substantive rationale for appreciation.<\/span><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-119155 size-main-slider\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/11\/luxury-home-interior-702x336.jpg\" alt=\"Luxurious white kitchen and living room in a big house\" width=\"702\" height=\"336\" title=\"\"><br \/>\n<em><br \/>\n<strong>Related:<\/strong> <a href=\"\/renewsblog\/2016\/02\/21\/tax-implications-house-hacking\/\" target=\"_blank\">The Tax Implications You MUST Understand Before House Hacking<\/a><\/em><\/p>\n<h2>Asset Class<\/h2>\n<p><span style=\"font-weight: 400;\">I chose against <a href=\"\/renewsblog\/2013\/04\/09\/how-to-buy-a-small-multifamily-property\/\" target=\"_blank\">multifamily<\/a>. The competition for multifamily is fierce. You\u2019ve got investors. You\u2019ve got BiggerPockets-style house hackers. Both are willing to pay more than I think property is worth, specifically in a location I\u2019d find attractive for my family. Besides, as has been discussed <a href=\"\/renewsblog\/the-new-house-hack\/\" target=\"_blank\">in the previous<\/a> <a href=\"\/renewsblog\/problem-with-house-hacking\/\" target=\"_blank\">articles<\/a> <a href=\"\/renewsblog\/why-you-can-have-nice-things\/\" target=\"_blank\">in this series<\/a>, we weren\u2019t 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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">So, multifamily was out.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">But this seemingly left us with the single family asset class, which wasn\u2019t going to work on the income side of the house hack equation. What now?<\/span><\/p>\n<h2>Multi-Generational Floor Plan<\/h2>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">He is coming down for a job. He\u2019s 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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">They call it a &#8220;multi-generational floor plan.&#8221; Imagine a main house with 3, 4, or 5 bedrooms and 2 or 2.5 baths\u2014and 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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In my household we call it &#8220;cha-ching!&#8221;<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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\u2019t share any walls with the main house. Try doing that in a duplex.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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\u2014you 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\u2014a world apart from that duplex your 24-year-old BiggerPockets friends are living in.<\/span><br \/>\n<em><br \/>\n<strong>Related:<\/strong> <a href=\"\/renewsblog\/life-hacking\" target=\"_blank\">Life Hacking in Pursuit of Financial Freedom: How I Add $1,500+\/Mo to My Income<\/a><\/em><\/p>\n<h2>My Financial Guidelines<\/h2>\n<p><span style=\"font-weight: 400;\">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 &#8220;finer things.&#8221;<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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&#8217; school is. But I think it\u2019s 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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">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\u2014but I wanted it for $1,350 per month.<\/span><\/p>\n<h2>We Found the House!<\/h2>\n<p><span style=\"font-weight: 400;\">We made a ton of offers on a ton of houses. I looked at all options, and then we found it.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Again, there are a lot of specifics to fill in, but for now, let\u2019s look at the results.<\/span><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-91260\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/08\/key-performance-indicators.jpg\" alt=\"key-performance-indicators\" width=\"702\" height=\"336\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/08\/key-performance-indicators.jpg 702w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/08\/key-performance-indicators-300x144.jpg 300w\" sizes=\"auto, (max-width: 702px) 100vw, 702px\" \/><\/p>\n<h2>The Result:\u00a0We Are Living Almost for Free!<\/h2>\n<p><span style=\"font-weight: 400;\">We chose to go the short-term rental route. I\u2019ll outline the rationale in the following article. As of this writing, the casita has been operational for about 6 months. We\u2019ve 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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">With this $1,300 rental subsidy against the PITI, our monthly burn delta should average plus or minus $750.<\/span><\/p>\n<h2>It\u2019s All About Life Design<\/h2>\n<p><span style=\"font-weight: 400;\">Guys, you can have anything you want, as long as it makes money!<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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\u2019ve never heard of and in a house half the size. We\u2019ve 10X-ed our lives and yet cut our burn!<\/span><\/p>\n<h2>Conclusion<\/h2>\n<p><span style=\"font-weight: 400;\">A few points to underscore and focus this conversation:<\/span><\/p>\n<ol>\n<li><span style=\"font-weight: 400;\">You cannot rent a remotely decent apartment for $750 in Chandler, AZ. <\/span><\/li>\n<li><span style=\"font-weight: 400;\">My tenants in Lima, OH are paying $700+ for my 2\/1 apartments, and that\u2019s Lima, OH!<\/span><\/li>\n<li>We came to Arizona looking to improve our family\u2019s 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\u2019ve done.<\/li>\n<li>As real estate investing goes, I\u2019ve 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\u2019ve made in real estate, ever!<\/li>\n<\/ol>\n<p><span style=\"font-weight: 400;\">Consider how difficult it would be to replace this $15,000 of cash flow with an investment property. Think it through with me:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">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.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Capitalized at 8% (if you can even find an 8 cap today), this means you\u2019ll pay over $550,000 for that NOI of $45,000.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">You\u2019ll most likely have to make a 25% down payment, which is almost $140,000.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">And, you\u2019ll have to manage that beast.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">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!<\/span><\/p>\n<p><span style=\"font-weight: 400;\">It produces the same income, but with much less headache than the multifamily. You choose!<\/span><\/p>\n<p><span style=\"font-weight: 400;\">And if you make the right choice, you 10X your life with luxury house hacking!<\/span><\/p>\n<p><a href=\"https:\/\/www.biggerpockets.com\/real-estate-investment-calculator?utm_source=renewsblog\" target=\"_blank\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-91220\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/08\/blog_ads-02.jpg\" alt=\"\" width=\"700\" height=\"85\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/08\/blog_ads-02.jpg 700w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/08\/blog_ads-02-300x36.jpg 300w\" sizes=\"auto, (max-width: 700px) 100vw, 700px\" \/><\/a><\/p>\n<p><em>What are your thoughts on this strategy? Would you consider trying it? Why or why not?<\/em><\/p>\n<p><strong>Weigh in with a comment.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>For me, luxury house hacking produces the same income but with much less headache than owning a multifamily\u2014all while providing a high-end lifestyle.<\/p>\n","protected":false},"author":810,"featured_media":114291,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7356],"tags":[],"class_list":["post-91381","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-house-hacking"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/91381","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/810"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=91381"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/91381\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/114291"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=91381"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=91381"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=91381"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}