5 Strategic Advantages of a Luxury House Hack

by | BiggerPockets.com

As much as has been written on this blog about investment properties and house hacking, there seems to still be a lot of confusion in regards to which asset class best fits in people’s lives. I see this question discussed on the forums quite a lot.

With this in mind, I am going to try to identify some of the key perspectives and elements on both, in hopes of helping you make the most intelligent decision.

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Why Asset Class?

Note that as I compare purchasing rentals to purchasing a house hack, I am not referencing techniques, but rather asset classes. Let me explain.

A lot of the confusion and hesitation around house hacking comes from the perceived loss of certain home characteristics that many people are hesitant to accept. The loss of privacy is quite real when it comes to house hacking, and so there’s a compromise on location, construction quality, age, and amenity package. This makes it hard for lots of you to justify giving up so much in life just so you can save a few bucks.

Are You Moving Into A Rental?

The dynamic I described above stems from the fact that people are mistaken about asset classes. The generally accepted norm for a house hack, for example, is to buy a duplex and move into one side while renting out the other side. In this example, you can also substitute either a triplex or a four-plex in place of a duplex.

The thing is — whether we are talking about a duplex, triplex, or four-plex — all of these belong to an asset class I’d refer to as rental. In other words, you, a reasonable human being who works hard and expects your home to be nice, are not intended to move into this asset class and call it home. Not unless you are twelve, and ride your bike to work.

And you know this! This is why you keep  wondering whether you should pursue a house hack or simply buy a rental.

Related: An Intro to House Hacking: Here’s How I Get Paid to Live for Free

You Should Do a House Hack

Presuming you realize that you should be house hacking in a completely different asset class, I say do a house hack. Understand, there is a way to do this without having to make all of the compromises you may be concerned about. However, there are truly too many benefits to what I call a luxury house hack not to do one.

I’ve written about luxury house hacking quite a bit over the past year (since I am doing it), most recently in this article. I don’t want to rehash the details of my house hack here. However, let us ponder all of the strategic advantages a luxury house hack represents.

1. They’re Easier to Manage than Rentals

A luxury house hack is infinitely easier to manage than a rental. First of all, since we are talking about a vacation or corporate rental, the quality of tenant is lightyears ahead of what you would expect in a rental. Secondly, these are short-term rentals, which means you’ll never have to sign a lease. This means that you will never be faced with needing to evict someone living next door.

Finally, if you utilize websites such as Airbnb, HomeAway, and VRBO, they will handle all of the financial transacting for you. This not only simplifies life by turning rental income into mailbox money, but it creates separation between you and the tenant. Not a small thing, especially if you are new!

2. More Money than Traditional Rentals

In one of the previous articles I wrote about a concept called velocity of money. Due to higher velocity, you will almost certainly make much more top-line revenue in a luxury house hack than you could in a so-so rental.

3. Competitive Advantage

And, having made more top-line revenue, we have to acknowledge that a lot of your costs will be built in. You won’t have a second set of utility bills, property taxes, and landscaping. This provides for significant competitive advantage, and results in lower operating costs than your competition.

4. Better Lifestyle For You

In order to attract class-A tenants, you have to be in a class-A location. Your options, therefore, are as follows:

 • Buy a rental in a so-so location, and buy a house for yourself in a class-A location.

• Buy a luxury house hack in a class-A location, and kill two birds with one stone.

What I am driving at is that the reason class-A guests will be attracted to your rental is the same reason you’d want to be there.

With a luxury house hack, you’ll gain a rental that makes more money than a traditional rental — but is easier to manage. Hence my recommendation. However, there are additional benefits!

Not only will luxury house hack provide for more income which is easier to manage, but it will necessarily put you into a class-A location for less money than you’d spend on class-C primary residence.

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

5. Added Tax Breaks on Your Home

This is the last bullet point. Typically, folks struggle with deductions as they relate to a primary residence. This is even more of an issue post Trump’s tax reform.

In a house hack situation, you will have many options to combat taxes.

In Summary

I would be very hesitate to recommend you do a traditional house hack. In my opinion, it simply requires you to compress your quality of life to such a great extent. It’s not sustainable. If the choice is between a traditional house hack and buying a dedicated rental, buy a rental.

However, a luxury house hack changes everything. For one thing, you keep your privacy. You will never have to sign a lease, which means you’ll never have to evict. You will make more money than a dedicated rental — and easier. And, by definition, you’ll live in a great location.

If the choice is between a luxury house hack and a dedicated rental, definitely do a luxury house hack!

What about you?

Which one do you think is better? Share your opinions below!

About Author

Ben Leybovich

Ben Leybovich has been investing in multifamily real estate since 2006. His area of expertise is creative finance. Ben works extensively with private as well as institutional financing. Ben the author of the Cash Flow Freedom University and creator of a cash flow analysis software CFFU Cash Flow Analyzer.

26 Comments

  1. Dave White

    Agree with the premise, but a bit light on the details… Is the main idea that you rent out part of a baller pad as an AirBnB? What happens when they continue to take more than that their fair share, you have exorbitant cleaning costs, or the AirBnB is outright prohibited by your city? Seems more risky than a regular rental.

    • Ben Leybovich

      Dave, so far they take very little relative to the value they provide. They could take much more and I’d still prefer. Secondly, there is a reason I recommend a luxury house hack – cleaning costs are minimal because of what it is and where it is. Lastly, do you really think that I’d be happy living in a place that’s liberal enough to outlaw AirBnB?! If that’s what they do, I’m outa there because that’s the least of their problems 🙂

      After 12 years in the business, Dave, this is by far the least risk profile.

      • Susan Maneck

        I have a condo that I bought as my vacation/retirement home but it is in an area which does not allow AirBnBs for condos. (Funny thing is the HOA would rather have them than long term rentals.) But what can I say this is Lake Tahoe and I’m a liberal. And if you can get anything in California for 110K, let alone in a vacation area, you better grab it!

  2. I don’t like class A locations, because they tend to make people cocky and annoying. Human beings are already expecting too much in life, especially the idea of “vacations” when so many people literally laugh at the notion of retiring. Maybe I’m too meta, but the entire concept seems unsustainable over the long term.

  3. Scott A Smith

    I also agree and understand the premise, but as a noob I am a bit unclear about the living arrangement in a luxury house hack. How does a luxury house hack provide privacy over a du/tri/quad plex? Are you presuming an in-law suite or something, or some other renovation to the house that would provide privacy?

    • Ben Leybovich

      Scott, I’ve written a number of articles on BP. I’ve written much more on my website. And finally, if that’s still not enough detail, I’ve written a book called House Hacking.

      It’s magical how well this works 🙂

  4. Susan Maneck

    While house hacking can work for a second home, as an investment strategy it is mostly for the young and single IMO, ones who don’t have the resources to buy a Class A house anyhow. I live in a predominantly African-American C-D neighborhood in a house I purchased during the recession for 30K (currently appraised at 70K.) It is because I’m wiling to live here that I had the money to buy seven other houses, with rents over 5K a month. If I sold them all it would buy me one house in Class A neighborhood. Not worth it. My pockets are bigger because I don’t need luxury and am willing to live next to the people I serve. (I’m a professor at an HBCU.)

  5. Travis Zuehls

    I’ll admit luxury caught my attention. However, as an agent luxury homes is what I sell in Seattle and the surrounding counties and not what I will be purchasing for properties as it’s a lower ROI. Find a decent amount of property for a reasonable price that’s a manufactured home with 3-4 units and maybe a garage or 2 to add more units. Have at least an acre or 2 of land, and if you can find one with a good amount of trees you can have the trees removed and sold to basically cover the price of the property or at the very least the price of the land itself (2k per tree on average here for the decent sized evergreens). Then find cheap trailers and put them on your property with full hookups and use those for Airbnb’s. You could also rent out vehicles on turo.com for more upsells. If you could find a property with with a sufficient amount of trees the property would be paid off immediately and the manufactured home in my location would bring me $2400-3200 a month before expenses and taxes. The trailers or even shipping containers used for additional airbnb’s would be paid off in a summer or less as you can find a camper 28ft with 4 beds for under 5k easy and the daily rate for something like that would be $100 a day.

    Property taxes on a manufactured basically a netflix subscription and the insurance quote I received was basically the same as my Amazon prime subscription combined with my car insurance of a 2008 vehicle ($300 a year). I would have the utilities split between the tenants.

    Luxury homes sounds is great for selling as an agent but not as an investment in my eyes. It’s all about the ROI and a luxury home here would be like 5 mil which would be around 9 mil if that includes interest, PMI, property taxes, and insurance. Meanwhile, the roomshares would only be earn maybe $100-$300 more per room and say you have an extra room that’s a total of at max $1500 extra a month. Heck say one charges $1200 a month per room in a 5 room mansion in Seattle. That’s the most I’ve seen anyone charge on Craigslist. That’s $6000 a month.

    Say you found just the best deal in Seattle with a 5 bed 2 bath in a great location for $2 mil. Well a 30 year loan at 4.5 percent combined with all other expenses would be over 10k a month. You would be in the hole already and that doesn’t even include income taxes.

    Now if you go with Air bnb you can make some more but it’s very inconsistent and the entire reason for air bnb was for cheaper rates than the prices but this would be a luxury house. Say you do just amazing and per month average 100% occupancy for 15 days a week and the highest air bnb room right now is $114. After the fee’s that would drop to $110. The insurance will cost more with Air bnb. The cleaning will be more frequent. so 110 times 5 rooms multiplied by 15 days a month on average and then multiply that by 12 months equates to 99k. Now you have 20% taxes on that which would drop you to about 80k and even if you manage to work the system really well you might drop it to 85 k. So 85k divided by 12 months is a little over 7k which would be 3k short of just covering your monthly expenses which doesn’t include cleaning and maintenance.

    A strategy you could use is luxury apartment arbitrage and find good deals on 3 bedroom luxury apartments that come with cleaning services and the covered insurance. Then just use air bnb on those bad boys.

    For me it’s not about saving money it’s about ROI. The ROI of a manufactured home (3-4 bedroom room shares)) on a good sized property combined with strategically placing inexpensive RV’s/trailers to hookup combined with other upsells like laundry (coin operated), rental cars, and rental bikes one would make a much more ROI than anyone ever could with a luxury rental property at least in Seattle. You would have to charge 12k a month just to cover all expenses and taxes. I suppose that’s possible but would be very difficult to pay the bills or ever make a profit.

    Maybe where you live a luxury home is under $400k and the daily air bnb rentals are around $200 a day. If that’s the case then go all in.

  6. Troy Williams

    The photo on this article must be easily be a 7 digit home. I would love to know how a person who could normally afford buying a B class property gets approval on a loan for an A Class property so that he/she can even attempt the house hack.

    @Ben where can I find your other articles for the answer?

  7. NA Stofko

    Ben, what are your thoughts about class A rental property when the rental season is only half the year at best? Is there a rough ratio to use as a guide? Is it better to use a management company that takes 20 or 30%? Or just stick to VRBO and Airbnb etc.? Thanks!

    • Ben Leybovich

      J, so here are a few thoughts:

      1. I like markets for this which exhibit desirability in more than one direction. For instance, Arizona is obviously a snow-bird destination. But, this is only true for 6-8 months out of the year. However, Phoenix MSA also happens to be growing by 2% per year for the last few years, which means business travel, weddings, sporting events, etc. So, while I have my primary rental season, there is no shortage of opportunity at other times. I wouldn’t want to be in a one-trick-pony environment necessarily.

      2. Everything we do is a function of where we feel is our competitive advantage. Short term rental as part of a house hack has much competitive advantage over a straight investment. the overhead with STRs can be hefty, but in a house hack we don’t see that. Therefore, I am not entirely sold on vacation rentals as a business model, with a few exceptions…

      Makes sense?

  8. The airbnb house I have in a terrific beach location is not a huge money maker in terms of monthly cash flow, although it does generate some, just not very much. However, the appreciation and equity it gains over time is fantastic. It contributes to my RE portfolio such that I can take out a HELOC and use that to acquire more properties. I have other properties that contribute much more heavily to cash flow but are more difficult to borrow against, so the lack of significant mailbox money isn’t a deal breaker. I wouldn’t recommend having one as your sole source of income. For me it’s a piece in the puzzle.

  9. Jenn N.

    I find your article a bit on the snobby side. 🙂 We bought a duplex and moved into one side before I had ever even heard of the term househack. Mind you I did this at 38 years old with four kids. It was my idea and my husband went along with it. He’s so thankful. My husband and I had spent the prior four years being nomads traveling in an RV seeing 49 states so we were used to small spaces and freedom. However our duplex is 2200 square feet EACH SIDE in a fantastic neighborhood in one of the best school districts (not that it matters bc we homeschool). Our traditional house hack has been the best decision we’ve made financially. We had been free spirits for so long we had a bit of catching up to do financially and our house hack has allowed us to do that. We were able to buy a few other properties after the duplex. Also we value simplicity and minimalism and out house hack fits these values perfectly. It’s amazing to live in a place that’s not a financial burden. (We used to live in southern CA!) Not only that but our last tenant became my best friend! She’s one of the most amazing people I’ve ever met. They recently moved out and we converted that side to an Airbnb and so far it looks like we are doubling profits. Personally, I think chasing “luxury” is waaaaay overrated. I’m very happy in my Colorado duplex. That said we love real estate and if a great property comes up that fits us we would consider it as long as it was house hack-able.

    • Ben Leybovich

      I love how polite you are, Jenn. You clearly feel the article has attitude, so much so that you couldn’t help yourself but to comment on it. Nonetheless, you did so in the most non-confrontational way possible. Even a smiley face…love it.

      Of course the article is in some way snobby. It is so by design. In so many ways I intend for the cream to rise to the top 🙂

      Thanks indeed for reading!

  10. Levi K.

    “House Hacking” Positive Effect – I first heard of Ben Leybovich back in 2014 through Bigger Pockets blog. Back then, I was just starting to educate myself about the ways I can create passive cash flow and becoming very interested in real state. I contacted Ben directly through Bigger Pockets website by sending him a “colleague request”. Throughout, I followed him on Facebook. Fast forward to 2017, I was visiting my best friend in Arizona and knew I wanted to meet with Ben.
    Through some persistence, I was able to meet him and discuss some interesting topics. Ben is very experienced and easy-going guy. He was approachable and happy to share his knowledge with me. He also signed his book titled “House Hacking” and gave it to me.
    I flew back home to San Diego and was excited to share with my wife what I’ve learned from Ben. Within a week, I read his book cover to cover. Within a month of meeting with Ben, my AirBnB was ready to be placed on the market and generated $761.45 my first month. I kept close contact with Ben through the process of setting my place. Ben was there to guide me through this and help me to pay attention on the details. I and my wife thank Ben for all the valuable information his book “House Hacking” offered and for his guidance. This is just a beginning for me and my relationship with Ben.

    • Ben Leybovich

      Levi – you’re killing it!

      So, you worked yourself into Ben Leybovich’s graces for the price of a meal. Nice work! But, might get more expensive from here. I’m thinking $50,000 in one of my deals might keep the flame alive. Thoughts? hah

  11. John Wilder

    In the first sentence of the last paragraph you state that “I would be very hesitate (should be hesitant). As a piece of advice, have your messages triple checked because this kind of glaring error paints you as not very professional. You have a lot of intelligent readers and this kind of mistake insults our intelligence.

    John Wilder
    904-655-2175

    • Ben Leybovich

      John, I suppose I will answer in several ways:

      First of all, you are right. This is a misprint.

      Having said this, though, as it relates to editing this article, I did not. I didn’t even re-read it once written. I am teaching real estate concepts, and grammatical errors are not at the top of the list for me. Now, if this mistake were to materialize on a website concerning with linguistics, I could see a bit of an issue…

      Secondly, if your intelligence decides to be bothered over something trivial like this, I care not at all. It’s not my job. I don’t get paid to care. I do it out of the goodness of my heart 🙂

      And, finally, BoggerPockets has people on pay roll whose job is to edit these articles. They get paid to care about grammar. And they get paid to care about your intelligence. So, if this is important enough to you, I’d address your commentary to the BiggerPockets staff.

      truthfully, though, I’d hope that you realize that these articles are written by real estate guys, on the run, in the moments between all of the other things that we do. Perhaps you could cut me, and the rest of us some slack, dude.

      Thanks.

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