Luxury House Hack Update: What I Think of This Strategy After 12 Months

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As most of you know, one of the last real estate projects I got myself involved with has been my casita house hack. We’ve recently hit one full year in operation, so I thought, why not do a bit of an update for you?

For those few who do not know what I am talking about, I should probably do a little review. But before digging in, I must ask where you’ve been and what’s been keeping you away from BiggerPockets?!

How It All Began

Anyhow, it all started toward the end of the 2016 school year. My wife Patrisha and I were on our way to pick up the kids after school in Lima, Ohio. We were crossing the street on our way from the coffee shop, and she turned to me and said, “We have to move.” I mean, it was a kinder-sounding voice than your typical staff sergeant, but much authoritative. It was not an invitation to consider the issue. No, it was more like, “You have a nice life and a pretty wife, and if you’d like to keep it that way, figure it out.”

To tell you the truth, I can’t blame Patrisha. I was ready, too. In fact, I stopped buying property in Lima around 2013, specifically because I felt, either consciously or subconsciously, that as a family we were going to need to move in the not-so-distant future. As a matter of fact, the last property I bought in Ohio was that Symphony 10-unit. I’ve written about it on this blog—and, as a side-note, for a no-money-down deal, it ended up pretty sweet!

But I’ve digressed. Once school was out that year, we packed up the Tesla and traveled with the kids for a few months, trying to figure out where to go. Phoenix MSA was at the top of my list and had been for a while. But Phoenix constituted a very serious cross-country move, and before taking the plunge, we thought we’d look at what was available closer. After all, we do have a lot of family in the Ohio area.

Related: 3 House Hacking Mistakes I Made (& How I Could’ve Prevented Them)

We knew that one way or another, we wanted warmer weather and good educational opportunities for the children. However, we wanted nothing to do with humidity, and so Florida was out. We looked at North Carolina, where the Research Triangle offered a lot. We also considered Atlanta. In the end, though, I realized that as we were traveling and experiencing all of these places, I was subconsciously stacking them up against Phoenix, with its palm trees, blue skies, and almost nothing property taxes—not to mention the Basis schools.

Patrisha and I wanted a change. And, in the end, recognizing that moving to Charlotte or Atlanta would be just as much work as moving to Phoenix, we realized that if Phoenix was what we truly wanted, then it’s what we needed to do. And we did.

arizona-market

Looking for Real Estate

Just this weekend, we were lucky to have family from Ohio at our house. One look at our house, and they correctly identified the reality that a comparable house in a comparable location in Columbus, Ohio would cost the same or more. And it would involve a property tax bill of about five to seven times as much. This means that as high as Phoenix SFR market is, it is very difficult to call it inflated still in 2018. Houses are not any more expensive here than in Columbus, Indianapolis, or Cincinnati, but Phoenix is experiencing population growth those other places cannot imagine.

Having said this, I really didn’t care if houses were inflated, at intrinsic value, or cheap. I had my own criteria, and it was this:

Our primary in Lima was costing us about $1,600 per month, all in. Upon arrival to Phoenix, we wanted to stay at the same burn rate, and this in and of itself wasn’t a problem. The issue was that we weren’t looking for a small house in a nothing market like we had in Lima. If we’d wanted that, we’d have just stayed where we were. We left because we wanted to upgrade our lives. So, we wanted a great location, convenient infrastructure, and a house that wasn’t huge but large enough to enjoy—with a pool.

What I described above would have cost more no matter where we bought. Quality costs more. But the fact remained—we weren’t comfortable increasing our burn. So, what do you do?

Casita House Hack

We were faced with three choices.

  1. Accept that scaling up would come with additional burn.
  2. Scale down our primary situation.
  3. Create some kind of rationale that would synergize that which is a home with that which is an investment.

Following a lot of market research, we ended up buying a nice house in South Chandler. There are many interesting attributes to this house, but most importantly, there is an attached casita.

Imagine a house shaped as a horseshoe put on its side. In the back are the main quarters—3-bedroom, 2-bath. Protruding forward is the pass-through laundry room, which leads into the garage. Attached to the garage is the casita, which is a bit under 250 square feet. The interior space inside the horseshoe, separating the main house from the casita, is a courtyard.

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

Upon purchasing the house, the first thing we did was to upgrade the casita. Think of it as a bedroom, with a bath and a kitchenette, staged with very nice furniture, under-the-counter fridge, microwave, Keurig, some cups, glasses, and forks, and a bottle of red (that’s a nice touch, don’t you think?). There is a private entrance and a very quaint courtyard with some wrought-iron sitting. Very nice!

Expectations

I expected to generate about $14,000-$16,000 of cash flow (after fees) annually from the casita. I figured I’d be able to book about 240 nights or so. Basically, I was hoping for about $1,200 per month.

My PITI (principal, interest, taxes, insurance) on this house is about $2,200 per month. With $1,200 to offset the PITI, I figured we’d be living in a very nice place for around $1,000 per month, and considering that it cost us $1,600 to live in our Ohio home, $1,000 for what we have now would have been a straight up gift.

T12

We placed our casita on Airbnb and VRBO (to learn more about how to rent your place and list for free on VRBO, click here) in February of 2017. The first booking came in within two hours of our listing going live. It was truly a pinch me please kind of a thing. I’d never done short-term rentals prior to then and had no baseline for my assumptions, aside from research. But research is not the same thing as experience, and that first booking was a trip.

Today, about 13 months later, I am able to tell you that while we did better than we needed to, we did not do as well as we’d hoped. We did not generate $14,000 of cash flow, only $12,000. There were a couple of reasons for this.

Bookings

We were not able to book 240 nights—or even 220 nights. We’ve had so many relatives and friends spend time with us (which is really nice, by the way, and our friend Darren Sager is a regular now) that we only booked 179 nights. Depending on how you look at this, there is an opportunity here in that we can certainly shoot for more bookings and therefore more income. I am not sure we want to sacrifice time with friends and family, though—especially considering that the casita already does enough to lower our cost of living below what it was in Lima.

airbnb-tips

Rates

When we first went live, we kept our rates very competitive. We needed to get some 5-star reviews before we could start pushing rates.  Our rates are about 15%-25% higher now. I think that based on our current ability to command higher booking rates we should be within striking distance from my original underwriting of $14,000-$16,000, without the necessity of booking more stays.

Helping Out

For about a month last summer, we had a student of mine stay with us. Cody is a CFFU student who had started investing by purchasing his first duplex. But called to inform me that he was done with the snow, got a job offer in Phoenix, and was going to be relocating. He asked for help, and I made him one hell of a deal for his stay in our casita for a month, while my wife helped him buy a house hack of his own on the North side of town. Last time we talked, Cody is living it up in Desert Ridge, frequenting eateries in Scottsdale. I live vicariously.

I was very happy to help, but the deal I made him did cannibalize some of the casita income and compressed the revenue. More than likely, we will see this uptick in 2018. Still, I was very happy to help a good kid!

Conclusion

The way I see it, real estate is a tool. The whole point of buying rentals is to create diversified non-W2 revenues. But why? Why is everyone chasing this goal? The fact is that we want to create these revenues in order to improve quality of life for ourselves and people we love.

What we’ve done here is to simply combine several principles into one action. Instead of buying a rental over here and using the cash flow to enable a nicer house over there, we bought a nicer house which happens to have a rental within. The main distinction is that the house really is nice and requires totally no compromise, which brings me to my last point.

Important to underscore is the notion that all of us reach a station in life where if you are not living, then what the hell are you doing?! A traditional house hack, while an acceptable solution in early adulthood, requires you to compress your lifestyle because it’s good for your wallet. That’s no fun, especially when you know you can have both—a wise financial move and upscale life.

While 80 percent of BiggerPockets has no idea what I just said, 20 percent just nodded their heads. Hell yeah!

So who’s on board with luxury house hacking?

Comment 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.

45 Comments

  1. Cody Barrett

    Fantastic article here. Truly once in a life time experiences being able to learn from professional for a whole month and get a deeper sense of what being involved in real estate full time was like. I appreciate your efforts Ben and helping me get on my feet down here! Your casita was fantastic and one hell of a deal…saved me a couple grand, minimum.. Hope all is well Ben!

  2. connie griffin

    Hey Ben being part of that 20% I have the same set up with our house; but we’re in Nevada. The court yard have a nice gas burning fire place also to enjoy. We now though have my 89 yr. young mom in the Casita. But, congrats on your success . Do you have an HOA? We will have to get approval I’m sure with our’s… Keep it rocking…

  3. Charlene McNamara

    We’ve done the same thing twice now in California. We decided years ago that we’d never buy a primary residence that does have some sort of small rental unit or rental unit possibility. Our tiny Airbnb studio covers our PITI so we live in our 3000 sq ft nice house for free! We chose that over a long term renter since it pays almost 3 times more and allows us to block days to use it as a guest space for visiting family and friends. We actually could book a lot more time, but often I block off chunks of time when I simply want a break or one of us wants some time to be living alone.

  4. Dani Z.

    Thanks for the update, Ben. I was wondering how that was going for you.

    Here in Portland, just about everyone and their mother seems to have an AirBnB. Over the past couple years, because of increased competition, rates have come down dramatically. (Portland is a very seasonal market, with summer rates being triple to quadruple winter rates; “summer” is June through September.)

    What I’ve observed is that during the slow season (October through March-ish), rates on furnished nightly rentals are about the same as the daily pro-rata rent on a long term unfurnished rental. But the STR is a lot more work with a lot more vacancy and much higher expenses (utilities, furnishings, cleaning, replacing linens, dishes, hotel tax, consumables, etc.).

    After I furnished one of my LTRs, I realized that the business model, at least in Portland where competition is high, didn’t make sense for me because of the cost and the work involved. Ultimately, it would generate about the same income [with a loss less brain damage] to simply have a year lease where the tenants furnish their own unit and pay for their own utilities. (Also laws in Portland make it expensive (~$4k) to ask someone to leave once they’ve stayed 30 days, rendering my idea to do a “medium term furnished rental” pretty much infeasible.)

    My question is, how do you think competition (and regulation, though Phoenix seems immune to Portland-style insanity) will affect your luxury house hack business model long term, and do you think it is a sustainable strategy? Clearly, you know how I feel, but I’m curious to get your take.

    • Ben Leybovich

      The thing about our set-up is that our overhead is so drastically lower that the competition angle is really not a concern. As the matter of fact, I am not at all sold on the viability of AirBnB as a business. Having these in an apartment complex makes sense, but free-standing could be more pain than it’s worth. But, as a house hack, specifically Luxury House Hack, it’s brilliant 🙂

      Thanks so much!

  5. Christy Flora

    This is great Ben! We’ve wanted to try something similar but are afraid of the HOA finding out and fining us for STR. I’m 99.9% sure you are also in an HOA (most of us in the suburbs of PHX are). So do you have any concerns over what to do in an HOA or neighbor complaint situation? Do you think you would be able to do 30 day or longer rentals (to comply with HOA rulings)?

  6. Sarah W.

    I loved the first article series and was glad to hear an update! I am in Charlotte and wish casitas were popular here. We toured some houses in Chandler and Scottsdale a few years ago and were amazed at how common the casitas were with new builds. It is very hard to come across any luxury house hacking properties here unless you are close to the million dollar mark.

    I’m curious about the tax implications and how that worked out for you.

  7. Laura Tokgozoglu

    We have been really enjoying our Airbnb experience here in Aiken, SC. There are many people who come to Aiken for the horse scene in the winter, the arts scene and also The Masters. We have a finished attic suite in the front of the house where guests use the front door and we use the side door and live in the back of the house. We rarely see our guests after the initial greeting. The place stays booked about 75% of the time. We are going to be moving and I am hoping that the Airbnb potential will help us to get a quick sale and top dollar. We are moving to Maryland and plan to look for something where we can continue doing Airbnb. The things I love about Airbnb is that we can block nights as needed and we always have had wonderful guests. Great article, Ben!

  8. Brad Fithian Jr

    Love it! Love it! Love it! This is gold when we find the right place. It fits perfectly into our goals as a business and our needs as a young growing family. Thank you again for your timely wisdom and outside of the box thinking Ben! To echo your last line, Hell yeah!

  9. Raymond Northcutt

    I love this. And I’ve actually done the same exact thing in Savannah, GA. You are correct in saying, generally speaking, a house hack will typically result in compromising quality of life with the ability to save on your mortgage payment. But we spend a lot of time in our home with family and friends; we cook there; we sleep there; we entertain there… so why compromise a place that composes such a large part of our lives?? A nice house in a good area with an attached (or detached) smaller unit can effectively solve this problem. In Savannah, I bought a nice home in a nice part of town with an attached carriage house. The carriage house brings in $1100/mo. I also have two roommates who pay $700/mo each, and we all split utilities. At the end of the month, I’m about $500 cash flow positive, and we all live in a nice house in a great area, and everybody’s happy. Great post!

  10. Kevin Auyong

    Nice.
    I’ve done kind of the same thing of sorts. I bought a 5200 sq ft macmansion. The bottom is a walk out basement of 1200 sq ft that was converted to an inlaw unit. It has it’s own entrance, driveway, and a garage. That leaves me with 4000 sq ft, more than enough for a single person. My PITI is $2365 and I get $950 a month for the basement. So that leaves me to pay $1415 a month.
    I was renting a smaller house less than half the size and not as nice of a neighborhood $1800 so I pay less for a bigger nicer place. After adding in write offs my cost drops down to about $1000 a month.
    I am curious to see if Airbnb would earn more, but I do like the fact that I only spend about 15 minutes a month on the rental so I’m not sure I want the extra work of the frequent different renters.
    Enjoy your new home!

  11. Dave Chapa

    We bought a really nice place out in the country with a very nice guest house build into our metal building. We thought about using it for an Airbnb however decided not to because we didn’t want the hassle. We just use it for family and friends.

    Maybe when I retire we will list it on airbnb.

  12. Five years ago we bought a house here in Grass Valley, CA with a guest unit that we promptly turned into a vacation rental. We were please to learn that it was a lucrative decision, and, netting about $15k per year, both covered our mortgage and allowed us to host friends with families at our new country home. However, after the bloom fell off the country rose for would-be visitors, we were left simply with a high turnover rental with skyrocketing utility rates eating into the net. We were feeling animosity toward tenants, who would leave the A/C on all day over the summer (even when they weren’t at home) in spite of signs requesting they not do that. Six months ago, an Airbnb tenant asked if we would consider renting her the house long term for $1000/month, and we said “yes”! It’s a much more pleasant situation for us, and, while it no longer covers our mortgage, we remain pleased with the decision.

  13. John Murray

    Unfortunately short term rentals triggers self employment tax, hopefully depreciation can off set the cost of doing business. Material participation is tricky when it come to Uncle Sam, active participation in long term rental yields much greater profits. You got the right idea to replace earned income with passive, portfolio and capital gains, Best of luck in wealth building!

  14. Staci Hanrahan

    Ben, I read your original article only a month or so ago so I was thrilled to see the one year review already! We had been considering a second duplex purchase but also wanted to consider what it would look like for single-family options. I thought that was really out of the question since we are in that investment mindset right now, but was happy to see this as a feasible option. It’s even more refreshing to know that you weren’t too far off on your estimate. I look forward to seeing what this next year brings, but am glad our options aren’t as limited as we though. Thanks for sharing!

  15. Christopher Davis

    A very welcome and honest update, thanks.

    “I must ask where you’ve been and what’s been keeping you away from BiggerPockets?!”

    Funny you should ask, neither my wife or I particularly enjoy RE and since it’s not a center of gravity in our lives, we tend to drift out of its orbit. You’re right, it is an effective means to an end but the point being made here is that although we don’t have a passion for real estate, we did our own hack as you outlined in your book and it’s worked out pretty well.

    Entering our 6th month and have been at around $1200+ per month in bookings on a $1550 note. We were renting prior so this is a bit + in my book.

    About the HOA situation, I know that someone who bought the same model home as I did in the east Phoenix valley who said the HOA is OK with short term rentals, but many are not. We plan to switch to longer stays if ours takes issue with it but until the development is completed, there has been a kind of “anything goes” posture.

    The update and perspective are appreciated, Ben. May you and your family enjoy many wonderful and prosperous years out here in Arizona!

  16. Hello Ben,

    Great article with a creative idea.

    As we age, our need for comfort and convenience changes. Your idea of a Luxury House Hack is perfect for those who are looking for another options. Especially, since Air BNB accommodations are now very popular in US. Keep writing and update us again in a few months.

    Thanks

  17. Justin Koehn

    Ben – Thanks for the update, and another great post! It’s good to hear this one worked out for you. I’m curious what your take on short-term rentals is for the long term. Is it a fairly safe bet to assume they will remain legal in Phoenix for a few decades? I have lived in towns in WA where there have been moratoriums put on them because of fear from local residents of what will happen to the housing market and neighborhood communities.
    Another question – if I remember correctly, you are doing all the turn-over yourself. Did you expense out your time, and if you hired this out, would it still cashflow sufficiently to keep your burn rate to $1600? I’m sure you look great in a MaryMaids uniform now, but after 15 years of AZ sun…. 🙂
    Thanks again!

    • Ben Leybovich

      Justin, the Governor in AZ passed a law prohibiting discrimination against short-term rentals by any governmental entity. This was supported by every lobby aside, of course, from the hospitality. The only risk is the HOA, but if you can work with this you’re good. As a very general statement – go conservative 🙂

      Our cleaning lady, who is wonderful, does the casita when it’s convenient. Like if she is here and the casita needs done, I ask her to do it. I also have her do scheduled deep cleaning every few months. Otherwise, I still do it. I used to listen to BP podcast for the 45 minutes it takes me to turn, but now I listen to Russian pop music 🙂

  18. Christopher Philbrick

    Hoping to close on our little up-grade in June. The rentable mother-in-law suite off the kitchen in New Jersey isn’t as sexy as a casita in 0% humidity, but it will do for another 18 months before we grab a 3% down mortgage deal again, spread our wings and rent all left behind. NJ taxes are a killer, but learning to embrace them and be smart about it has opened up a door to the short-sale floodgates as others struggle with paying more in taxes than on mortgage each month. BRRRR is that a draft or is that the cash flowing past my W2? Leverage it all, up-grade without sacrifice.

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