Oct 23, 2020 265 comments

The Man Who Retired at 27: Why You Should Consider House-Hacking

Way back in the olden days, people used to be amazed at my life story. I was
“The Man Who Retired at 30”, and it was so unusual that it would show up in news headlines all over the place.

Thankfully, this is no longer such a surprising story. The idea of financial independence has spread far and wide with the rise of the FIRE movement, and people now realize it’s not such a big deal after all. And in fact, people are doing more innovative things than I did, and getting themselves to financial independence in less time.

My story was a nine-year working career, and retirement at 30. This was achieved by earning an engineer’s salary, not spending all of it, and investing the surplus in very standard index funds and fixing up my own house.

Today we will learn about a guy who did it in about three years, and is now financially free at age 27. And this was accomplished on a lower salary, without the cooperation of the badass and high-earning partner that helped me, and without my own honey badger dedication to bike transportation and DIY home renovation.

His secret was simply buying houses in an area with solid demand and renting them out. But with an interesting twist: by partitioning larger houses into smaller, more affordable units, he was able to make a small initial investment go much further, and grow much more quickly.

This is an age-old business model, but it has come back in a newer, better form and today it sometimes goes by the name House Hacking. And my goal with this article is to get you to consider the practice, because it is often the highest hourly wage and most flexible job you can possibly create for yourself. And, if you do it right, you are improving your city by providing a useful service, making housing more affordable and increasing density in a place where it is needed.

What is House Hacking?

At its most basic level, this is just a trendy name for “renting out part of your house as an apartment.” You can go further and add layers of complexity (and profit), for example moving yourself into that apartment and renting out the bigger part of your house, a move which I call the “Mustachian Inversion.” Or go even further and live in a tinyhouse in your own back yard. But at the core, we are still talking about renting apartments.

While it may sound a bit daunting and/or inconvenient if you’ve never done it, the reality is that becoming a landlord is usually surprisingly easy, and also ridiculously profitable. Seriously – almost every one of my friends these days has some form of rental property, and is financially independent. And these two life conditions are usually related.

So if you currently live somewhere with extra space – or if you plan to shop for a house at any point in your future – and you have any use at all for more money, you should consider it seriously.

There are two fundamental reasons that house hacking works so well:

1 ) Rents are Non-linear. Or in plainer English, people pay a lot for their first bedroom, bathroom and kitchen. But they only pay a little bit more for each additional bedroom. So as the homeowner you can sacrifice just a little bit of your space, but get a larger portion of the rent that you would have collected from renting out your entire house.

2) Borrowed Money is Ridiculously Cheap. We are living in unprecedented times, where banks are willing to lend out huge amounts of money at just about zero cost after you adjust for inflation. This effectively makes houses cheaper to own, because you lock in the purchase price today, but pay it off super slowly with dollars that are worth a bit less with each passing year.

With those big puzzle pieces in hand, let’s put the rubber to the road with a real-world example.

In fact I can use myself as a case study because I currently own a house all to myself, with a bit more space than I need.

Case Study: Should Mr. Money Mustache Hack his Own House?

Dear Self,

I currently have a small house in Longmont, Colorado, which is a fairly expensive market because it is right next to the stratospheric wealth engine of Boulder. The current value is about $390,000 which includes some renovations I have done since I bought it.

The total house size is about 1800 square feet:

900 sf main floor
500 sf finished basement which includes bedroom, bathroom, and small kitchen/living area
400 SF finished 2-car garage which could become living space if I wanted.

I don’t have a mortgage on this place, because I am overly conservative and bought it with cash. But if I did, it would have the following monthly stats:

Outstanding balance: $312,000 (assuming a 20% downpayment)
Monthly payment: $1600 (includes principal, interest, taxes+insurance at local rates)

Note: This is assuming today’s 30-year interest rate* of about 3.08%

… a couple of additional details:

Amount of this that is Principal Repayment (a form of savings): $520
Actual carrying cost of the house after you account for that principal repayment: About $1080

First of all, wow, isn’t it amazing that you can own a $390,000 house for only a thousand bucks a month of actual cash outlay? That’s the cheap money at work.

But that’s just the beginning of the amazement. Because my house happens to be in a row of townhouse-like identical detached houses located along the side of a small hill. The fronts of these houses have a few steps down to the sidewalk, and street parking. The backs of the houses are accessed by an alley, where we each have a two car driveway, two-car garage, and a ground-level entrance which leads to the sorta-walk-out basement.

This setup is just ripe for creating a separate apartment, and indeed several of my neighbors have already done so. So what if I did it myself?

Scanning Craigsist and Zillow for smallish 1BR apartments in the better neighborhoods, I am surprised to see them in the $800-$1000 range. Especially with off-street parking and the fact that my house backs onto the main bike path and a beautiful greenway with a mountain stream running through it, I feel confident that I could be within this range so let’s say $900.

So where does this leave us?

Monthly rental income: $900 per month ($10,800 per year)
Portion of house carrying cost covered: 83%! (900/1080)
Portion of total house payment covered: 56%

Wealth difference over the first ten years, if you conservatively reinvest the proceeds: about $150,000

Wow! So even in this very beginner situation, I cut my housing costs by 83% and increase my wealth by $150,000. Just by giving up a portion of my spare living space and putting up a Craigslist ad.

I wonder what would happen if we took this even further?

Meet Craig Curelop

Our House-hacking member Craig Curelop shares his stories with a group at a recent event at the **HQ Coworking space**
(**which you can join too**)

Craig started with this strategy in a small way, but scaled it up rapidly. It went roughly like this:

2017: bought a house in a less-than-pristine but very central Denver neighborhood for $385,000 (with only $17k down). Lived there in one small room partition, rented out part as an apartment, and rented out the rest as an Airbnb.

Rental Income: $2850/month (plus free rent he values conservatively at $400)
Costs: About $2250 including expenses
Net cashflow benefit: $1000/month = $12,000 per year.
(including principal payoff, this is over a 100% return on that initial $17k downpayment!)

So at the end of year one, Curelop’s portfolio looked like this:

2018: Bought a second house for $343,000 ($27k down including some upgrades). Then immediately rented it out by the room for a total of $3100 per month. Carved out a little space for himself, and moved in. Raised the rent on the previous unit since he wasn’t living there any more. The end result was this:

2019: With so much passive income already rolling in, Craig continued to save vigorously and bought another house for $380,000, this time with a 5% downpayment ($19k) plus $32k in repairs and other costs to make it a nice two-unit rental. This brought him to this situation:

And BOOM – at this point Craig was already set for life.

$4150 per month is more than enough to live on, which means he never has to work again – unless he chooses to do so. This happens to be my personal definition of “retirement”, because the old definition of ceasing to work is obsolete. Work is better when you don’t need the money.

And it gets even better. The $4150 number is before taking into account the fact that about $2000 of principal is being automatically paid off on these three loans per month, or that they are appreciating in value at an expected $3000 per month based on expected inflation alone. And thanks to US tax laws regarding property depreciation, a large portion of this cashflow arrives completely tax-free.

And as luck would have it, the Denver real estate market has gone up much faster than inflation in recent years, boosting his net worth by an additional $100,000+.

All of this wealth has been exploded out of an initial cash outlay of only about $100,000. With this amount invested in index funds, the 4% rule would suggest you rely on only about $4000 per year of passive income. Craig is getting about ten times higher returns, in exchange for some good brainpower, a moderate amount of work and some risk – all multiplied by the magical power of massive leverage with money from banks.

A Bit More on Risk

So far, everything sounds almost too good to be true. And indeed, this story is an unusually successful one. Things can and do go sometimes wrong when you use leverage, so it is important to know what could happen:

Interest rates on a fixed-rate mortgage are locked in, so this part is relatively safe.

But economic conditions can flip in a heartbeat. If you have multiple rental houses, you could end up in a situation where all of them are vacant for several months at a time. Or, rents could decline by 20-30% and stay there for a year or more, as may currently be the case in Pandemic-affected cities like San Francisco and New York. If your rentals are in a one-trick town and that industry happens to evaporate like typewriters or coal mining, you could be faced with dropping rents and property prices. The worst case could include defaulting on your mortgages and losing all accumulated equity.

There is no free lunch, but real estate is a fundamentally sound human need – people will always need housing. So as long as you keep your leverage reasonable, your profit margins high, and your lifestyle costs low and flexible, you decrease the chance of big financial stress. Which brings us to our next point: you don’t have to push the limits of leverage far in order to be very successful.

Because Craig has been so aggressive and efficient, it can seem a bit intimidating to hear his story. And in fact, I’m hesitant to even mention that in 2020 he has gone even further and bought seven additional homes, just because he is on a roll and enjoying the game (for now).

Oh, and while most wealthy people go out shopping for mountain houses, Craig is going the opposite way at the moment – experimenting with Van Life, having bought a nicely converted vehicle which is currently parked in the back yard of our HQ coworking space.

Oh, and he also wrote this book on the subject.

But fear not. You absolutely don’t have to go to these extremes in order to become financially independent. Because all you need is enough money, so that you no longer have to think about the stuff. House hacking is simply a very powerful tool to get you there much faster.

So if you do have a use for more money, you should definitely keep this in mind. Even the slightest bit of dabbling like renting out a basement or making sure your next house has a suitable rental space, can cut years off of your mandatory work career, and bring in an income equivalent to hundreds or thousands of dollars per hour that you to put into it.

It’s well worth the hassle, and you just might discover that you love it.

In the Comments: Have you tried house hacking or at least rental real estate? How has it been working out for you?

Do you have a question for Craig specifically? Feel free to ask him here, and I’ll invite him to participate in the discussion. You can also find him at his own website, where he has built a small team for continued real estate deals and other fun, at https://www.thefiteam.com/

* Indicates an affiliate link – MMM may earn a commission if you decide that Credible’s Mortgage rates or Student Loan Refi Rates are the best for you, see affiliates policy.

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Want More?

George Choy October 23, 2020, 11:18 pm

Hi MMM

My wife and I became Financially Free through rental properties in the UK. We realised that we had completely replaced our incomes when she was 39 years old.

We would have achieved FF many years earlier if we had been checking whether we were financially free – we hadn’t considered early retirement could even be a possibility at the time! So we just kept accumulating properties.

We own a mixture of private rental properties (some to people on state benefits), and also offer rent to own – where we help people to get on the property ladder and they can buy the property from us in a few years time. We also have commercial property rented out to small independent companies.

I agree there are some slum landlords out there.

However, we never plan to be one. We prefer to keep all our properties maintained in good condition and don’t charge peak market rent. We don’t increase our rents every year either.

We also donate a share of our profits to feeding children and their families who can’t afford to eat, and share our property knowledge with others a couple of days per month.

Reply
frank October 24, 2020, 1:34 am

Inspiring stuff!
But next time could you do a case study on someone who took a slower and more leisurely path, who retired at around age 40? Will make me feel less lazy!

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bob October 24, 2020, 2:33 am

Can make some real money using debt and a cap rate above the interest rate. I would gear till the banks didn’t give me anymore money.
I have to be a bit more prudent because in our market interest rates are 20 year, 7% variable rates. The gross yield is a bit higher, but you could get into serious trouble if rates go up and squeeze the margin, especially with so much gearing.

Sadly Covid, retrenchments, university lockdowns etc has caused some real property pain here. I’ve got a friend that’s sitting with 4 empty homes now because of the university shutdowns. So he’s picked up the mortgage expenses with no income. His own job is secure for now, but it causes real economic pain.

The fixed mortgage is an amazing US tool for building RE wealth!

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Patrick October 24, 2020, 4:24 am

Nice article! But to each their own. Not my preferred option for a few reasons. First, I like animals more than people, so I don’t like thought of inviting a bunch of strangers into my life. Second, I suck at DIY and single home ownership is stressful enough for me. My wife and I are happiest on the FI by age 45 path.

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meatro October 24, 2020, 4:29 am

Great topic as always, thanks MMM!

The key here is that the story shows the raw power of this investment strategy.
I don’t interpret it as a full financial planning guide for everyone or a call to buy 10 homes on credit in Denver ^^

Anyone with extra space can profit from subletting a room or creating useful space out of unused. This is just being efficient and smart with what you have, which is generally a good idea.
I sublet a room in my apartment since my personal situation changed and it is an important contribution to my monthly earnings.

I personally would not buy a bigger place just to house hack. I would do it if I planned on using that space for myself one day, since this is an efficient way to bridge the time until then (i.e. vacation home, parents move in, children, etc.). Also in Germany, the numbers don’t check out (commented above).

Note I say personally because my salary and ETFs will get the job done and I am good with that. I also appreciate ETF’s diversification, ease and ability to scale.
But as MMM wrote, if you don’t have a great salary, this is a method that works even then and mostly involves planning, time and risk.

It’s a significant, classic investment for each of us to consider, at least as a potential addition to what you’ve got.

All the best!

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Todd Pavela October 24, 2020, 5:01 am

This is great. I’ve rented out once before, with so-so success. The young couple seemed nice, but they split up and ripped up all the carpet without permission. The security deposit didn’t cover all the damage.

Anyway, what’s not factored in here is that an owner of rental property really needs a solid rental contract and a way to enforce it when things go sideways. In the example shown, that’s a lot of tenants, and even good people can end up in dire situations that require eviction or whatever. That costs money.

The other aspect not covered — and I would welcome having it addressed — is that by the time you’re owning 7 rental properties and enjoying all the tax benefits, that takes some real tax-law wizardry, and few people have that. Who can keep up with all the changing tax laws? And one small error could cost you thousands. It strikes me that either another professional is needed in your landlording enterprise, or if you’re doing it all on your own, you’re putting in many hours on a computer logging every toilet repaired/replaced and all other depreciable items, along with all the other bookkeeping, and so after all those hours sitting at your computer with tedious spreadsheet drudgery…isn’t that technically working? (smile)

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- Mr. Money Mustache October 24, 2020, 10:06 am
  
  Yeah – I would definitely recommend having a professional accountant doing your taxes in this situation, and figuring out how to do small business book-keeping as well.
  
  My strategy is this: a dedicated business bank account and credit card, with Xero accounting software automatically scanning and importing every transaction from those accounts and entering it into the books, with just a bit of occasional categorization help from me on the Xero phone app.
  
  Then at the end of the year, my accountant is able to access my Xero account via a separate login and download all the data, which goes straight to his software and into my LLC tax return and the resulting Schedule K-1s. Super easy!
  
  Reply
justonepercentbetter October 24, 2020, 5:24 am

How inspiring! This is almost exactly how I stumbled on financial independence… I just didn’t want to pay rent.

Around 2017 I went from a high-consumption/consumer lifestyle to re-assessing my goals in life, and decided spending needed to be curtailed. I bought a triplex with 3.5% down, lived in one unit and rented out the other two with minimal capital invested, and the other two units covered all but about $200 of that mortgage. This savings allowed me to buy another duplex, which gave me profits to cover that $200 and then some. A year and a half later, I moved into another house hacked duplex… this let me rent out that other unit from the triplex, banking $1000/month – giving me a total passive income around $1,5000. Lean, but something I could live off of and exit corporate.

Since then, I’ve invested in an 8-unit multifamily to add some cushion to passive income. This all took about four years, and it’s the best financial move I’ve ever made. I preach house hacking to anyone that’ll listen :D

Thanks for sharing this.

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Michael Bacarella October 24, 2020, 7:24 am

Taking on several 5% down payment mortgages is a little eyebrow raising.

A thing that property owners often overlook is just how many variables they’re actually managing. On the most basic level they focus on how much of what was their rent is now going into their pocket as equity (no longer “throwing money away”).

The NYT has an unusually excellent rent vs buying calculator that takes many additional variables into consideration. I think it paints a somewhat different picture then the one illustrated here.

https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

I’ve had a friend describe it like this: good luck figuring out how to deal with all these variables. Speculation is the name of the game. Owning real estate means that you have an option on an infinitely-long swap contract whose cashflows are options on the GDP. What’s that about CDSes being “evil derivatives”?

If you don’t speak Wall Street, another way to think about renting is that you’ll pay about the average price for housing over your life, whereas by taking on home ownership you’re opening yourself up to significantly more upside as well as downside. You’re raising the stakes in the hope that your number comes up. If you can do it intelligently you can increase your odds of winning, but make no mistake you’re ratcheting up the risk.

There’s nothing wrong with this per se. Taking on and properly managing risk is how you make money. But should people be doing this with a significant portion of (if not the entirety of) their net worth and the place they call their home. And further still, get heavily leveraged to do it, further magnifying their potential losses? I couldn’t recommend it.

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Laura October 24, 2020, 8:18 am

“While most wealthy people go shopping for mountain houses…”: I am an avid skier, and love going up to Vail / Beaver Creek but hate the I-70 traffic. Two years ago, I bought a two bedroom / two bath house in Minturn (back side of Vail, right between Vail and Beaver Creek), and I rent the master bedroom / bath to a couple I found on Craigslist. It has worked out amazingly well – they live there full-time so I’m never worried about something going wrong while I’m not there, they keep quite opposite hours from me so we aren’t often in each other’s way in the common space (though we’ve had a few lovely dinner / movie nights together), and they pay 80% of the mortgage. The 20% of the mortgage that I am left covering is less than the principle that is being paid off, so I look at what I do pay as savings. So basically, I can enjoy the benefits of a second home in the mountains without having to pay for it! Of course I could rent the full house for more, but I love having my getaway spot. I would definitely recommend this approach to others.

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Brad S. October 24, 2020, 9:08 am

could someone explain why this is different than just renting out a whole house? I feel like renting out the house and then letting tenants figure out who is in which room is much more efficient. Usually the rooms get full with “tenants”, either college students that pooled together, coworkers that decided to move in together, a family that has kids in each room, etc. Is the only difference that you’re charging more because people are lazy and don’t want to “pool” together and rent a full house on their own?

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- Mr. Money Mustache October 24, 2020, 10:01 am
  
  Your last sentence is the answer – by offering smaller portions of housing you can get more for the whole house. Sometimes 50-100% more.
  
  As a 20-something, I did exactly what you suggested – pooling with up to 5 other friends and renting big amazing luxury houses in great neighborhoods close to work. It was such a win-win because we got to live in prime accommodations, for way less than the cost of a one bedroom apartment per person.
  
  Reply
- Mark Schreiner January 16, 2021, 10:59 am
  
  “Is the only difference that you’re charging more because people are lazy and don’t want to “pool” together and rent a full house on their own?”
  
  Almost all voluntary, profitable transactions can be seen as one party being “too lazy” to do something themselves and therefore paying someone else to do it. I am too lazy to grow my own carrots, so I buy them at the grocery store. So “people are lazy” is part of the answer to “What is the house-hacker’s value-add?”, but it almost always is part of the answer.
  
  Historically (and currently in poorer countries), what is being called “house hacking” here is called:
  
  — Living with a large (and/or extended) family
  — Living with roommates (where one roommate is the owner/landlord)
  — Living in a boarding house
  — Living in a fraternity/sorority house or a dormitory
  
  The four arrangements above differ from MMM’s cooperatively pooling with 5 friends (see his comment below) in that there is one person (the head of the household/parent(s), the landlord/owner, the landlady running the boarding house, the person hired by the fraternity/sorority to run the house) who is officially/legally in-charge and in-power of the maintenance and on-going operation of the house and who also keeps social order. So anon-trivial part of the value-add by these house-hackers is literally the value of having someone in charge who can resolve disputes (including by eviction) between house-mates and who is responsible for getting things fixed, the bills paid, rent collected, and so on. (In the case of 5 friends who are house-mates and see themselves as equals and no one is officially/legally in-charge with power, there are often problems (even among friends) with people who shirk their responsibilities to the collective or otherwise misbehave and, without a clear authority figure, can cause the rest in the “cooperative” a lot of problems.
  
  In other words, having a landlord, when one lives in an arrangement where people live closely together and share space and other residence amenities, is part of the value-add.
  
  Reply
Dharma Bum October 24, 2020, 9:17 am

When tenants do not pay the rent that they promised to (by entering into a contract), and still expect to carry on residing in their apartments, trust me, it’s bad for landlords.
This is the kind of crap that Toronto landlords have to deal with:

http://parkdaleorganize.ca/2020/03/20/keep-your-rent/

Try walking into a store, taking things off the shelves, and walking out without paying for them, then whining publicly about the mean old storekeeper.

Tenants have more rights than landlords. The landlord is virtually powerless to evict tenants regardless of the circumstances. It’s a game rigged in favour of the tenants at the landlords’ expense.

There are numerous horror stories of landlords’ properties being destroyed by deadbeat tenants who essentially become squatters and turn the premises into garbage dumps before finally vacating either voluntarily or by legally enforced means. It is a time consuming and very costly procedure.

Income properties can be lucrative, but you need to have patience when choosing the property, location, and the quality of the tenant that you allow to inhabit your property. Credit checks and tenant history are critical, and even with due diligence, you can’t be too careful. One wrong move and your investment can backfire big time.

In certain markets it can still work well, but it’s becoming very difficult to get a cap rate that makes any sense. REITs now provide a much better return (for no work) than a hands on income property.
The prices of properties in urban markets that have a bustling housing and rental market are sky high, while those same areas have strict rent controls making it impossible to raise rents by barely 2% (if that) annually, as all other household expenses continue to climb steadily.

Local governments (municipal, state, provincial, etc.) make it next to impossible for landlords to expedite a bad situation in which the tenant has clearly abused their rights at the expense of the landlord.

It’s a tough way to make a buck, if the stars are not aligned.

Reply
- Mr. Money Mustache October 24, 2020, 9:59 am
  
  These are wise cautions Dharma, but I notice a distinctly Toronto/Canada style vibe to them. In the US for example, there are many many towns where houses are still under $150k and you can get gross cap rates over 12% per year. And there are many areas with balanced laws. Colorado is a blue state, but it still took me only about four weeks to accomplish the two evictions I had to do when I accidentally let in some shady tenants. And it required no lawyers, cost me only $50 in court filing fees.
  
  We’ll leave the ideological battles over which set of laws is better for another website, but I’ll just say for my own temperament I wouldn’t even consider offering rental housing in a state that didn’t allow for easy, quick evictions.
  
  Reply
Jerami Marsh October 24, 2020, 12:28 pm

Love this article. I could also write a book on this. I retired at 35 having a mediocre $29/hr job for about 3.5 years, but landing a house with enormous potential (another amazing story), putting $0 down (another story). Creativity and vision was key, as well as selecting the right tenants (another story). I’m not a finance guru, and WISH I had a partner who had been on board and able to help me reign in some of financial details a little better, because I’m not a penny-pincher by nature. I love to have fun, and renovating, having a place to brew wine, build greenhouses and grow awesome food was part of my vision – land is leverage, so if I have any advice, make it a part of your portfolio. The downside of having this kind of lifestyle, is that it’s taken me a long time to build confidence in what I’ve done. To be honest, I did it because I hate work. And perhaps people see it, and constantly tell me I’m “cheating” the system because now I don’t really have to “work.” That was my goal, though I am constantly still trying to bend over backwards to find and keep the right tenants, and most often, those are the ones I get through sites like Airbnb, because they provide the infrastructure to screen at a foundational level. It was up to me to develop the right wording to get A) People who will best fit the property and B) Absolutely love it enough to write a 5-star review. That way in the “down economy” I continue to have repeat business, travelers who remember my place, even though it isn’t as nice as all the others out there. Also, though I wish I could have a 5-star rating 100% of the time, it takes a lot of “work” and energy to maintain that level of service, and I am a hands-off type manager, so try to automate most everything so I can be managing it from say, a sailboat in Key West. Also, my second bit of advice, is to watch out for the economic cycles. When I first started thinking strategically about investing, I didn’t take the huge ups and downs of American optimism. That means, stick with the basics in mind. Think about selling those primo houses ONLY when the market for a given time/place is booming, then reinvest after a crash. It could be a global, national or local crash. Just don’t buy when everyone else is buying. If you can do that, risk is minimal.

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- Jerami Marsh October 24, 2020, 12:38 pm
  
  *However, there ARE ways you can still get good deals in a bull housing market with the right approach. That’s the beauty of real estate, especially as an alternative to the stock market when diversifying your portfolio. For instance, when the economy gets bad, people move from rural areas to urban to take jobs, save money or time on commuting, and the rental markets shift in other ways you can take advantage of, even if you aren’t in a touristy area, or when the short-term market softens. Then you start to take advantage of the ups and downs of the economy in new and more creative ways…
  
  Reply
Brandon October 24, 2020, 2:32 pm

Hi MMM, the reason Craig’s numbers sounds bit too good is that he isn’t accounting for enough maintenance. Proper way to calculate yearly maintenance cost is to take all of a properties components’ (replacement cost) / (life expectancy) added together. Each year you have 1/15th the cost of an interior paintjob, 1/25th flooring, 1/25th appliances, 1/3oth bathroom, 1/35th roof, 1/35th fences, 1/40th HVAC, 1/50th kitchen cabinets, 1/60th windows, 1/75th driveway, 1/100th siding etc etc.

Classic mistake by new players is to under estimate the cost of this stuff. Possible to neglect but the property is just worth less when you go to sell. Pay me now or pay me later.

His averaged passive income after the third house is more likely $2500/mo after above mentioned costs and vacancy. Still a win in my books, and it’s not like he quit his day job(yet), but he’ll learn that his numbers are bit lower than he calculates. Still a great strategy. Thanks for reading my comment.

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Ben October 24, 2020, 2:34 pm

This is a tough one for me. 11 years ago I was ALL IN on real estate. Before I knew anything about FIRE, I was planning to retire at 37 with passive real estate income stream. But it turns out, “passive” isn’t really the best description for me. Since I believe heavily in tenant screening and frugality, I always wanted to manage the property myself. But this turned into an annoying part-time job. I treat financial independence as being able to never needing work for wage ever again. Maintaining real estate properties is work, so it is difficult for me to equate income from the market as really reaching FIRE. Sure you can hire a management company, but there are costs and risks associated to that. Also, considering how accommodating the tax code is to roth conversions and capital gain harvesting, it makes investing in the market so easy and efficient. Expense ratios for index funds/ETF are incredibly cheap, especially when you contrast those to real estate costs and mortgage costs. Depreciation is a misleading tax benefit as that deduction is recaptured when you sell. Liquidity is also a big challenge. Index funds/ETFs you can buy/sell in smaller amounts, but real estate is a massive transaction which makes it tough to manage your tax burden from capital gains. I could keep going, but I’ll stop there. The one benefit I see in real estate is it is a good way to diversify your money.

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Rajneesh Jha October 24, 2020, 2:34 pm

Hi MMM,

A long time fan. You set me on path to become FI, 7 years ago. Now I have FIREd. And been an example to a couple of other folks in my circle to do so too.

5 years into my journey, I came across Multifamily real estates ( apartments) and it turbocharged my journey and helped me FIRE faster.

If you like house hacking, you will love multifamily real estate investing. The scale, ease and power of apartment investing makes is a much more solid alternative to stock market investing and even house hacking.

Think Fat FIRE attainment 2X faster and making it attainable for complainypants (~30% of income savers)…FIRE becomes more widespread not just a cult following.

I started investing in mid 2017 and by mid 2019, I had built a portfolio of 29 units. Invested about $300k and now I have a passive income of $68,000. Its net of all operational expenses ( Insurance, taxes, repairs, water, sewer,trash, heating, cooling, property manager fees and vacancies), capital expenses ( sporadic but expensive boiler, roof repairs etc) and mortgage payment expenses.

It’s definitely worth exploring for MMM followers and mustachians.

I am on a mission to help more people FIRE faster with real estate investing. I have created an LLC, website, created marketing material and about to launch my company to help help FIRE seekers educate themselves and make an informed decision about what vehicle ( low cost, diversified vanguard mutual funds or real estate) to chose to pursue FI.

I have been meaning to get in touch with you to talk about this concept when I came across this article.

I would love to speak with you about how I achieved FIRE faster through Real Estate and answer any questions you may have. Maybe you find it useful for other MMM followers too.

May I have 30 minutes of your time?

Raj

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Robert Reisner October 24, 2020, 3:20 pm

The house hacking plan should be considered where you are in your life.

A 24 year old with limited resources and in a time that appears to be good for house hacking (low mortgage rates, appreciating homes and easy credit availability) would or even should take the three year risk described here. If it works it is life changing and if it doesn’t this person is a broke 27 year old. And in real life a broke 27 year old isn’t very much disadvantaged over the long term.

A 40 year old with assets and savings has much more to lose if it doesn’t work. And a lot less time to recover. Ditto for the 50 year old. When house hacking fails, you not only lose your real estate but you likely lose all your other assets … you really are starting over again.

I’d suggest that anyone over 30 doing house hacking be more conservative. And the older the start the more conservative the strategy. For the 30 y/o, a larger down payment and keeping some of the surplus cash generated liquid (not all in on the next home). Real estate tends to crash every ten to fifteen years. Having cash on hand to handle vacancy (or reduced rents) keeps you ‘alive’. Over 40 y/o, non recourse buying and packaging everything in an LLC reduces the reach back to other assets. Over 50 y/o, find a partner(s) to do it and take 19% equity positions and having your investment in the form of second in line debt.

And if you the successful 27 y/o house hacker, derisking should be as important as expanding the ’empire’ for the same reasons as above … this person now has real assets to lose. In life we only hear about lottery winners. Be assured there are more losers than winners.

The age recommendations are not ‘fixed’ but just a few of the examples that can be used to make the investing safer for those who have other assets. The 24 y/o person is usually in a different position and loses little if ‘bad luck’ happens. Yes, the leverage is reduced and the speed to exit is lengthened when getting ‘conservative’ but the risk of catastrophic loss is hugely reduced.

=======

I’ve owned rentals in past years and now do lightly leveraged RE participations. And if you get to the level of ‘accredited investor’, you options increase greatly.

As a side note, investing in small businesses can have similar returns as house hacking and can be both less risky and have greater returns. I’ve had decades of great success in this area and generally very easy.

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- Rob June 14, 2021, 5:26 am
  
  Actually, at least on a national level, RE rarely crashses. 2007-2009 is the only time housing prices crashed in the last 80 years, at least on a nominal basis. There was a really short, very small blip in 1991-1992 but otherwise RE has been straight up since 1950.
  
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Vasily R. October 24, 2020, 3:22 pm

I moved to Denver myself a few months ago and got totally lucky and found a great 3/1+4/1 duplex in Cap Hill that I’m currently house-hacking and kept the previous tenants downstairs! Having paid upwards of 1600 for a tiny studio in Seattle before this, it amazes me how my rent is effectively $600 now.

Of course, house-hacking is a bit of a gimmicky term because smart people have been doing this forever. At least, in the form of short-term rentals, AirBnB has made this accessible to anyone for over 10 years.

I agree with some people in the comments that over-leveraging to this degree is risky, not to mention. I have a 9-5 that pays well enough that I don’t need to do that, and plan to put 20% down every year using this strategy. Going below that, you get significantly worse rates and added risk due to the added monthly PMI expense.

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Dennis Dresler October 24, 2020, 4:53 pm

I’m a big fan of both MMM and real estate (RE)! If you’re thinking of diving into RE, consider these suggestions:

1) Spend a hour or two reading the landlord/tenant laws of your state and city to get a feel for whether you would be comfortable in the RE business. Find yours by searching “your state” + ” Landlord Tenant Guidelines” + “Attorney General.”
2) Spend a few bucks for some consultation time with your tax planner. (Sorry MMM, depreciation is not “completely tax-free.” It catches up with you as a “depreciation recapture tax” at the point of sale. Also, converting your personal residence into an income-producing property will alter the favorability of capital gains tax rules. Discuss that with a tax pro, which I am not, before moving forward.
3) Don’t buy a rental that doesn’t pay for itself. If PITIM (principle, interest, taxes, insurance, and maintenance) exceeds your rental cashflow, forcing you to dip into your wallet every month, then your risks are too high and you become a speculator, not investor.
4) Most big banks stop lending once you get to 4 mortgages (even though the Fannie/Freddie rules changed to a 10 mortgage limit), but you may find smaller banks still willing to lend. Check with brokers, RE agents, and other RE investors for leads to such banks.
Good luck to all and thank you MMM for the though-provoking and enjoyable reading over the years!
-Dennis

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Craftdrip October 24, 2020, 6:05 pm

Best cities for house hacking? Looks like Longmont is mighty expensive

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Jock October 24, 2020, 11:55 pm

How does he manager to get loans for 7 more (10 total) houses without a huge amount of down payment cash? Aren’t there debt to income ratios which prevent this type of personal strategy from scaling? Don’t the banks jack up the interest rates on these later homes, or just flat out deny the loans?

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- Bryce W Stewart October 28, 2020, 7:52 am
  
  Nope. Rent is factored in to determine the debt service ratio. As far as downpayment, as long as you’re willing to live in the investment as your primary residence (at least initially), then you have access to the same owner occupant residential mortgages as everyone else (i.e. you could buy with a 3.5% FHA loan.) This is not to say that every bank approves every loan that comes across their desk. It’s just to say that you can rinse, lather, repeat as an owner occupant buyer.
  
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Valley of Plenty October 25, 2020, 12:49 am

I had the pleasure of meeting Craig and getting to listen to him speak at CampFI earlier this year (got to meet you as well Pete), and hearing his story really inspired me and fueled my confidence for the house hack I am currently undertaking.

I’m in the process of buying a triplex to house hack, and the numbers are looking very exciting indeed. I live in one of the few places left in the country where it’s still possible to get properties that can easily clear the 2% rule, and this property is a fantastic deal even by those standards.

For anyone who’s interested, I have a thread on the forum titled “The Great $55,000 Triplex Saga” where I’ll be posting updates as I go through the process.

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- Mr. Money Mustache October 25, 2020, 9:38 am
  
  Awesome, congratulations VP!
  
  For those not aware of what “the forum”, this is a reference to this website’s independently run discussion area, and here is the thread in question: https://forum.mrmoneymustache.com/real-estate-and-landlording/the-great-$55-000-triplex-saga/msg2715637/#msg2715637
  
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Sean October 25, 2020, 7:37 am

I’d really like to get a rental property to diversify and take advantage of the interest rates, but I can never seem to get the numbers to work. Am I making a mistake or are home prices too high in my area (Salt Lake City)?

A hypothetical 3 BR house in a part of town I want to live in might go for $410k. Assuming I get $2400/mo in rent, 20% down, a 3% 30y mortgage, and $4000/y in repairs, my cash flows are only $300 per year. Obviously it looks better if you factor in principal repayment, but you can’t eat equity.

What am I missing?

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- Mr. Money Mustache October 25, 2020, 9:31 am
  
  I think you are evaluating the deal properly Sean – that house would make a BAD rental at those prices.
  
  On the other hand, if you already owned the house, and it had a reasonable portion you could rent separately while living there comfortably yourself, and maybe collect $1500 – it would be a good idea for greatly boosting your savings rate.
  
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  - Bryce W Stewart October 28, 2020, 7:58 am
    
    A good, though not bulletproof, rule of thumb is called “the 1% rule”. Briefly, if you can buy a place where the monthly rent is equal to 1% of the purchase price, you *might* have a deal. In Sean’s calculus above, he needs to find a 3bd home that will rent for $2400 each month and is being sold for $240,000. “That’s impossible!” In Salt Lake, perhaps. I invest in Bethlehem, PA. I just bought a condo for $175k, which, after spending $12k on renovations, is now renting for $2199. This exceeds my 1% rule and is therefore a pretty decent investment.
    
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Kyle October 25, 2020, 7:47 am

I think there is a difference between house hacking and building up a portfolio of rental properties. If you buy your home and decide to rent out a room or two, it certainly helps with paying off our the mortgage and reduce your income. You obviously have a tougher time if you have a family with kids, but can be doable.

When you go from this situation to buying multiple homes and renting out rooms via long term rentals or airbnb, you start becoming a landlord and you are building a business. Now, if you leverage to take on 9 additional homes, risks certainly increase. Look at Casey Serin who took the gamble and purchased multiple properties, only to find that he had trouble generating cash flow and ultimately had to foreclose on all his properties.

The gentleman you highlight seems like he has almost $3M+ in debt. As long as he can continue generating positive cash flow, it is a great leveraged system to build wealth, but if his vacancy rates shoot up, his portfolio will come down quickly.

I like Scott Trench’s approach who is much more conservative. I have slowly built up my rental properties, so I’m a fan of his asset class, but man 10 rentals, renting out rooms, all leveraged, seem a bit too aggressive for me. But that’s just me. Hopefully regulations aren’t passed that prohibits this.

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- KT November 3, 2020, 12:09 am
  
  “I think there is a difference between house hacking and building up a portfolio of rental properties.”
  Exactly.
  The initial house hacking strategy is brilliant, especially for a younger adult whose lifestyle suits closer living. This is MMM 101 for the under 30 crowd. Do this and save for the future.
  Moving each year to build a portfolio is smart too for a while, though much riskier. Once you no longer live in those previous houses you now have less control and oversight, and you have bigger leverage risk. Still doable for a young go getter.
  But when you start to talk about 7 doors a year you are not house hacking, you are RE investing. Which is great, but you need skills and work ethic and some good fortune. It is a career, not a passive income. And like any business it can fail, or be very prosperous.
  I would want a young adult to read this and take away from it that you absolutely should house hack your first housing situation or two. But only become a true RE investor if you have the skills, energy, and accept the risk.
  
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Victoria October 25, 2020, 9:19 am

For Craig: how to you manage the properties? Self? Property manager? Especially with now 10 of them.
I have a rental and I bought a home warranty for utility issues and then for longer term needs I take care of it myself and make my tenants agree to keep the yard tidy.
I find my tenants myself because demand is high where I live and good tenants are easy to find.
What do you do?

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Kathryn October 25, 2020, 12:09 pm

Lots of great comments here and the article itself got me all excited about house hacking – again! I have a BIG challenge of a question for Craig or anyone else.

I am 67 years old, and have not done what Craig has done – sure wish I did! Here’s my story and I would like some feedback on what you think are my best options.

Been divorced for 2 years. I did not work (I was ill) the 7 years we were married. I live in the house by written agreement with my ex’s name on the deed, not mine. Rent free. He pays me alimony every month. I got the house, he got the investments. The thing is, he is paying off the mortgage (44,000 left), my student loans, and the home equity loan which will be paid this year. The money he pays me will be titrated down over the next four years until he pays me nothing – the thinking is that I would get work and be able to support myself with or without my master’s degree. In 4 years, he will put my name on the deed.

I am an entrepreneur by heart. He is a locksmith and got that business, I got the other part of the Home Watch business that generates 10-12 K a year. I also rent Airbnb in the house I live in. It is now a 2 bed, 2 bath house with an acre lot. I do fine with the Airbnb, plus I do other projects for clients that generates good income. The thing is, when will I ever be able to “retire?” I don’t mind working at all. But, I don’t want to work for pittance just to be happy with what I’ve got. I am not a retirement home kind of gal.

Because the lot is so big, I think about doing things with this house like, building a second story, using the carport and storage in it to build a studio apartment, and/or building a tiny house in the backyard (although the property is in a flood plain in the very back so its likely they won’t let me build a tiny house even though it would be close to the main house). My ex and I updated this house (he is the one who is handy) and we get along well – we can talk about money and business and we work well together, but he has a more than full-time job. I’d also like to make a food forest of the property. So much to do, so little time! And sometimes, so little energy as I’m still not 100% well.

Of course, I could wait until it is mine and then sell it to buy something else or just rent. But I LOVE living here in this neighborhood!

Is it too late for me? Oh, by the way, I have no debt; the only cash I have is $30,000 (I put a lot in savings every month) sitting in a money market and I am less scared to build onto this house than I am to invest in index funds. It just seems that with the time I have left, (my dad is now 87 and going strong even with kidney disease) rental property could net me a better retirement. I have no other investments. I have no clue about any of that – not that I can’t learn. It’s all a giant leap, no doubt. Any suggestions/guesses even though you don’t know the whole story? TYIA

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TuMo October 25, 2020, 3:22 pm

I had a property near a prestigious grad school and rented by the room. The property was in California where there are many laws and regulations that favor tenants. One such law says you cannot discriminate on the basis of gender or religion, which normally are all well and good – until you bear the risks. I had all young males in the 3-bdrm unit when one moved out and a female applied. I was concerned about her physical safety and my risk exposure since I did not live onsite. I was also concerned since one of the young men was of a religion where young unmarried men co-habitating with a young unmarried woman would have been a no-no. Fortunately when I explained that there were only men in the unit, she declined on her own. I was bothered a lot, though, about the risks had she insisted on renting. Although I love RE too and still have 4 other properties, I am glad to no longer have the rent-a-room property although it was a sweet investment where I paid $200k when it was an eyesore and put $200k more in it for renovations (which the neighbors thanked me for, and didn’t accuse me of profiteering from a basic human right, or curse me for exercising capitalism, blah, blah, blah) and cleared $45k/annually after expenses.

I personally would advise to only rent by the room if you live onsite, or make sure you have a clever lawyer with rental agreements to mitigate that risk.

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ChrisD October 25, 2020, 4:57 pm

Reading some of the comments I wonder if ‘private rental markets are the worst solution, except for all the other solutions’. Of coure it’s annoying when house prices go through the roof because of arms races so that rent starts to include huge payments to the bank instead of just maintaining the property. Living in London, where most of the houses were built a century ago, and the buiding costs are paid off, it’s a bit painful to still have to pay through the nose. In London the answer would have been to not allow banks to create money out of thin air, and to blow up a huge bubble (we took 300 years to create the first billion £ and only ~11 years to create the second billion) and to stick strictly to only loaning multiples of people’s income. That would help prevent bubbles. In some ways a buy-to-let is contradiction in terms, why not loan people money to buy stocks and shares too, then pay of the interest with the returns (I know it causes bubblees). I think the main thing is balance. Laws and regulations, that are flexible and update on a decade scale to maintain the balance of power in a fair way. And not too much inequality. In London if you rent, you can be thrown out with two months notice at any time, even if you are a family. In Germany you can only be evicted if the landlord personally wants to move in. So in Germany people have more security that their children can keep going to the same school, even if they rent.

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AM43 October 25, 2020, 6:51 pm

Got my first 4 plex back in 90s. Lived in one unit and rented out 3 other units.
Place had good bones, but was very dated and I had to renovate all 4 apartments one by one.
While living in one of the apartments, 3 other apartments paid all of my house related bills.
I was living absolutely free while saving money for a down payment on my own house.
While my friends were out partying and having a good time I was busting my ass day and night fixing up the place while having a full time job. When I was almost done fixing it up , I was looking for ways to maximize my profit when I realized that my property was very close to a train station and parking there was in big demand so prices were sky high. Back of my property was not used much, so I built over dozen parking spaces and rented them all out. 18 years later and a place is fully paid off and throws really nice income month after month. With this income combined with my index funds and all other investments I was able to FIRE this year at 49.
Not bad for a trade school graduate.
To sum it up, yes its doable. Is it for every one? Absolutely not.
Before you jump into this with both feet after reading all these success stories ask yourself if you are cut out for this.
There is a lot more to this than collecting rent checks every month.

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Canadian girl October 25, 2020, 10:34 pm

Snooze. I was really looking forward to your newest post. Landlording it to FI is not new information. Maybe I’ve just been following FI people for too long on the net and my expectations are too high. Love you Pete and I miss your provocative older posts. The best part of this post was the compliment and shout out you gave to your former partner :)

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Barry Rogge October 26, 2020, 7:34 am

How is he getting loans for investment properties for less than 20% down unless he keeps moving his primary residence each time that he buys a new house?

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Andrew Nazzaro October 26, 2020, 7:46 am

I told my father about this – we laughed. He’s known about this for 50 years. He called it matures approach to real estate. Nowhere near as sexy as “House Hacking.”

I live in the Boston area we have triple deckers here or 3 unit buildings.

Buy one, live in one unit, fix it up rinse and repeat.

I am glad the secret it out. It has changed my life and if you’re smart enough to take the advice from the author, it will change your life too.

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Chris October 26, 2020, 11:06 am

Hey MMM – first, thank you for all of the educational material that you’re putting out into the world; it’s really revolutionized the way that I think about my family’s personal finances. My wife and I are planning on having our first kid soon, and I’m working towards the financial freedom to focus on his/her upbringing.

I’ve been curious: do you have a holistic plan for the extra wealth/income that your compounding nest egg is generating? I just finished listening to your interview on the Tim Ferriss show, which was recorded a few years ago, and you alluded to effective altruism, opening something akin to the MMM HQ, and even building an entire town.

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- Mr. Money Mustache October 26, 2020, 2:41 pm
  
  Yes, I think that’s the basic idea! My plan is not very holistic because my daily life fairly random and disorganized (until the parenting job is complete in a few years). But I have done two of those three things since the Tim Ferriss interview, and the future car-free town/city is yet to come.
  
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Anmar October 26, 2020, 12:33 pm

Great article, but only realistic in the US perhaps. In Finland, you will be lucky to get $2000 in rent for a $500.000 house.

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Kelly October 26, 2020, 7:44 pm

I live in a small rust-belt city that has a ton of beautiful old houses in a nice downtown area, perfect for splitting up into apartments. Been living in the top half of an 1890s charmer for over a year now, and all but $50 of our 15-year mortgage is covered by my downstairs tenant. Even if they moved out we would be well able to afford the mortgage payment, and we set the rent a bit low to attract the largest pool of potential applicants possible so as to have the pick of the litter. Our market can be hard to sell in, so house hacking had the added attraction of being able to rent both units should we ever want to move. I think a big advantage to house hacking is familiarity with your local market. It helped to rent in the same market I now landlord in for six years before making the switch.

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Jacob October 26, 2020, 10:05 pm

We bought a small (1200 sq ft) “shop” in a tiny tourist town for 70k. Converted it to a small open concept home while living in it–a challenge but worth the effort. Now we get to live in a beautiful area with a $300/month mortgage–this alone is worth it but our next step will be to buy another cheap place to fix and rent this one. Not a retirement plan but you can really live cheap which makes everything else easier.

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Gregg Hopfeldt October 27, 2020, 12:39 am

I’m South African living in South Africa. I started house hacking in 2009. I started with a business partner who had been doing it and assumed he knew what do do. Turned out you actually needed specific housing permissions granted by government which he didn’t know. We call it zoning here.

Over time we rid ourselves of him and made our properties legal. But you can’t re-finance here like it seems you can in The USA. The banks wouldn’t consider the income we were earning from the properties for the purchase of other properties. They wanted to see income from our jobs. Even if we paid ourselves a salary that didn’t cut it for the banks. Plus the banks are cautious and your income needs to outstrip your repayments by a significant amount, I don’t know exactly what it is now.

Banks saw our business model as risky as it didn’t fit neatly into what they were used to. Actually it’s a less risky rental model. If one tenant in your house doesn’t pay it makes up only a portion of your total rental if you’ve split your house into a number of units.

SA banks conservatism is probably also why South Africa wasn’t hit as hard back in 2008. So not all bad.

We’ve sold the last of our properties now and I won’t rush into it again. But I certainly think it’s worthwhile considering. It does buy you free time, albeit with some different headaches.

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Jerry October 27, 2020, 9:41 am

As the article says, “Rents are Non-linear”, but for the most part, time spent managing tenants is. I’ve always found the bulk of time spent managing rentals is spent during tenant turnover (advertising/showing the property, screening tenants, coordinating move-in, etc.). If you’re renting individual rooms, you’ll need to repeat your entire turnover process for each room; much more time intensive than renting out an entire property at once.

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- Rob June 14, 2021, 5:39 am
  
  Jerry – I agree, and also why I don’t bother with airbnb. The time consumed for the items you just listed, plus tracking their payments, is a pain in the rear, and when you look at it on a time cost and risk cost (likelihood of getting sued goes up significantly this way), its just not worth it to me, but for other folks who love the hustle of dealing with it, more power to you.
  
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Bryce Stewart October 27, 2020, 1:15 pm

I did this from age 29 until I “retired” at age 35. At this point, the portfolio generates around $20k per month in tax-advantaged income. Not too bad. Hard to call it “retirement” though!

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Chris October 27, 2020, 1:50 pm

MMM,

We’ve thought about doing the whole AirBNB thing or corporate temporary housing when we take longer trips (3 months+) since otherwise, our place will sit vacantly. That’s as close as we’ve really dabbled with house hacking like this.

The problem isn’t funds or even interest, we have plenty of both. Rather, it just seems like… well, it seems like work. Our investments automatically increase as our index funds pile up dividends. It’s easy peasy.

I think what Craig has shown here is a great path to reaching FI more quickly, but I view it as more of a potential career path. I struggle with the idea of it being passive income, though I think it can get closer to that if a management company was hired that also contracted maintenance and whatnot. That’s not to say that one can’t *enjoy* the process of managing tenants or DIY maintenance, but that it does seem like another job. The sustainable method would be to have third-parties handle that.

To Craig: do you have any intention of passing off those marketing, maintenance, and management responsibilities to third parties as you grow your portfolio? Or do you intend to form this into more of a full-time job for yourself?

Cheers for the insightful post,
Chris

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Asim Sheikh October 27, 2020, 4:56 pm

Great article! The only problem is that with real estate so hot right now across the country, and in especially places like the suburbs of New York, it is next to impossible to find homes and not overpay. Personally, I am taking a “wait and see” approach before jumping in, as I have heard of multiple stories where people are paying an average of $50k over asking price to get into even crappy little homes in Long Island. By the time you do the calculation to determine monthly cash flow, it is hardly a worthwhile investment, even if you rent by the room.

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GingerMustache October 27, 2020, 7:16 pm

Thanks for another good read.
We bought a fixer-upper 2 units on one parcel. We fixed up both units and rented out one to a long-term tenant and the other on airbnb. After a few years our long-term tenant moved out and we moved into the 2/2 and rented the second bedroom on airbnb, too. When the pandemic hit we took down both airbnbs. We immediately converted the standalone unit to a month-to-month furnished rental . We were out 2 weeks of rent total and out of a roommate in our house. We had planned for the back unit to eventually convert to long-term because we assumed it would eventually be outlawed – instead the pandemic hit. In any case, we had a plan for things to change and I think that is key.

Additionally, our area got up zoned and we are now in the middle of building a duplex on the same property (with solar, tons of insulation and air sealing, etc. – it’s going to be rad) and then rent them out either to long-term tenants or short-term tenants. Haven’t decided yet. Either way the project pencils.

For those that are writing about landlords as leaches well…a few things. Always think about how you can add value. Whether that’s fixing up the home or increasing density or just making the experience better in some way to future residents. For us it’s building units that have a small footprint using cutting edge building techniques, designing with the tenant experience in mind and being kind and honest landlords to those tenants.

Real Estate has roller-coastered us to FI and given us a lot of fun projects to work on. We’re grateful for this. I have friends that have made a TON more money than we have by leveraging more and buying faster. I don’t have the stomach for that and I’m also not so driven to make that much money. Like many of my FI compatriots, I spend meagerly so I’m able to compromise some of my wealth building by taking on less risky investments and then just look at the appreciation as icing on the cake instead of relying on it for the project to make sense.

MMM, the hubby and I love your building videos and articles. What building projects, if any, are in store for you next?

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Brandon October 27, 2020, 8:00 pm

Does Craig (or others who have successfully implemented this strategy) do anything to address zoning regulations before moving forward with one of these projects? In my town, the regs are very strict – multi-unit housing (vs. single family housing) is only allowed in certain areas. I would be concerned that the local municipality would shut down my operation if they caught wind of it.

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Nona October 28, 2020, 2:00 am

What are the legal repercussions of dividing a one-family house into two or more housing units? Don’t you need a permit for that, which could turn into a costly and drawn-out process?

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OnCashFlow October 28, 2020, 10:14 am

Perfect timing for this article MMM!

I’m very excited to pursue my first house hack (and first real estate purchase) I bought a single-family home with a fully above ground basement with a separate entrance that I will use as a rental. I am buying and moving out of state to a low cost of living area in the Southern United States.

By doing so, not only am I house hacking, but this is also geographic arbitrage as I will technically be FI with the rental income, low cost of living, and my index fund net worth! I will continue pursuing my online business that makes a few hundred dollars per month full-time and stress-free!

The house hack itself will fully pay for my mortgage, insurance, and property taxes. Only utilities will be out of pocket for me. Thank you for all of your guidance over the years, sir!

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Gavint October 29, 2020, 8:42 am

House hacking in my area isn’t really doable for a number of reasons, local laws, insane housing prices and regulated rents making it not feasible for someone who, like me, would have to leverage it. I’ve also been a landlord before, and HATED the experience, way too much stress for the money earned off it – counted definitely as life-suck.

Here’s a thought I’ve been having since I read the article, Mustachians talk me out of it: What about the lazy-person’s house hack? Take advantage of ridiculously low interest rates and take out a cash loan of say 100 k € and use it to buy REITs – the 3-4% dividends alone would cover the below 1% interest, giving me a head start in earnings over just saving an equivalent amount payment on a month-to-month basis. Over the 8 year term it makes a difference of around 15 k €.

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- Jerry November 2, 2020, 2:41 pm
  
  Do you actually have someone willing to lend you 100 k € for an 8-year term at 1% interest annually? If so, go for it, but the problem I see with your plan is no one is going to lend money with no collateral at the rates you’d need for your plan to work.
  
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Marcia October 29, 2020, 11:19 am

I’m kind of fascinated by the anti-house hacking comments here, like being a landlord is immoral. Fact is, a lot of people rent, and want to rent. I spent most of my 20s and half of my 30s renting. I did *not* want to buy anything. For that, you need landlords. Mostly I rented apartments, but eventually half of a duplex.

People want the option to rent houses, rooms, and apartments. Where I live, it could literally take decades after you buy to be able to rent the house to cover the mortgage.

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- Andrew Mullen November 2, 2020, 1:37 pm
  
  You’re right on the money, many people that I rent to are contract workers looking for a furnished place that they can rent for 3-6 months. I actually try to go above and beyond for them by giving them access to my e-bikes, providing laundry, internet, allowing pets, etc. I don’t feel like I am taking advantage of anyone or driving up housing prices, I’m actually providing people with a great value and they appreciate it.
  
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Jeffrey Harris October 29, 2020, 12:35 pm

I live in Oak Ridge (pop 30K), and am a research scientist (pretty much a 24/7 job). Lots of those here because of natl lab. Plenty of lab visitors. House prices v low compared to Longmont or the coasts. I have used Airbnb all over the world, from Poland to New Zealand. Airbnbs rental costs in Oak Ridge comparable to Russia, some as I low as $25/night. No way is that worth the hassle. My guess is that if yo have a regular job, you have to be in an area with high and expanding housing demand for an Airbnb scheme to be worth it. Suspect same is true for being a landlord.

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Heather October 29, 2020, 1:09 pm

Are there educational resources for depreciating property that you can point me to? Thanks!

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Barrett October 29, 2020, 10:57 pm

I had two friends that “retired” on Las Vegas rental properties bought in the early 2000s with a decent amount of leverage. I remember wishing at the time that I’d been smart enough to snap up 6, 7, or 8 Las Vegas rental properties. Fast forward a several years and we all know what happened. Some foreclosures later, they’re both back at work. Buying rental real estate with high leverage and concentrated in one market is little more than gambling.

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Andrew Mullen November 2, 2020, 1:30 pm

I purchased a duplex for $52,000 back in 2014 and have been renting it out on Airbnb since 2016 (long term before that). I am making quite a bit more going the short term route ($1,200 vs $600). It is more work but I actually enjoy it and I meet great people from all over the world. It has been the best financial decision of my life as it has allowed me to build an investment portfolio that has changed my life and will shorten my career by 20 years. I am currently working on acquiring property along our new bike trail to build new housing and scale this idea up, with an emphasis on car free living, of course.

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