Pillar II: House Hacking: Affordable Housing

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House Hacking Affordable Housing Costs
Image credit: Roberto Nickson

Behind taxes, housing cost is typically the largest expense for Americans. National data indicates that average America spends 1/3 (or 33%) of their paycheck on housing expenses and some even over 50%. For this reason, housing costs earns its position as the second pillar of FI.

Assuming that you have already started hacking your taxes the house hack is the next most critical place to address to keep those hard earned dollars on your side of the ledger. Remember that the two biggest after-tax expenses account for half of the average American expenses.

So the reality is that if you just get those two right you can drink all the lattes you want and still crush the financial independence game. Remember that these two are closely tied together by your daily commute.

Housing 33% + Transportation 17% = 50% of the average American’s expenses

There is no reason you couldn’t reduce or eliminate your housing expenses. And if done right even make money on housing. Turning your largest liability into an asset is exactly the kind of decision that gets you to financial independence.

9 Ways to House Hack

There are several ways you can go about house hacking. Which cheat codes you apply will depend on age, phase of life, single vs. married, kids vs. no kids, cleanliness preference, social or introverted, etc. There is no one right answer for everybody but if you read this list below and apply a house hack that works for you, you will catapult yourself to financial independence. Some people couldn’t conceive living with family, for others, it would be a blessing.

1) Move in with Family

Move in with your parents, sibling(s), or extended family. This one can be powerful and eliminate hosing expenses and draw you closer to family. That is of course, as long as you get along with your family. This is especially powerful if you are still young and single. This can be an optimum strategy to save up for your first down payment or pay off those student loans after college.

2) Roommate(s)

Either rent with multiple roommates to reduce costs or better yet, buy a big house with lots of bedrooms and rent them out to eliminate costs and even make money! One of my friends bought the biggest house he could get financing for after he started his first professional job. It was a huge five bedroom house that would ensure he would be house poor for many years to come. Except for one thing, he bought the house with the intentions of renting out the other four bedrooms to roommates of his choosing. He reserved full control in vetting who got to live there. If they were too rambunctious or unclean they did not have the option to renew their lease. The roommates not only paid his mortgage those years but made him money.

When he eventually got married roommates started moving out and the bedrooms were ready to be filled up with kids. His career progressed to make the payments much more affordable by himself with each pay raise.

If you are already a homeowner and you don’t want to sell yet, rent out a room or two and use the money to offset a decent portion of housing expenses.

3) Part-time Roommate(s)

If you want to date the idea of roommates but not marry into a long term commitment consider this option to try it on for size. Or if you don’t want full-time roommates just rent on certain days or for a short duration. Airbnb and VRBO have made this very easy. Heck, you can even rent out just a couch. This strategy can be excellent for a young professional who travels a lot and is not home all the time. There are a few acquaintances of mine that are making more part-time doing Airbnb with an extra bedroom than they would otherwise make with a full time roommate. If you live close to an airport or a tourist attraction you will definitely want to look into this option.

4) Multi-Family Rental

Want the ability to rent out your residence but still want the peace and privacy of your own space? Consider purchasing a duplex, triplex, or quadraplex, living in one of the units, and renting out the others for a profit. Your tenants pay the mortgage for you! My Friend Coach Carson did this for a long time and made a profit from his primary residence. He turned his biggest liability into a cash flowing asset.

5) Live-in-Flip

Buy a home that needs a little TLC. Stay for at least two out of five years (to take advantage of the homeowner tax rate) then move out, selling the house for a sizable profit. This is the strategy that Mr. & Mrs. 1500 used to scale up their net wealth (I don’t say net worth because no amount of wealth with ever determine your worth) over the years.

Remember there are varying levels of rehab depending on you skill set, willingness to life in a construction zone, or ability to invest in contractors.

  • The Updater – move in ready and livable but the wallpaper, shag carpet, and yellowing appliances will be strong motivation to update room after room.
  • The Rehabber – This project will require you to replace most of the home finishing’s and may be unpleasant to live in at first. You may want to tear down to the studs and repurpose space allocation or remove walls to open up spaces. This property has a higher return on investment.
  • The Pyromaniac – light a match, turn your back and walk away. This home may be easier to demo and rebuild from the ground up but typically has the highest return on investment. You might need to prepare to live in a tent in the back yard.

6) Live-in Rent

This strategy follows all the same guidelines as the live-in-flip but instead of selling the house at move-out, you can rent it out. Compared to the purchase price these rehabbed homes typically rent out at a premium given all the renovation you did. This one can be a great way to have a tenant cover your mortgage and make a nice profit on top. This strategy can be doubly powerful when combined with the BRRRR method (Buy, Rehab, Rent, Refinance, Repeat) With this strategy you can pull all your money back out of the house to reinvest elsewhere, say in the next rental. Be careful not to over-leverage beyond the zone of safe expected returns.

7) Landlord

Have Kids? Like your school district? Love your current home? Live biking distance from work? This strategy is for those that moving out may not be practical at your current phase of life. This one is straight forward so I will not belabor the point. Own one or more traditional rental properties to increase your passive income.

8) Downsize

The old adage is true “buy utility and rent luxury.” Downsizing is a very viable option for most Americans. It is all too common today to see people buy a home for the maximum they are approved to finance and live house poor for decades. Americans seem to be in this childish cold war of “my house is bigger than your house na-na–nah-boo-hoo” competition. This is the same competition that forced the Jones’ and their neighbors into bankruptcy. Would you rather have net wealth to brag about or square footage that in reality, you are borrowing from the bank?

Secondary home costs add up to more than you want to know. Consider the taxes, insurance, lawn care, pest control, home maintenance, furnishing costs, etc. of a larger home. These secondary cost by themselves seem insignificant but they often add up to 50% to 100% of the mortgage cost. Do yourself a favor, combine all of you secondary housing cost and total the bottom line. I will likely lose a dozen reader due to heart attack from this exercise. Stop buying stuff you don’t need to impress people you don’t like with money that you don’t have!

9) RV Living

Feeling adventurous? Ditching the traditional stick or brick house entirely and hit the road. This lifestyle is great for people who can work remote or love adventure. This house hack does not have to be permanent. I know a couple that did this for a year then parked their RV behind their new house after settling back in. They spent a couple hundred to landscape around their new RV parking spot to add an outdoor table with umbrella, string lighting, and a fire pit in front of their RV. By renting out the RV behind their house they earned a profit above the RV cost. They blackout dates for the 2 weeks a year they want to use it for vacations.

What Housing Hacks Have I Used?

In the past, I lived with roommates to defray the cost of rent and utilities. At times (after college and when recovering from surgery) I have moved back in with family. When I was ready to buy a house I bought ‘The Updater’ with intentions to fix and flip. With the value appreciating 9% per year in my area I will end up flipping and renting. At the time it was on the small side as I thought I was about to get married and grow a big family. That never came to pass due to catastrophic unforeseen circumstances.

My house is way bigger than I need without the big family to fill it and I am debating between downsizing and getting a roommate until I meet Mrs. Refined. I live in a very low cost of living area so while my house is much too big for me, the mortgage was still only 17% of my income at the time of purchase, a far cry better than the average 33%. This simple decision to buy affordable housing allows me to have a 16% higher savings rate than the average American. An additional 16% of my income on my side of the ledger means I can buy a heck of a lot of lattes and still save more money than the average bear.

Keep the fire burning my friends.

Additional Resources

Here are a few other resources discussing house hacking, home ownership, and real estate investing if you are looking for a deeper dive.

Footnote: for the remainder of the pillar of FI we will talk in after tax dollars since we accounted for this in Pillar I.

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