In what is likely the understatement of the year, 2020 was rough. With so much tragedy, fear, hate, and unrest dominating the headlines, most people have negative feelings regarding the year.
I also had my fair share of hardships last year, and definitely feel many of those sentiments about 2020. However, there were many great things that happened in our world and in my own life that are worthy of celebration, and I think that is helpful in fully processing the experience of last year.
I was fortunate in many ways, including flipping my first real estate property, getting engaged, getting married, and most recently by diving into house hacking by purchasing a duplex!
What is House Hacking?
For most of the year, my wife and I were living in a small one bedroom apartment. In my downtime, I was hunting down leads for another land deal or an investment property. In her downtime, she was looking at houses to buy to get us out of the small apartment.
Fortunately, we ended up finding a duplex property that was the best of both worlds. The duplex was larger than our apartment, so it met her desire for more space. It also had an investment aspect that I was excited about. After running the numbers and discussing the pros and cons of the house hacking lifestyle, we decided to jump in!
So what is house hacking? House hacking is a concept where you utilize your living space to help lower housing costs. Some people do this by renting out rooms in their home or guest house. Others use a multifamily property where they live in one unit and rent out the others. That’s what we are doing with our duplex.
The Property
Our duplex was built in 1927, so it’s approaching 100 years old. It’s in a wonderful neighborhood and has a lot of “charm” – which is really just a great way to describe uneven floors and doors that don’t close. Overall, it is in good shape and will be a hopefully be a sturdy and profitable property for years to come.
In running my calculations, the property met all of the typical rental “rules.” It passed the 50% rule, the 1% rule, etc. My main concern was making sure we could get the highest rent range within the area to capitalize on the investment.
Speaking of rent, there was an existing tenant in the second unit. However, he was moving out right around the time we purchased the property. We were thankful he was moving, as his lease was on the low end of the market rate. With his lease ending, we were able to make some renovations to both of the units, which helped us capture the higher end of market rental rate.
Living For Free!
We listed the vacant unit for rent on the day that we bought the property. Fortunately, we were able to get a signed lease within just seven days of listing the unit!
The total rent payment that we receive for the other side of the duplex is more than our entire mortgage (PITI) payment! Yep, you read that correctly. We are living for free and using other people’s money to gain equity in our property!
That’s one of the reasons real estate, and specifically house hacking – is so powerful. You build net worth in three ways:
- Cash Flow – Money you make from collecting rent after all of your expenses (mortgage, taxes, management, vacancy, etc.) are paid
- Equity – The difference in what you owe on the property and how much the property is worth
- Appreciation – The rise in the value of the property over time
The Money Stuff
As far as the financial breakdown for the property, we had to pay a 15% down payment. If my current conservative calculations play out as expected, the property will net us a 19% cash on cash return. This return is approximately double the average return for the stock market over the past 50 years.
We went from paying $1,000 a month for our small 1 bedroom apartment, to living for free in a larger 2 bedroom space. Talk about an upgrade! That alone is $12,000 per year in savings. Then add in appreciation and the equity gained from paying down the mortgage note, and we are expected to realize around a $17,000-$20,000 net worth increase within the first year of owning the property. This net worth increase includes maintenance fees and costs to update the duplex that I’ve already taken into account.
In regards to the long term investment, we were able to capitalize on the current mortgage rate market and score a great interest rate. Since the duplex will be owner-occupied initially, it qualified for a traditional mortgage instead of an investment loan. That means we will have an incredible interest rate on an investment property for years to come, even if we decide to move out!
There are a few other benefits such as tax write offs and capital gains tax breaks that are a benefit of an owner-occupied duplex, and those will help increase the ROI as well. However, I’ll save those details for another day.
Repairs and Updates
When we purchased the property it was in pretty good shape. However, we knew we were going to need to make some updates. Since we have closed on the property, we have painted, installed new light fixtures, changed out the kitchen sinks, and fixed some miscellaneous maintenance issues. Most of this work we did ourselves.
Take a look at the before and after of the new sink we installed below:
In my opinion, a fairly inexpensive change in the sinks created a huge aesthetic upgrade.
We also decided to renovate the bathroom on the tenant side in order to increase the rent that we could receive. Here’s the process of that transformation:
As you can see, we changed out the tile, fixtures, and sheetrock. We also re-finished the tub and painted the room. I love the way it turned out as it created more space and really freshened up the feel of the room.
While we do love how the bathroom turned out, in hindsight, we may have overdone it a little bit. We probably could have gotten away with updating instead of doing a total renovation, which wouldn’t have cut into our overall ROI as much. However, that’s part of the learning process and something we will take note of for the future.
Wrapping It Up
After a few weeks of living in our new place, we have finally gotten settled in. Everything has been great so far, and we are looking forward to making this place our home for the next couple of years.
On paper it looks like everything is lining up for this to be a successful house hacking adventure. Unfortunately, if 2020 is any indication, anything that can go wrong likely will. Even still, my wife and I are excited to start this adventure as we hope it will be a wise move for our financial future.
Have you ever thought about house hacking? What are some things that keep you from trying it? What other ways could you save on your housing costs?