House hacking is by and large one of the very best ways to build wealth and super charge your journey to FIRE. What does house hacking mean? It essentially means buying a house or property that you will rent, so you pay nothing or next to nothing for your living expense. You might buy a house and rent out the other rooms, covering your mortgage and then some or you could purchase a duplex and luxury house hack, renting the other side to cover the mortgage. This plan can also go all the way up until a fourplex since that is what a bank still will finance with a low amount down conventional loan. So this plan is available to anyone who is looking to buy a home and wants to position themselves for financial independence.
I've done this, twice actually! Once when I was in college, buying a 3 bedroom home and renting the rooms to friends. I still have it to this day and don't ever plan on selling since it's in a highly sought after rental market with much future growth predicted. Currently, my wife and I have purchased a duplex that we live in one side and rent the other to a family. It doesn't pay the whole mortgage but about 90%. As more time goes on and rents increase, I can charge more, reducing my costs even further. The duplex would cash flow nicely if I was renting both sides, so it also gives us options for what we want to do in life. Perhaps, we move, we'll rent it, maybe, we buy another duplex or fourplex, then we'll be in a great position to earn more money, but for now it cuts our living expenses down immensely. I'm only telling you these things to prove that yes, it is possible to buy a home to house hack, i'm living proof. No, I don't have a fancy tech job, I am paid by the hour, and I don't make that much money. I'm simply making my hard earned dollars do the work for me with a little help from time. We are setting ourselves up to reap the rewards of our planning later in life. Like I've said before, this is not a get rich quick scheme and if somebody says they have something quick and easy to be a millionaire, most times you should run in the other direction.
“Don’t wait to buy real estate. Buy real estate and wait.” -Will Rogers
There are many tax advantages to owning a rental. All of the expenses you incur can be deducted from your taxable income at the end of the year. This has huge implications, that could put you in a lower tax bracket, saving you thousands. You'll have to save your receipts and keep great records, but in the end it will all be worth it when you can keep more of your hard earned cash. The interest you pay on your mortgage and down payment can be used as a deductible! That's a lot of money. You'll even have the possibility of using what is called, a 1031 exchange, this essentially is you don't pay income tax when you go to sell the property and select another one to buy within 45 days. This is what people call the ultimate trade up, getting you to bigger and better properties. We all have to pay our taxes and I highly advise you do so. Please consult your qualified accountant, who can walk you through the intricacies of the tax law.
You could get your very own home and have other people pay the mortgage. How sweet does that sound? Pretty cool if you ask me. Also, you're providing a wonderful place for people to live. So, how do you get started? First things first, talk with your banker to see with your income what the bank is willing to loan you. Do not forget this step. Secondly, you need to save some money for a down payment. Depending on where you are at in the country of the U.S. (who knows maybe people from other parts of the world are reading, hey I can dream can't I), the price of your home could be relatively cheap. Let's say I live in a medium priced market and my duplex cost $200,000. How much does a person need for a down payment? Well, since you're going with a conventional loan, you could get in with a low 3% down payment! What?! So, you're telling me that I can purchase this property and potentially live for free with as little as $6,000!? Why yes, I am telling you that it is entirely possible. If you were able to save just that amount, you could be well on your way to FIRE, shortening your journey by a decade or two. This plan seems so crazy, it just might work! Now Thirdly, find an agent who understands your desires and knows what you're looking for. Then, you pull the trigger and buy the house/duplex/fourplex!
So here are the steps to make it easy for you:
1. Talk with your bank or multiple banks to see what they'll loan you and what rate.
2. Save up for the downpayment (this should be easy for us FIRE minds)
3. Find an agent who knows what you want. (or don't, I purchased ours directly from the seller)
There can be a few downfalls with house hacking. You'll have somebody living with you or in the unit next door, depending on which house hack you choose. This can be good or it could go badly. Maybe, they don't want to pay their rent, or roommates won't get along. It's my opinion that if you're very clear about this up front you can prevent this from happening and you have a protocol to follow if it does. Things happen in life and if you have a system in place to take care of it, that makes life a lot easier. Just be aware of what the pitfalls could be when pursuing this method of living, but I guarantee that the benefits far out way any of the tough moments. Who knows, maybe you'll make new friends and have an amazing time.
So to sum up what we've said before, house hacking is simply, one of the fastest ways for you to reach FIRE and will get you there faster since living expenses are some of the biggest we have. You can choose a single family home, all the way until a fourplex, why, because the bank will only give you a conventional loan up to a fourplex. Yes, you might have roommates or tenants next door, but that is a small price to pay for more freedom in the future! Please comment if you have any questions, let's get you going on the path to FIRE! Cheers!