Hi, Reader!

Many people are pursuing real estate so they can make big changes in their life. For some, it's completely quitting their W-2 job. For others, it may be scaling back their W-2, pursuing a W-2 they feel more passionate about, or starting their own business.

I was no different. Once I realized I could actually make decent money investing in real estate, I had the goal of completely quitting my W-2 as a special education teacher.

While some might spend a decade or more plotting their escape, it happened much more quickly for me. I bought my first investment property in 2017, and by mid 2019, I was free from my W-2.

Buying cash-flowing real estate certainly helped, but there was one tactic that was crucial for my successful transition from W-2 earner to self-employed. In fact, this may have been the single-most-important tactic that lifted the chains of my W-2.

Let's get into it.

Today, the tactic is called house-hacking. Everything now has a catchy name, but it's not a brand-new strategy. It's probably been around since the inception of real estate.

House hacking has different varieties, but the basics remain the same: renting out part of your home to someone else to cover all or part of your housing expenses.

It could be buying a 4-plex, living in one unit, and renting the others.

It could be renting a spare bedroom to a roommate or on Airbnb.

It could be building an ADU to rent.

In each of the three residences I house-hacked, I was living in Cheyenne, Wyoming.

There is a classic style of build that is common in Cheyenne that lends itself really nicely to house-hacking. Many of the houses in Cheyenne that were built in the 1950s and 1960s have a side exterior entrance right off the basement stairs. A separate unit can be created in the basement, and the basement tenant would have their own entrance without having to walk through the rest of the home.

My first house hack had this setup, but it did not come with a unit in the basement. So I created one and rented out the basement unit to traveling workers.

The second property I house hacked was built in the 1930s. Many of the houses of this era were built with a separate unit in the basement to house airmen at FE Warren Air Force Base, located just down the street. This was true for my property, so I fixed up the basement unit and rented it out to traveling workers.

The third property I house hacked was a large home built in the 1990s. It came with an attached mother-in-law suite, so that was a no-brainer to rent out. But the house also had a walkout basement, so I created another unit in the basement. I rented both units out to traveling workers. Not only that, but I also rented a big garage in the backyard to someone needing to store their RV! Even after renting out all of this space, my family still had the main 4 bed, 2.5 bath house to live in.

The whole point of house-hacking is to have your tenants partially, or in some cases completely, cover your housing expenses. It's a total game-changer for someone seeking financial freedom. Imagine having somebody else pay your mortgage for you!

The Numbers

How powerful is this strategy? Let's go through the numbers for the 3rd property I mentioned, The Branding Iron house. It was about 3500 square feet, including the mother-in-law suite and finished basement. I purchased it for $690k, and the monthly mortgage, taxes, and insurance payment was about $3000.

The mother-in-law suite rented for about $1600 per month.

The walkout basement unit rented for about $1200 per month, and required ~$12k to get ready.

The RV garage rented for ~$400 per month.

When everything was full, the rentals on this property were bringing in $3200 per month, more than covering our mortgage payment.

This example is maybe on the extreme side, but house hacking allowed us to get into a great house that would otherwise have been priced out of our reach.

The Downsides

Skeptics I talk to about house hacking always have their "Yeah, but's" ready to go.

Yeah, but what about getting the space ready to be rented?

Yeah, but what about having strangers live in your house?

Yeah, but what about vacancy and problem tenants?

Look, the road to financial freedom will sake some sacrifice. It's going to mean being challenged or even uncomfortable in moments.

Nothing is 100% fool-proof. Even when house hacking, there is going to be some vacancy. I learned that not many traveling workers want to come to Wyoming in the winter! So, I planned for a little more vacancy December - March. I learned to properly screen tenants and ask the right questions to avoid the bad tenants.

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I believe in this tactic so much that, as I look for a new house every two years, one requirement is that I have to have the ability to house-hack it. Some floor plans and house designs just lend themselves easier to house-hacking, and as I got more experience with it, I learned what to look for in a house.

A house might require some work to get ready for house hacking. Whether it's reconfiguring some walls, adding a bathroom or kitchen, or installing an egress window, the cost and work is probably worth it.

Take the example from above: I had to spend $12k to get the walkout basement ready for a tenant (adding a kitchen and remodeling the bathroom). But when it was finished, it rented for $1200. It paid for itself in less than a year! Plus, the renovations added value to the house!

Here's the powerful truth: I don't know of any other strategy that will pay your mortgage for you. The road to financial freedom can be long, bumpy, and for some people unwilling to take the right action, the road is un-ending.

THIS WEEK ON THE PODCAST

I talk with Cody Payne, broker with Colliers specializing in small-bay industrial. In this episode, we discuss how to evaluate potential small-bay properties, how to attract the best tenants and highest rental rates, and the potential in ground up development.

Listen here on Apple Podcasts.

Listen here on Spotify.

Watch on Youtube.

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Curious about commercial real estate? Read The Top 6 Reasons to Invest in Non-Residential Commercial Real Estate. ​