The Crazy Way These Homebuyers Bought Their First House—And The Secret To Getting Rich Off Real Estate

Dan and Marissa McDonald were in their mid-20s, paying $2,000 a month for an old, outdated apartment in Boston when they started thinking about buying their first home.

“I was sick of paying such high rent,” Dan recalls. “I wanted to really jump into actually having an asset to my name beyond my 401(k).”

While many couples in their shoes might have begun searching for a single-family home, Dan was intrigued by a trend called “house hacking,” which involves renting out rooms or parts of a house to help cover the cost of a monthly mortgage, and perhaps even make a profit.

“I have always been interested in real estate investing, but I didn’t really ever think it was possible, being young and not having a lot of money to put down,” Dan admits. But through house hacking, he had learned that buying more space—and renting it out—could end up costing less than simply buying their own place.

After months of looking for a property in their price range that wouldn’t require too much work, they found a duplex in the quaint seaside town of Beverly, MA, with a two-bedroom, one-bathroom unit on each floor for $501,000.

Armed with an FHA loan, the couple were required to put down only 3.5%, bringing the house within their financial reach. They had been pre-approved for a loan and were hoping that rental income would offset their higher monthly bills. They closed on the property in May 2020.

“Everyone called us crazy for buying such a large purchase at the peak of the [COVID-19] pandemic,” Dan says.

Yet they quickly proved the critics wrong by finding renters who were happy to take the bottom unit of their duplex for $1,800 a month. This covered a sizable chunk of their mortgage so that they only had to pay $800 to make up the difference.

House hacking, in other words, was immediately paying off.

“It cut our living expenses by more than half and accelerated our savings,” Dan says.

In fact, just two years after buying their first duplex, Dan and Marissa used the money they saved to purchase a second duplex just a few streets over in 2022.

“Again, we got a lot of strange looks for buying an even more expensive home amid a recession and climbing interest rates,” he says. “But it allowed us to get a much bigger space for ourselves, while still having someone else help pay for our new asset.”

Today, the people who once thought they were “crazy” for buying so much property are singing a different tune.

“I’ve had people tell me, ‘Man, I wish I had done [house hacking] for my first house,’” says Dan. “Everyone has that idea of a traditional starter home, but no one thinks ‘What if instead of that, I bought a house that I could actually make money on?’ To me, it almost has become a no-brainer.”

How house hacking can help bridge the affordability gap today

In an era when affording one home feels out of reach for many Americans, buying two homes might seem risky. But as the McDonalds’ story proves, this approach could be the perfect antidote to the affordability crisis squeezing many homebuyers today.

While homeowners have been recruiting renters to help pay their mortgage throughout history, the term “house hacking” originates from real estate investor Brandon Turner, who introduced this strategy through BiggerPockets.com in 2013. While its popularity bottomed out briefly during the COVID-19 pandemic, the trend has resurged and served as a life raft amid today’s rising home prices and mortgage rates.

“House hacking helps offset that extra cost until the interest rates decrease, and the owner could potentially refi with a lower rate,” says Karyn Sederberg, a real estate agent with the Coffey Team in St. Augustine, FL.

The many ways to house hack

While house hacking was originally conceived as purchasing multiple-unit properties like duplexes, the concept has since evolved, with homeowners simply renting out rooms in their homes, for either the long term or short term.

“There are a lot of ways you can go about house hacking,” says Boston-based real estate agent and investment specialist DJ Richmond. “It doesn’t necessarily have to be the multifamily. You can do it with condos, townhomes, single-family [homes].”

For example, Richmond helped a client buy a top-floor condo in Salem, MA. Since this city hosts one of the largest Halloween celebrations in the world with nearly a half-million visitors, his client started renting out one of the rooms in the condo on Airbnb during the month of October. The client now mints anywhere from $10,000 to $15,000 over just that month.

Brian Davis, a founder of Spark Rental, says he has seen people build and rent out accessory dwelling units, or rent out space on their property for other purposes, such as storage or parking for cars, RVs, or boats.

“My co-founder has house-hacked by renting out her detached garage,” he says. “She and her husband got even more creative when all their kids moved out and brought in a foreign exchange student. The monthly stipend covered most of their mortgage payment.”

And since house hack rentals are often attached to or within the main residence, this lowers the cost and maintenance hassles of owning a rental, making it much easier for homeowners to become landlords and break into real estate investing.

“Buying a straight investment property is getting difficult because of the high interest rates and prices not going down enough to compensate,” says Rick Albert, a real estate agent with LAMERICA Real Estate in Los Angeles and a two-time house hacker. “With house hacking, you are eliminating some of those roadblocks.”

The challenges of house hacking

While house hacking has great potential to reduce living expenses, generate income, and accelerate equity in the home, there is a lot of work and challenges that come with it, which means it’s not right for every homebuyer.

“House hacking is not a one-size-fits-all strategy and may not work for everyone,” says Shaun Martin, a real estate investor in Denver and the owner of Cash Home Buying Company. “It depends on several factors such as the cost of the property, location, rental income potential, market conditions, and personal preferences.”

Klaus Gonche, a real estate adviser and principal of the KG Group with Compass in South Florida, has been helping clients house hack their way to homeownership for the past eight years.

“If you do not have any interest in dealing with tenants and the upkeep and maintenance associated with being a landlord, this strategy may not be your best option,” he warns. “If, however, your goal is to generate income and wealth over time through real estate and you are prepared to handle the ins and outs that come along with it, then it may be something worth considering.”

The biggest reason many people are scared to house hack, says Dan, is the fear of being a landlord.

“Everyone thinks that you’re just going to be constantly bombarded by phone calls at 2 a.m. that the toilet is flooded,” he says. “But these are all problems you have in regular houses.”

Richmond says he’s heard his fair share of tenant horror stories but adds that having the right processes in place can avoid headaches down the road.

“You have to do a lot of due diligence upfront when you’re screening your applicants,” says Richmond, who helps his clients find potential tenants as part of his services as a real estate agent.

A thorough screening, he says, means “you can have the trust and the faith that they’re going to pay on time, take care of the property, and just be all-around good people.”

He breaks down due diligence as the following:

• Hire and work with a good real estate agent to help find a good tenant.
• Run a full credit report to verify tenants’ credit and income sources to ensure they can afford the rent.
• Collect and call references, including past landlords. Speak to former landlords to see how tenants treated their previous rental.
• Do a criminal background check and check for previous evictions.

In sum, Richmond says, “Be as thorough as possible upfront so you can stay away from future evictions.”

Tips for successful house hacking

Dan, who now teaches a course on how to house hack, says it’s essential for rookie real estate investors to establish a budget and find the right team of a real estate agent, lender, and contractor (if you’re planning for renovations).

He also recommends that, once you’ve purchased your house, you prepare for the unexpected. The joys of homeownership also come with the pains of homeownership, including surprise expenses like a flooded basement (which Dan and Marissa had to deal with on their first duplex).

Richmond adds another key piece to house hacking is having a thorough understanding of the tenant/landlord laws in your respective area. In addition to doing research on state and local laws, he recommends taking an online class for first-time landlords to help set you up for success.

After two house hacks in three years, Dan says he and Marissa are focused on paying off the debt from renovating their second duplex and plan to live in the second-floor unit (with four bedrooms and two bathrooms) for at least the next five years.

After that, they plan to purchase and move into a single-family home. “My wife and I are eventually going to want a little brick house,” he says. However, “that doesn’t rule out buying one with a finished walk-out basement or in-law suite.”

 

Source: www.realtor.com

Author: Meera Pal