House hacking as a concept is not exactly new, but the term is relatively new to me. If I knew then what I know now about the strategy, I would have been more inclined to implement a house hack as a college student, medical student, or resident.
I saved money on rent by having roommates throughout my eight years at the University of Minnesota, but it never occurred to me that I could actually live for free and possibly make money while doing so.
Craig Curelop is a young man who has reached financial independence in just a few years with a few clever house hacks that he’ll detail below. Our mutual friend Scott Trench, author of Set for Life, CEO of Bigger Pockets, and Craig’s boss, also employed this strategy to become financially independent in his twenties.
As of today, Craig is also a published author. His book release coincides with the publication of this post. If you are intrigued by the strategies he outlines in this article, be sure to grab a copy of his book that offers much more detail, The House Hacking Strategy.
I first met Craig at Fincon in Orlando in 2018 when he took me up on the offer of a ride to Whole Foods to pick up some craft beer to share at a gathering that evening. I’d like to say I bonded over beers with a man wise beyond his years.
Allow Craig Curelop to share with you his thorough house hacking guide today.
Your Complete Guide to House Hacking
Before we get into this, I need to thank the man, the myth, the legend—A.K.A. The Physician on FIRE—for giving me the opportunity to share the idea of house hacking with all of you. Through this strategy, you will learn how to reduce or likely even eliminate one of your largest expenses.
Housing alone makes up 34% of the average American’s expenses, according to the Bureau of Labor Statistics. With house hacking, that 34% could be money back in your pocket, to save or invest however you’d like.
In this blog post, I will share my story, go over the different types of house hacking, and the best kind of house hacking for you. Before we do all that, though, let’s answer the question: “What is this house hacking thing, anyway?”
House Hacking 101
House hacking is real estate investing strategy with which you purchase a one-to-four-unit property with a low-percentage-down loan (3-5%), live in one part, and rent the other parts out. The rent from your tenants covers (or almost covers) your mortgage, and you live for free.
You may have heard of this strategy before and decided that it wasn’t for you. The idea of house hacking always seems to scare away families or people who really enjoy their space.
Don’t worry! Before you dismiss the idea altogether, I suggest that there is a way for all demographics to house hack, regardless of whether you are a bachelor(ette) or married with kids. House hacking does not discriminate, and there is a strategy out there for everyone.
Different Types of House Hacking
Thanks to the emergence of Airbnb ($40 off your 1st stay!) and other home-sharing sites, the luxury house hacking strategy is the newest kid on the block. This strategy is best for folks who really value their space, have a family, or do not want to trade money for comfort.
With a luxury house hack, you purchase a single-family home that has a guest house, mother in-law suite, or separate-entrance basement. You live in the luxurious house you have always wanted and rent out the space you seldom use.
Because the spaces are separate, you do not have to worry about the misuse of appliances or the destruction of your home, and you know the place will be cleaned thoroughly after every guest.
This is known as the “most comfortable” strategy, and unfortunately, comfort is not free. While it is very easy, and your current lifestyle will not change much, it is also unlikely that you will reap the highest financial reward for this. It is, however, infinitely better than not renting it out at all.
The original and most common type of house hack is the traditional (hence the name). This strategy is great for couples and small families who enjoy their own space.
The idea is that you purchase a duplex, triplex, or quadplex, live in one unit, and rent out the other units such that the rent from the other units covers your mortgage. In this scenario, you are not sharing any indoor living spaces with your tenants, just the outdoor areas.
Most people’s dream homes are not small, multi-family properties sharing a wall with your neighbors—though it could be the dream of those in rapid pursuit of financial independence. This method is slightly less comfortable than the luxury house hack, but will likely be more lucrative.
Rent by the Room:
Another strategy—one that I am actively using—is the rent-by-the-room strategy. This is where you purchase a single-family house, live in one room, and rent the others by the room. Since your privacy is confined to a bedroom, this strategy works best for people who are single or young couples without families.
The rent-by-the-room strategy is my favorite. Why? Well, I am a single male in my mid-20s. I am super flexible, can easily move, and do not have a lot of stuff. I have lived with people my entire life, and quite frankly, I do not enjoy being in a house alone.
Not only that, but this strategy is much more lucrative than the aforementioned; when you rent by the room, you can often get 30-50% more in rent from a traditional house hack. It is slightly more work because, in a house with five rooms, you are essentially managing five separate units. But like almost anything, with more work and less comfort comes more pay.
Trailer House Hacking:
This is a bit on the extreme end, but I have friends that have done it. You purchase a house, rent out the entire thing, and live in a trailer or converted van on the property. Like rent-by-the-room, this strategy is best for single minimalists or young couples who might find the van experience interesting.
The live-in flip strategy can theoretically be combined with any of the aforementioned strategies.
With this strategy, you are not renting anything out. Instead, you are purchasing an owner-occupied loan, living in the property, and fixing it up while you live there. After two years, you are able to sell it capital gains tax-free for the first $250,000 you make (if you are single) and $500,000 (if you are married).
This strategy is great for anyone, as long as you do not mind living in a construction zone. I know many people who use this strategy; some have families and some are single. It’s nice because you do not need to share your own space, but you are paying the mortgage yourself, have a lot of work in front of you, and do not get paid until the sale at least two years later.
So, which house hacking strategy do you choose? My suggestion would be to pursue the one that is on the outer most limit of your comfort zone. That way, you are reaping the highest financial benefit while still having a comfortable place to live.
Now that you have an idea as to what house hacking is, who the heck am I? My name is Craig Curelop (A.K.A. The FI Guy). I graduated university with over $90,000 in student loans, then moved to California for a couple of years to pursue an “American Dream”-type career. I was working more than 60 hours per week to make my boss ten times richer than me, with hopes that I would someday climb the ladder to be in my boss’s position.
In the summer of 2016, my girlfriend (at the time) and I were spending a weekend in Big Sur, a beautiful part of California where the beach meets the mountains and there is absolutely no cell reception.
This was our last weekend together, as she was moving back to Paris. Upon returning to reality on Sunday night, I received an email from my boss saying that I needed to get this memo out by 8 a.m. Eastern Time Monday morning. That’s 5 a.m. Pacific Time! My last night with my girlfriend was ruined. She was unhappy. I was unhappy. It sucked.
I got the memo done, and that’s when it hit me. There was no way I was going to live the rest of my life this way. I started researching the ways I could not work for the next forty years.
I read Tim Ferriss’s 4 Hour Work Week and realized I needed a passive stream of recurring income. Since I was living in Silicon Valley at the time, I started thinking of one ridiculous startup idea after another when finally, it hit me: I didn’t have to do something that no one else has done before.
Why not get into real estate, a tried and true wealth-building method? I started doing some research, found BiggerPockets, and fell right into the rabbit hole of financial independence.
My First House Hack
Fast forward a few months, during which I had made some serious changes. I moved to Denver and started a job at my dream company, BiggerPockets. At that point, I still had not paid more than the minimums on my student loans, but just a couple of months after moving to Denver, I purchased my first house hack.
I purchased an up/down duplex just five blocks north of Denver’s largest park. I rented out the top unit and lived in the bottom while Airbnb-ing out my bedroom. So where did I sleep?
Well, I made a quasi-bedroom out my living room by putting up a room divider and a curtain. I slept in the living room while a revolving door of strangers slept in my bed. It was great! Seriously, I got to meet cool people and travelers from all around the world, some of which I am still friends with today.
How did those numbers shake out? I purchased the property for $385,000 and my mortgage payment was just north of $2,000 per month. I was making about $3,000 per month in rent and Airbnb income, so I was netting $1,000 over the mortgage. After setting aside reserves for vacancy, capital expenditures, maintenance, and the like, I was living for free and cash flowing about $750 per month. Here are those numbers laid out:
Purchase Price: $385,000
Monthly Payment: $2,000 per month
Rental Income: $3,000 per month
Reserves: $250 per month
Cash Flow: $750 per month & living for free
The rent savings and cash flow from the property had allowed me to save up and purchase my second property exactly one year later. This one was a 5-bed, 2-bath single family home in Thornton, CO for $343,000.
This time, I got my own bedroom (WOOHOO!) and rented out the other bedrooms by the room. The mortgage payments on this property were also just over $2,000, and I was bringing in a total of $3,100. After setting aside reserves, I was cash flowing about $700 on this property, as well.
Purchase Price: $343,000
Monthly Payment: $2,000 per month
Rental Income: $3,100 per month
Reserves: $499 per month
Cash Flow: $700 per month & living for free
My initial property, the duplex, cash flowed closer to $1,000 since I moved out. From the two properties combined, my passive income was about $1,700. With all of these savings, I was able to yet again purchase a third house hack one year later.
The third house hack is a single-family residence with a total of six bedrooms and three bathrooms for $380,000.
The downstairs is essentially its own unit. It has its own kitchen, laundry, bathroom, living area, three bedrooms, and a private entrance.
The upstairs is essentially a 3-bed, 2-bathroom house, so I rent out the upstairs by the room and am rehabbing the downstairs to turn it into an AirBnb.
When all is said and done, I expect to make an average of $2,000 per month on the AirBnb and $1,500 per month on the rent-by-the-rooms upstairs. My mortgage payment on this property is $2,100, and I will be making a total of $3,500 and living for free. After reserves, we are talking about a cash flow of $1,000.
Purchase Price: $380,000
Monthly Payment: $2,100 per month
Rental Income: $3,500 per month
Reserves: $400 per month
Cash Flow: $1,000 per month & living for free
As I move out of the properties, I am able to rent my space out, so I am then able to receive more in rent, which increases my cash flow. At the time of this writing, my portfolio looks like this:
Property 1: $1,000
Property 2: $1,000
Property 3: $1,000
Total Monthly Cash Flow: $3,000
I house hack so I spend little on housing, and I bike to work most days. Most of my personal expenses are just food and fun. I do not spend anywhere near $3,000 per month so I have officially hit financially independence in my mid-twenties, all through house hacking!
How to Make House Hacking Work for You
Now that you see how house hacking can create wealth, let’s talk about how house hacking can create wealth for you. The first step would be to pick your strategy—do you want to live in a place by yourself through a traditional or luxurious house hack? Or would you prefer to have roommates or live in a camper?
Wherever the limit of your comfort zone is, I suggest you take it one step further. That is how you grow, after all. When picking a strategy, know that comfort comes at a cost. The more comfortable your living situation is, the less profitable your house hack will be. So what is the ideal strategy for you?
After you have picked your strategy, it’s time to save up. Luckily, with house hacking, you don’t need to save 20-25% of the purchase price for a down payment. Instead, you just need to save 3-5%.
Whatever target property you’d like to purchase, save 3- 5% plus $10,000 as a buffer for reserves, in case something happens. (Though, many people are much more risk tolerant than me and spend their entire savings on that down payment. The number for your reserves is totally up to you.)
I suspect that if you are reading this article, you are a doctor of some sorts, and you likely have a high-paying job with lots of student loans. Rather than work harder to make more money, you need to figure how to save more of your money.
If you are in the highest tax bracket, a dollar saved is two dollars earned. If you earn an extra dollar, you are likely paying close to 50% in federal and state taxes. However, if you save one dollar, that’s one dollar of after-tax savings.
Not only that, but the less your monthly spending is, the less you need to live and the less passive income you will need to become financially free. My suggestion? If you do not already use Mint or Empower, download the last six months of credit card/bank statements and see where most of your spending is going. Then try to cut anywhere you can.
You may not be able to do much about the student loans, but what about your current housing situation? Could you downsize and rent a cheaper place? When you downsize, could you downsize such that you can bike or take public transportation to work? How much do you go out to eat? Do you drink alcohol when you go out?
Once you have enough money saved, it’s time to engage a lender and an agent. A lender will tell you what you can afford, and the agent will set you up with an MLS search that sends your deal criteria to your inbox. From there, the house hacking journey begins!
House hacking can be scary. For many people, it’s the largest investment of their lives. But do you want to know what is scarier? Working for forty or more years. Being tied down at a job for eight hours per day, five days per week, fifty weeks per year. Why not take this risk now so you can escape from the rat race and live the life of your dreams?
House hacking is, without question, the most efficient way to propel you towards financial independence. By eliminating your largest expense, cash flowing, paying down your mortgage, and gaining equity in a property as it appreciates, you are able to grow your net worth at an exorbitant rate and this compounds exponentially as you pick up your second, third, and fourth properties.
Do you want to know what the best part is? Anyone can do it! Pick a strategy that works best for you and your family and watch your financial position expand and grow over time.
Happy house hacking!
Need more info before you start your first house hack? Check out Craig’s new book, The House Hacking Strategy, and learn the the in-depth details to make your first (or next) investment a success.
14 thoughts on “Your Complete Guide to House Hacking”
House hacking is certainly a great strategy to start investing in real estate. Yes, it is a sacrifice; yes, it can be difficult. But nobody said it wouldn’t be. You are hustling and investing for a better future.
I’ll admit, it’s easier when you’re young and willing to live with people. I don’t plan to house hack forever, but it is setting me up for an incredible financial future and investing career. It’s not for everyone, but definitely a valid option as far as investing strategies go.
I like that I can buy a property each year when I wouldn’t be able to if I had to save up 25%. I also appreciate that it slowly introduces me to property management, business development, etc. Develop your systems, put a good team in place, and scale your business.
I would consider the luxurious separated house at a lower profitability option. I like my space and would probably hold strangers at more of a distance at this stage of my life. 🙂
I’d be more likely to do this during retirement. Maybe make a side hustle out of air bnb hosting?
I wonder how the depreciation of the asset works if you live in it.
I bought a house in medical school and rented out the other rooms until my now wife moved in with me. Even though our finances were separate at that time it was cost saving for both of us. I was also lucky that I bought it in 2009 so it appreciated nicely. Rent did not go down that year but the housing prices fell nicely.
It was a lot of work though. Maintaining the home while a medical student was not a cake walk. However it is not much easier now as an attending but having little kids.
Living in shared space with a bunch of other people works OK when you’re young, male and single. And don’t own a lot of stuff.
I find as I get older that I don’t like dealing with other people’s bad/dysfunctional behavior, so the only way I’d do this is if I had my own private space. Coming home to find someone helping themselves to my possessions without permission isn’t something I’d appreciate at all. And it’s happened more than once. Some folks don’t respect boundaries.
I did notice this author progressed from spartan situations to having his own private space. He has a formula which worked for him, and that’s pretty cool for someone who’s only in his mid-20s!
Any reason it couldn’t work reasonably well for females?
While I’ve had times of successfully living with roommates when younger, I have cohabited with several men (and one woman) who really pushed their weight around simply because I was female and small, and they figured they could get away with it. They wouldn’t have pulled such nonsense on a guy. This is something that most men don’t have to worry about. After the last one who I told to leave the home I own, who informed me he wouldn’t leave until he darned well felt like it, I decided I would never share my space with anyone again.
Not everyone is normal and respects boundaries, and they don’t advertise this up front. My mother had similar problems with a couple of boarders she took in. One stole money from her, and the other one refused to pay the full rent agreed upon, then insisted she had equal rights to my mother’s home and would stay as long as she liked. Mom had to call the police on that one to set her straight. The police scared that tenant into moving out by telling her about Florida laws on elder abuse.
I definitely feel that it is paramount to fully vet anyone you rent to by running a credit check, and possibly even a background check on them in hopes of weeding out the ones who already have a history of behaving badly.
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Good article and solid idea.
But…I would pay a ton of money to not deal with other people. I guess I did have roommates for many years, but that rent was convenient so that I could focus on my primary job.
The cost of introversion and convenience….
I wish I knew of house hacking when I was in college all the way through till residency. Would have been a smart way to create cash flow without much extra cost.
I am curious why you mentioned that with house hacking you only need a down-payment of 3-5% instead of 20-25%. Do the mortgage companies relax your down payment requirements if you say you are house hacking? With doctor loans you can get it for 0% but that would not be available for college students.
An FHA loan, which one can get on a first home purchase of a 1 to 4 unit property.
As you mention, doctors have the option of physician mortgage loans, as well.