House Hacking: A Lucrative Passive Income Stream for Young Professionals
Today’s post is a guest post from fellow Minnesotan Erik who runs the blog and podcast The Mastermind Within. On his site, he shares tips and strategies to unlock your full potential in the areas of personal finance, self-improvement, and entrepreneurship. He loves to help others, and uses his site as an outlet for this passion.
In this post, Erik shares how he created a passive income stream of $15,000+ a year after finishing grad school and commanding a high salary, and how you can create passive rental income with house hacking.
The timing couldn’t be better with college grads about to start med school, graduating medical students about to start their residencies, and graduating residents looking to start their careers under a big pile of debt. Could house hacking be right for you?
Let’s see what Erik has to say.
First, I’d like to thank the Physician on FIRE for giving me the opportunity to share my story with your readers. I’m excited to share with you how to create another income stream with your high salary and house hacking.
I’m guessing you are like me: always looking for the next best thing to include in your life, never settling. Each day, excited to wake up and experience the thrill of the chase. When you find that new, amazing brew, it is so fulfilling, and, oh, so very tasty.
Sorry, I got off topic.
Hi, I’m Erik. I’m guessing you are like me, always looking to improve your situation.
I’m not one to sit around and wait for those around me to help me out. There’s always something to learn or do, which will result in being a little bit better.
After finishing graduate school, I applied the same mindset to my finances. Even though I had student loan debt, I was able to leverage my relatively high salary to create more income – I bought a house and rented it out to my friends. In this post, I will be sharing with you my house hacking story, the benefits of house hacking for a high-income individual, and how you can house hack.
What is House Hacking?
First, for those unfamiliar with the term, house hacking is buying an owner-occupied property and getting paid to live for relatively cheap or free.
How are you able to live for relatively cheap or free? You get a house which has rental potential, and rent out your additional rooms or units to other people (friends, Craigslist people, strangers, etc.) House hacking allows you to get into the real estate game, and at the same time, have your housing subsidized by roommates or tenants.
My House Hacking Story
It was the summer of 2015; I’d just graduated with my Master’s degree and had been working full-time for about 5 months. At 22 years old, my salary was $63,000 – above average for a fresh college grad.
Over the past few years, I had been reading about different wealth creation strategies. Real estate seemed to be a great way to build wealth. I was renting at the time and my friends, and it was time to find a new place to live – we were interested in moving to a vibrant and hip community in a different part of town.
The problem was there were no available options for 4 people where we were looking.
Then, a crazy idea popped into my head. I was sitting on the couch with my buddy and said to him, “Hey, I know we are kind of struggling with the whole apartment search… I wonder what I could buy.” That set off the search for a house…
My roommates were stunned. I was pleased: I’d just created a passive income stream using my relatively high income and ability to borrow.
The Financial Results of House Hacking
For the past 3 years, I’ve had some great financial results from house hacking. I’ve been able to save over 40% of my income, paid down my consumer debt, and increased my net worth by over $100,000 by age 25.
First, let’s dive into the numbers. My mortgage payment (PITI) was $1,820 a month. My roommate situation changed a few times over the years, but on average, I was bringing in roughly $1,450 a month.
This means, for me, I was essentially paying myself $370 in “rent” and banking the gains in appreciation and equity. $370 in rent? That’s unheard of in a metropolitan area such as the Minneapolis / Twin Cities area!
Diving into the Numbers Deeper
Over the past three years, I brought in just over $39,000 in rental income. I didn’t do anything special to earn this money – all I did was purchase a house in a great area and rented it out to 2-3 of my friends.
I was being paid to live, a great deal!
As I mentioned above, my housing expense was quite low, and actually, because I was paying down my mortgage each month, I was coming out ahead every single month. I was building equity in my house at $500 a month, with only $370 out of pocket – again, a great deal!
Combining the rental income, the reduced housing cost, and my relatively high salary at my day job, I was able to throw an extra $2,000 a month at my student loan debt. With rent coming in at the beginning of the month, I was able to make extra payments on my debt, make other investments, and save up money for emergencies more effectively.
Since buying my house, I completely eliminated my student loan with passive income, and also paid off my used 2014 Jetta.
Cash (flow) is king. Being able to bring in extra cash each and every month is so critical if you want to get ahead financially (and it’s amazing to do it passively!)
Other Comments on My House Hacking Experience
I was lucky to have some great tenants and fortunate none of the big appliances (furnace, water heater, etc.) went out on me.
I don’t think house hacking is for everyone, but it’s something I would recommend to everyone.
Being a landlord and renting out rooms to your friends or strangers can be a good experience, and I’d recommend having a roommate agreement and lease in place for legal and protection purposes. My roommates were solid gentleman, but if someone doesn’t hold up their end of the deal, you need to have some sort of document in place.
The Benefits of House Hacking for High-Income Professionals
I’ve talked about a number of ways that house hacking benefited me, but I want to talk more in general now about how house hacking can benefit a high-income professional like yourself.
There are 3 main benefits of house hacking for high-income professionals:
- Tax Benefits
- Increased Cash Flow
- Exposure to an Appreciating Asset
Tax Benefits of House Hacking
(Disclaimer: I’m not a tax professional, the following is my opinion and me sharing my experience. Everyone’s situation is different.)
When you have a high income, tax efficiency is critical. With house hacking, you will be increasing your income, but not necessarily increasing your debt burden.
Even though I was bringing in, on average, $1,450 a month, I was able to offset this by my house insurance, private mortgage insurance, interest, and depreciation. In addition to these expenses, I was able to claim additional expenses for repairs and improvements.
When you are being taxed at 25-30% or higher, it’s crucial to keep your adjusted income low. House hacking allows you to do this.
Increased Cash Flow through Passive Income
Unfortunately, many of the readers of Physician on FIRE are riddled in student debt. Even with a high income post-graduation, it’s still crucial to have a positive cash flow and always be looking to improve your financial situation.
By effectively eliminating, or at the least severely decreasing your house expense, you free up thousands of dollars a month to better your debt situation or put money towards your investments.
The best part? Your income is passive – you’ve built an income stream where there wasn’t one before.
Gaining Exposure to an Appreciating Asset
One of the most asked questions in personal finance is “Should I pay down debt or invest?
With house hacking, you add an appreciating asset to your balance sheet, while maintaining the ability to pay down your debt.
In the 3 years of owning my house, I’ve increased my net worth by nearly $100,000 by house hacking through the combination of appreciation (roughly $60,000) and mortgage pay down (roughly $30,000). Throw in the facts that I’ve continued to increase my salary in my day job, paid off my consumer debt, and am saving for the future, at 25, I’ve created a fantastic financial base. Now, I am set up to crush my goals of financial freedom and independence.
House hacking has allowed me to do all of these things at a young age. I know you can do this too.
How You Can House Hack
Anyone can house hack if they want to. I’d recommend house hacking because it’s both a boost to your income and it’s an investment in real estate. You improve your cash flow, and get invested in one of my favorite asset classes.
Why do I like real estate as an asset class? Real estate is:
- Accessible – Anyone can buy it
- Appreciable – Can increase in value over time
- Leverageable – You can buy on margin and borrow against equity
- Rentable – Cash flow baby!
- Improvable – Through sweat equity or contracting out
- Deductible/Depreciable/Deferrable – Amazing tax benefits as we went over above.
Looking for duplexes in your area, or homes with extra rooms you can rent out are fantastic ways to get started with house hacking.
In addition, I would also recommend reading different books and blogs on real estate. Continuously learning will help you become more familiar with the various real estate investing concepts.
Some additional resources on house hacking:
- A great article from Bigger Pockets: House Hacking 101: How to Get Paid for Free
- Set for Life, a Bigger Pockets book by Scott Trench, a master house hacker.
- Guy on FIRE, has amassed a nearly $500,000 net worth by age 30 through house hacking and real estate. He has some great content about his experience of buying 4 houses all through house hacking.
- House hacking doesn’t only need to be through renting out your rooms in the traditional sense. Financial Panther, who rents out one of his rooms on AirBnB. He is making around $1,000 each month, which helps him cover part of his mortgage.
- The House Hacking Guide — How to “Hack Your Housing, Live for Free, & Start Investing in Real Estate from Coach Carson.
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House hacking is a great way to build wealth at an early stage in your career after graduation.
At the end of the day, house hacking is all about reducing one of the main 3 big expenses: housing, transportation, and food. Focusing on reducing these will have the biggest impact on your financial situation.
The best time to plant a tree was 20 years ago; the second best time is today.
For high-income professionals, there is so much potential to get ahead financially. Don’t settle with just a high salary – keep pushing, look to create passive income streams, and enjoy the ride.
And finally, don’t forget to keep searching for that new great brew! 😉
PoF: Thank you for the educational post, Erik. I’m glad “house hacking” has worked out well for you. Readers, do you have any similar tales of success or failure with this type of housing arrangement?
Again, be sure to check out Erik’s blog and podcast at The Mastermind Within, where he shares tips and strategies to unlock your full potential in the areas of personal finance, self-improvement, and entrepreneurship.
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