From House Hacking to House Stacking

Wednesday, March 31, 2021 by Louie Bacaj

House stacking is when you use the process of house hacking, and you repeat it nearly every year to stack multiple rental homes and start building what the pros call a portfolio. You do this while never quitting your day job and making the entire process as passive as possible.

First, a crash course on House Hacking if you are not familiar: it is the process of buying a home to live in one part of it while renting out the rest. In most markets, a 2-3 family home works best because a primary residence 30-year mortgage is the fuel that makes house hacking so profitable. (I have written a whole article on house hacking the American Dream if you want to know more about House Hacking.)

House Stacking, from one multi-family to another.

In short House Hacking is excellent because it gives us the lowest possible financing of any home-buying method in the modern world. House Hacking lowers payments enough such that rental, or Airbnb, income covers all expenses and allows us to live for nearly free. It is eliminating our biggest expense; housing.

However, after living in a mortgaged home for at least a year, the hack is complete, we are free to move and buy another one. We are allowed to convert the hack we just lived into a full rental property, with all of the advantages that real estate investments provide, such as depreciation and tax deductions. All of this, of course, allows us to begin the next hack and trigger the chaining process I am calling House Stacking.

House stacking is for amateurs.

The pros recommend you ratchet up our real estate investing each iteration. Ratcheting up means if you bought a three-family property home this year to house hack, they suggest that you buy a six-family home next year. The problem with doing that is you are now getting away from house hacking, the thing that makes real estate investing so incredibly profitable for beginners and lazy people like me. More importantly, once you go pro, real estate is anything but passive.

If you want to become a real estate pro, it's hard to argue with the pros, and you should do what they say. But maybe, like me, you have more ambitious goals than just becoming a real estate pro.

The downside of house hacking is that it only works on properties that are 1-4 family homes and you can only do one at a time, and there is a minimum of one year that most banks require you to live in it, or as Stephen Elliot says "pretend to live there." Anything above four units is considered a building; your primary residence can't be a whole building, no bank will give you favorable financing on that. Banks know managing buildings, being a pro, is tough, and they need to manage their risk on the loan they are giving out.

In short, because of the limitations of house hacking, House Stacking requires some sacrifice. However, the amount of wealth it can build for the little amount of required work is staggering.

The first house hack I did I was able to take a 3.5% down payment, $17,500 to be exact, and five years later turn into over $300,000 in equity in a multi-family home. I lived for half off, because rent was paying more than half of my expenses, the entire 5 years that I lived there and the home appreciated from a 500k property to one that I could sell for 800k. I refinanced, took money out, and House Stacked the second one. This is the power of house stacking.

Lots of ways to make money

There are many other real estate strategies for beginners to build wealth, and usually, all of those work too. My problem with all of those methods is that if you are a knowledge worker, an engineer, or anyone who can get so much more leverage from your time, it makes no sense to be consumed by your real estate investments. You could be spending the time writing code or writing blogs.

The big advantage of house stacking is we can buy a property in good shape, live in it for a bit, not worry about renovations, and still get all of the upsides with very low risk.

House Stacking won't make you a billionaire, but it can make you a millionaire pretty quickly, especially if you persist and do it a few times.

Through House Stacking and within a few short years, you can have a strong enough base of nearly passive income, allowing you to take more considerable risks or do what you like. It is an excellent way to gain freedom from the nine to five much earlier than a 401k will ever get you. After all, everyone in real estate will agree that 401k's don't pay you rent every month.