House Hacking the American Dream
House hacking is the act of buying a home and using it to build wealth while leveraging the most American thing since baseball, the 30-year fixed mortgage.
The process of house hacking involves living on one part of a house you buy while renting the rest so that your monthly costs are at zero or you turn a profit.
My journey into house hacking happened accidentally; it happened when I bought my first home in 2015 with 3.5% down, $17,500 to be exact. I remember writing that check, worried I might lose all that money; it was a ton of money for me back then. Five years later and we have over $300,000 in equity in that home. That is a 17x return on the money, 1700% return, in 5 years. My story is a common one among house hackers. In fact, as we will learn through the references below, others are even more aggressive. Once I knew what house hacking was, I house hacked my second home too.
House hacking also led me down the path of owning a business, which is what your home becomes after you rent it. You learn all about taxes, what you can write off, equity, putting capital to work for you, and many other things that lead to wealth. You can't avoid learning about these things if you want to become wealthy.
Many people assume they can invest in the stock market or bitcoin and become insanely rich, but even Warren Buffet owns actual businesses and not just paper.
House hacking is entrepreneurship on rails. It is just like when they put up the guard rails at the bowling alley to let you win.
The American Dream is real, and it involves house hacking.
There is a misconception that America, the land of innovation, is just good at technology innovation; I am here to tell you that America is just as good at financial innovation. The lynchpin of the ability to house hack is the American mortgage. To understand why the plain old 30-year mortgage is so innovative, you've got to take an outsider's perspective, Marc Rubeinstein writes:
"I don't understand the most American of products: the 30-year fixed-rate fully prepayable mortgage.
On American streets, the product is everywhere. It makes up around 80% of an $11.3 trillion mortgage market. Yet, with the exception of Denmark, it doesn't exist anywhere else in the world. Even baseball exists in more countries.
... It's a simple loan that offers stable repayments, kept low because they are spread out over such a long period of time. Its kicker is a free option to prepay, which shields the borrower from interest rate risk. If rates go up, borrowers can commend themselves on a great bargain; if they go down, stay calm—the loan can be refinanced without penalty. Win/win.
All the characteristics that make it terrific for the consumer make it terrible for a traditional lender. Thirty years is a long time to have something sitting on your balance sheet, watching the credit risk compound. Especially something that's loaded with as much interest rate risk as this."
That piece of financial innovation, which the US Government backs or it would be difficult for banks to make it work, allows us to make small monthly payments on a home loan spread over 30 years. The low enough payments allow us to earn more from rent than the cost of our monthly mortgage, taxes, and insurance combined. This, in turn, makes the house hacking technique possible.
That innovation, the 30-year mortgage, is further enhanced because a primary residence, your main home, the mortgage is far cheaper than one for investment reasons. A primary residence mortgage is close to 1% cheaper, to be exact. That may not sound like a lot, but if you are getting a 3% 30-year mortgage (current rates) vs. a 4% 30-year mortgage, that is a 25% discount on the loan from 4% down to 3%.
We can see that with a 3% mortgage we can save over 100 grand over the life of the loan.
The lower rates, of course, also lowers payments nu 200+ dollars a month, allowing us to live for free or turn a profit, save up our biggest expense which is our housing for more real estate.
The house hacking technique enables anyone to buy their main home, instantly have a business, earn money, and start building wealth. House Hacking makes entrepreneurs out of all of us.
The best house hacker
One of the more prominent and now incredibly wealthy, house hackers Graham Stepehen, started out by house hacking. You may have seen his YouTube videos; he has made a few detailing the process of house hacking. He has been on many podcasts; one of those was with BiggerPockets, which can be found here
In the podcast, Steven says that he bought a Duplex in Culver City, then he realized he could get a cheaper loan, and he needed a place to live anyway, so he decided to live in that home and rent to save money for even more real estate.
In his YouTube channel, Graham details how banks treat these loans and how we can daisy chain the income from the home we are house hacking in to qualify for even more loans and buy even more real estate.
The best articles on house hacking
There is an entire community of house hackers on BiggerPockets that I found out about much later after being deep into the process myself. These people taught me things I hadn't thought of that I will go over with you.
6 Different Ways to Hack Your Housing (Find One That Works for You!), by Craig Curlop, details the many different ways one could get into this. I got into it accidentally the first time, but every time after that was and will be intentional. There are many ways to do it, including Airbnb, so do check the article out if you aren't sure how you might do it.
House Hacking: A Beginners Guide to Hack Your Housing and Live for Free is also an awesome piece by perhaps the OG of the BiggerPockets community, Brandon Turner. The piece details how to get started and how to manage your property after you are in it. It is a great write-up, especially for beginners.
If you are still not convinced, another great resource on house hacking can be found on MillenialMoney. It is titled House Hacking, and I recommend a glance if you are still hungry for more information.
The books on house hacking
After finding out that I am a house hacker, I became intensely interested in the subject; I bought two of the best books on house hacking on my kindle and combed through them. I will give you a quick review so you can decide if you need them.
One of those books is called Set for Life by Scott Trench. It details how the average young person can become frugal enough to save some money and get into house hacking. The book covers house hacking as a main strategy to get financial independence, and it is not that different from what Graham Steven teaches young people on his YouTube videos. The book is also not just about house hacking but covers much more about how we can set up our lives to be free of the dreaded 9-to-5.
The other book aptly titled The House Hacking Strategy, by Craig Curelop, the same guy who wrote the article I mentioned above, is purely about house hacking. The book goes into delicious details and has case studies from across America of people using this amazingly innovative financial instrument, the 30-year mortgage, to build insane wealth. Some of the strategies people use are outlandish; some involve trailers in the backyard and renting the whole home. While it is not necessarily for my family and me, I applaud those individuals who build so much wealth within a few years they can become full-time writers or hang out on a beach somewhere from the strategy.
I may have accidentally gotten into house hacking, but I can confidently tell you that I am intentionally in love with it.
As I look for my third home, now manage six-plus rentals, I can tell you that house hacking is a gateway to becoming an entrepreneur, and it is so much more than just a fantastic way to build massive wealth. House hacking teaches us the fundamentals of a capitalist society in ways that holding paper assets like stocks or bitcoin never will; it teaches all about building equity, tax breaks, debt, leverage, wealth, and putting capital to work for you and on and on.
It also begs the question, why is this called house hacking at all? After all, are we hacking the system if this is how the capitalist game is intended to be played in the first place?