Summary: This deal of the week documents our house hacking experience in Seattle. In it, we cover the definition of house hacking and delve into financial details of our house hacking experience in 2016. Though it does require some sacrifice, house hacking can save you on rent, help you build equity and leave you with a cashflowing rental that you keep for the long term.
Recently we’ve noticed that we’ve been referring to house hacking more and more in our posts. But what exactly is house hacking, and is it something you should ever consider doing?
In this article, I cover the basics of house hacking and share our house hacking experience so you can see if it might be a step you’re willing to make to secure your financial future…. faster.
What is House Hacking?
House hacking is when you buy a property, live in it and rent part of it out at the same time. The goal of house hacking is to live in your property for as close to rent free as possible. You can house hack in a single family home and have roommates or you can house hack in a multifamily property and occupy one of several units.
The Property
Address: 14352 Roslyn Place North, Seattle
Purchase price: $429,000 on 3/30/2016
Sale price: $870,000 on 6/18/2018
I found this property on Redfin several hours after it became available. We toured it that morning and put in a full-price, all-cash, no inspection offer with a personal letter attached (including a family picture). This was a multiple offer situation, but the owners took our offer perhaps in part because we suggested we’d be interested in buying more properties from them in the future.
At the time of purchase, the property was a vacant 4 bedroom/2 bathroom duplex of 2,400 sq feet. When it was rented, the property was generating about $2700 a month (note, not close to the 1% rule!). The owners were covering electric, water, sewer and garbage since the units were not separately metered.
The property was located off 145th street, on the Seattle side of the street. Across the very busy street, properties are located in Shoreline, another city.
We bought this property as a house hack. Because it was a personal residence, we obtained a lower interest rate. We also had the opportunity to refinance the deal and pull out a lot of our money at the end of the rehab.
Unexpected Challenges
After we had purchased the property, we discovered that squatters had been living in it.
The first time we visited after sale, we found one of the bedrooms had a closet full of stolen outdoor furniture cushions with marker “love” poems on the walls and candles and flowers strewn around. We also found the dryer was full of underwear.
One of our first mistakes was not removing the underwear and clothes and putting them outside. Since we had new windows placed fairly early on in the project, the squatters actually cut through a screen to gain access through a window to get their clothes. We caught the squatters exiting our house one time as well. It was then that our neighbor told us that a lady who was using methamphetamine had been living there with several of her boyfriends for a while.
Fun fact: we once saw her with a shopping cart hauling copper pipes down 145th street!
The Outcome of House Hacking
We started rehabbing the property in May. The upstairs unit was mostly finished by the time we moved in in July and the downstairs unit wasn’t finished until the fall.
This was a complete gut project. We replaced the siding, windows, put in new flooring, and a new roof. In the top unit, we refinished the old wood floors. Next up, we took out a staircase that connected the two units. Then, we added an extra bathroom in the upstairs unit where the staircase used to be. Another important thing was adding an extra bedroom downstairs where there used to be a laundry room. We also re-did the pavement and driveway, and added landscaping and fencing. Finally, we added storage units to the yard so we could rent them out as an additional cost.
House Hacking Deal Analysis
Purchase price: $429,000
Rehab: $200,000
Sale price: $870,000 cash, no inspection
Lived in the property July-December rent free
Final rents at time of sale:
Upstairs unit 1: $2,145 + additional pet rent (we charge $25 per pet per month)
Downstairs unit 2: $1,900 + additional pet rent
Storage unit rent: $75
Expenses: none—all utilities were covered in a $300 per charge per month for each unit, renters were responsible for their own landscaping
Total income: $4,120 per month, not including the utility paybacks and pet rents. These totaled over $100 a month in additional income.
Total profit on sale: approximately $170,000 after all expenses
*Note: this profit does not take into account the tax benefits accrued during our time of ownership (depreciation and de minimus safe harbor) or the amount of cashflow per year ($24,000). When you take those into account, the total amount made from this project is approximately $275,000. Plus, then we lived there rent free.
At the time of sale, this property was 1031 exchanged into two other properties, one in OKC and one in Spokane.
So How Does This Apply to Me?
House hacking is a great way to save money on rent and build equity. Plus, if you can find a value-add opportunity, like this one, you can grow your wealth by leaps and bounds very quickly.
Sure, house hacking involves sacrifice.
As you can see from this example, things are not always sunshine and roses. In fact, in this case, my parents told us that this was the worst place they had ever lived (they stayed with us a couple months). Keep in mind that they’ve lived in multiple developing countries.
But, in the end, we walked away knowing we had turned that little duplex into cashflow of >$40,000 per year through two other properties. Plus we gained the experience and knowledge of how to supervise a major rehab project.
How much is your financial freedom worth to you?
