However, there’s one unique way to lower your cost of living while building you business: live for free.
Now, I know that sounds farfetched. But I’ve done it, and you can too. Through the process of “house hacking,” you can get others to pay your rent or mortgage while you focus your time, and money, on growing your business.
What is house hacking?
House hacking is a term I invented to describe the process of getting other people to pay your rent or mortgage.
Although there are several ways to house hack, the most common way is to buy a duplex, triplex or fourplex and live in one unit while renting out the others.
My first experience in “house hacking” was during college when I rented a four-bedroom apartment for $800 a month in Olympia, Wash., and rented each bedroom out for $400 a month. I quickly discovered that I could make even more money by renting out my bedroom and sleeping on the couch. Now, I don’t recommend this, but for a poor college kid, I was getting paid to live for free.
Later, I purchased a duplex for my wife and I to live in. We stayed in the small one-bedroom home in the backyard and rented the larger house out. It was during this time that I seriously began building up my real estate investing business, thanks to my incredibly low cost of living. I was able to quit my job and go full time into flipping houses and buying rental properties. (This is the property I discussed in What Accidentally Buying Kurt Cobain’s First House Taught Me.)
But I can’t buy a house!
You’d likely be surprised how easy purchasing a house actually is, especially for house hackers.
House hackers are not seen as “investors,” thus the qualification standards and down payment requirements are much more attainable. A lender will look at a duplex, triplex or fourplex in the exact same light as a single-family house or condo. This means that you have the ability to use a low-down payment loan such as an FHA loan, requiring just a 3.5 percent down payment (or, if you are a member of the U.S. Military, $0 down for a VA loan.)
It’s also possible that you live in one of those insane markets where the cost of a duplex would be millions of dollars (hello San Francisco!). In this case, even a 3.5 percent down payment might run you tens of thousands of dollars and the property still won’t prove to be a good investment. In that case, you may consider the idea of renting a property and subletting the bedrooms if you can make the numbers pencil out.
I have one friend in San Francisco who is paying $50 per night to rent a single bedroom in a house with 12 other people. If you do the math on that, the house owner is bringing in $18,000 per month for his trouble. I don’t know what his home expenses are, but I doubt they are anything close to that.
The most important consideration for house hacking.
House hacking can be an incredible way to decrease your expenses while increasing the cash you can invest in your business. However, house hacking can also be dangerous if you don’t buy the right property.
This is why I insist on you taking the time needed to learn how to analyze a real estate deal. Make sure it’s actually going to produce the results you want. Because, simply put, most properties are not worth buying. Just because it is a duplex or a large house doesn’t mean it’s going to allow you to live there for free. You have to shop smart, run the numbers carefully and know what you are getting into.