What does it take to turn your housing costs into a source of income? How can you find the right property to make this transformation possible?
In Set for Life, Scott Trench reveals the strategy of house hacking—a real estate approach that helps you live rent-free while building wealth through property ownership. He outlines essential factors to consider, from affordability and location to cash flow analysis and appreciation potential.
Keep reading to learn how to house hack and transform your biggest monthly expense into a wealth-building asset.
How to House Hack
Trench writes that you can transform housing from an expense into a source of income through house hacking. He explains what this practice is and shares advice on how to house hack.
Trench advises that, instead of renting an apartment or buying a single family home to live in yourself, you buy a small multiunit property such as a duplex. You’d then live in one of the units and rent out the other units.
(Shortform note: In The Book on Rental Property Investing, Brandon Turner says that multiunit properties usually cost more upfront and require more maintenance work since more units mean more things that can break down. If you’re looking for a lower-maintenance option, Turner suggests complex-based properties such as condos or townhouses. These typically need less upkeep, but you’ll have to deal with homeowner association fees and restrictions that limit your control over the property.)
According to Trench, your tenants’ rent should cover most, if not all, of your mortgage payment and other housing costs, allowing you to essentially live for free. With time, your property appreciates in value and you gradually build equity as you pay down your mortgage. Trench argues that, in the long run, house hacking can boost your wealth far more substantially compared to traditional rental or homeownership.
(Shortform note: House hacking has become increasingly controversial on social media. Critics argue that house hacking takes advantage of renters who have few other options in an expensive housing market. Critics particularly object to landlords building equity (the portion of the home’s value they own) while tenants gain no ownership. However, some house hackers defend the practice, suggesting that it can benefit both parties if landlords focus on creating positive long-term relationships rather than maximizing short-term profits.)
4 Factors to Consider
Trench shares four key factors you should consider to secure a good house hack property.
1. Affordability: You should be able to afford the property with a standard mortgage while still having a few thousand dollars or more set aside for repairs, maintenance issues, and other problems that may arise.
(Shortform note: A mortgage is a loan that helps you buy a home by letting you pay for it over many years, typically 15 or 30. When you get a mortgage, you agree to make regular monthly payments that include both the money you borrowed (principal) and a fee for borrowing (interest). The bank uses your house as collateral, meaning they can take it if you stop paying. The most popular type is a fixed-rate mortgage, where your monthly payment stays the same for the entire loan period.)
2. Livability: The property should be a place you can happily call home. Consider work commutes, public transport or cycling routes, and the overall feel of the neighborhood. If your desired area is too expensive, Trench suggests exploring nearby neighborhoods that cater to your needs but are more affordable.
3. Cash flow: Trench recommends you analyze how money flows in a potential house hack. First, figure out how much money you’ll make with you living there, factoring in your living expenses and rental income from other units. Then, calculate how much money the property would make if it were entirely rented out, without you living there. A true house hack should make you more money than it costs in both scenarios. This ensures that the property remains financially viable even if your circumstances change and you need to move out.
4. Appreciation potential: Consider a property that needs some work, as you may be able to acquire it at a lower price and then boost its value through strategic upgrades. At the same time, Trench advises paying attention to neighborhood trends, such as new developments, improving infrastructure, or shifting demographics that could drive up property values over time—for instance, a new public transportation line or a growing job market.
| Consider Neighborhood Categories to Find Suitable Properties In The Book on Rental Property Investing, Turner explains how to evaluate areas based on their neighborhood classes, which can help you determine the livability, cash flow, and appreciation potential of potential properties. He breaks down neighborhoods into A, B, C, and D categories based on factors such as income levels, employment rates, and property conditions: A and B neighborhoods: These most desirable neighborhoods often have better infrastructure and attract higher-quality tenants, but they come with steeper purchase prices. If you find yourself priced out of these locations, Turner suggests you look at properties on the edges of these neighborhoods like Trench suggests. C and D neighborhoods: Lower-rated neighborhoods might seem attractive due to lower prices and appreciation potential, but Turner warns about the challenges of finding stable, reliable tenants if the area suffers from neglect or crime. This is relevant when considering Trench’s cash flow requirements, as unreliable tenants can quickly turn a promising investment into a financial burden. |
