The House Hacking Strategy No One Ever Talks About
The House Hacking Strategy No One Ever Talks About

The House Hacking Strategy No One Ever Talks About

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“A vision without a strategy remains an illusion.” Lee Bolman

If you check out any real estate/financial independence blog or podcast the topic of house hacking almost always comes up. House hacking is the strategy of buying a home and either renting out rooms or renting out a unit of a multifamily home to absorb a portion of the mortgage/cost associated with owning a home. The basic idea is that you don’t need to pay for the full mortgage and in some cases you can actually be paid to live in your home; which is pretty awesome. However, there is one method of house-hacking that I feel is never discussed and it involves the dreaded word: Selling…. Stay tuned for this blog on what strategy I’ve used house hacking for and how it’s leveraged my financial position. 

We Don’t Talk About Selling –  Selling is kinda like Bruno from Encanto…  when it comes to real estate investing; we really don’t talk about it. Afterall, it’s called “buy and hold” for a reason. Most real estate investors buy their investments with the intention of keeping their real estate for life. However, on my financial  journey I took a different path. My story goes like this: 

In 2016 I bought my first duplex using an FHA loan. Per FHA guidelines I needed to live in one of the units for at least 1 year. So I did just that. My mortgage when I closed was about $1600.00. I rented my downstairs unit at the time for $1,000.00/mo So my total housing expense was $600/mo. I was happy with this, as it allowed me to move out of my parents basement and nowhere in New Jersey was I going to be able to rent a place for $600. So to me this was a win. During my first year living in my upstairs unit I did light renovations, painted the cabinets, redid the floors, and redid the bathroom. I made the unit shine like a new penny. When my one year concluded my upstairs unit was looking pretty good. When I first bought the home that upstairs unit had previously rented for $950/mo,  I now felt confident I could rent it for about $1350/mo, which was great. During the first year my downstairs tenants mentioned they found another unit and wanted to move out; which was fine by me since their unit needed ALOT of work as well. Within the course of a few months I rented out my freshly renovated upstairs unit for $1350/mo and then moved into my downstairs unit for another year. Keep in mind my mortgage was still $1600.00 so now my living expense was around $250/mo with my upstairs unit renting for $1350/mo. During my second year I renovated the downstairs kitchen, redid all the floors (#luxuryvinylisthewaytogo), redid the bathroom, again I made the unit shine like a beacon in the night. After the second year my downstairs unit which previously rented for 1k/mo was now ready to be rented for $1725/mo. 

Years 3-5 –  At the end of year two of owning my home I found a beautiful girlfriend (who is now my wife) and we moved in together at an apartment her father owned. For 3 more years I kept my duplex. I continued to  rent my upstairs unit for $1350/mo and my downstairs unit for $1725/mo while my mortgage was $1600/mo. For three years I cash flowed about $1475/mo. After the mortgage was paid it came out to about $17,700/year of cashflow ( this is not including allocating for things such as vacancy, capex, repairs etc..). Yet as year 5 of me owning my duplex approached Covid-19 entered the world  and the market really started to take off. I was posed with the question of should I sell or not sell? The home had appreciated about 100k from what I bought it at, and I was still getting great cash flow; however the biggest factor in me listing my duplex for sale was the fact that I lived in the unit 2 of the 5 years before selling. 

Due to this factor I would list my home as a primary residence and not be taxed on the capital gains I made from the sale. In the end, I did list my duplex for sale, I sold it for 100k more than what I bought it for. In total I walked away with 119k check for the sale of the home, and three years worth of cash flow equivalent to $53,100.00 (17,700/yr x 3years), not to mention being able to write off a portion of all renovations I made on the home. The great part about this is that because I lived in the unit for 2 of the 5 years before I sold the home, I got to keep the profits and was not charged a capital gains tax on them. The cool part about this strategy is that you don’t need to do this with just a multifamily home. You can do this with a single family home by renting out rooms while renovating the home, as long as you live in the home for 2-5 years you can avoid capital gains tax when you go to sell and be taxed as a primary residence owner, not an investor where you’d be taxed more heavily.  

What I learned/Conclusion –  Traditionally when we talk about selling real estate investments we think the only way to avoid taxes is to do a 1031 exchange which allows us to scale. However, house hacking and living in the unit or home for 2-5 years before selling also allows you to take a tax advantage before selling. What I feel this strategy did for me was it allowed me the potential to scale faster. It’s true that due to Covid and supply and demand the market I was invested in appreciated way faster than normal. However… At the end of the day I walked away with 119k of tax free money which could be used for a 4plex, or small apartment building. In closing, it’s important to consult with a tax professional and also  realize that real estate investing is a journey and to “sell” is not a dirty word. While us real estate investors get wrapped up alot in cash flow (rightfully so) we also need to take into account the potential of our next projects by selling off the assets in our portfolio which will get us to our goals. What do you think? What is your real estate investing plan? What are your action steps to reach your goals? We want to hear all about them in the comments below!

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