492: House Hacking Over 50

SHOW NOTES FOR EPISODE 492: HOUSE HACKING OVER 50

House hacking can be a great way to get started in real estate investing and to grow a rental property portfolio.  But for people over 50, it might be a big challenge or a big benefit, depending on how you view it.  In today’s episode, Bill explores the various types of house hacking and weighs in on the pros and cons for investors over 50 years of age.

Tip of the Week:

Top 10 Due Diligence Mistakes

1. Not checking the last 3 months bank deposits
2. Not looking for an outliers on P/L statements
3. Not doing a risk reduction rent audit
4. Not knowing the school ratings for the area
5. Not knowing the crime stats for the area
6. Not doing a lease audit
7. Not driving/shopping camps yourself
8. Not comparing to market rent comps
9. Not analyzing numbers properly – T3, trailing 12, rent roll
10. Analyzing off of the pro-forma

House Hacking Over 50

I’m sure you’ve heard the term “House Hacking.”  We talk a lot about it on the Old Dawg’s Podcast.  It refers to the situation where people buy a house or multifamily property, live in part of it and rent out a part or other parts of it so that your tenants pay your mortgage and help you generate cash flow.  But it’s a strategy most often used by young single or young couples just starting out.

It’s often twenty-somethings – who generally start out living with roommates, and then they become “real adults” by getting their own apartment or have actually saved enough to buy their first home.  When they want to start investing, house hacking becomes a next logical step to begin to build their rental.

If they buy a single family home, people commonly live in half of the house and rent out the other half.  Or, they live in one room and rent out the others.  If they buy a small multifamily property, like a duplex/triplex or fourplex, they will live in one unit and rent out the other(s).  The rent they receive, if they bought right, should exceed their monthly mortgage , including taxes and insurance, and can also generate cash flow income on top of that!  So says conventional wisdom.

But did you ever think it could be for older people, people who are approaching retirement or already retired?  Generally, it doesn’t seem as common.  Why?

• They generally already have their own home and may even own it outright – why buy another to share with others
• They also are used to having their own home/their own space to themselves and the thought of sharing that space is not appealing

However, there are some older persons of whom house hacking may have an appeal.  For example,

• Empty nesters, who kids have all grown-up and left and now they are left with a large house to keep-up and maintain. These are people who want to downsize but would like to invest the proceeds from their primary home to leverage the funds into cash flow generating real estate portfolio.
• Single parents whose kids are gone and they want to generate income but don’t really like the idea of living alone and see sharing a house or small multifamily property as a means of creating community
• Adventuresome older persons who really want to spend time traveling, living in different countries for extended periods of time or visiting their kids and grandkids and don’t want to leave their home empty for long periods of time
• Or, it could just be older persons who want to create a real estate portfolio to generate cash flow and build a legacy for their children but:
  • They don’t have a lot of money to start investing. Or
  • They don’t want to risk their nest egg but want to just try investing in rental properties, or it could be
  • People whose prime income is Social Security or a small pension and who don’t have a lot of cash to acquire rental properties, so they can buy one for only 3% down as their primary residence.

Finding ways to live, invest and save (and make) money – isn’t just for the young!   It can help propel people in their 50’s, 60’s, and beyond to reach their financial goals as well.

Benefits Beyond Financial

• House hacking can also alleviate a big problem many people in their second half-century face: loneliness.
• Research shows that up to 47% of American adults, young and old, suffer from loneliness.  A study from the UK found people over 50 to be particularly at risk.
• This makes sense. As we age, we lose partners to divorce or death, our children leave home, and when we retire we find ourselves free not only of the work, but of the social connections the workplace fosters.
• And now, in the age of corona, many of us are isolated even more.
• House hacking can generate social connections as well as help further your financial goals.

House Hacking Takes More Than One Form

• Let’s look at different forms of house hacking, some that might have to wait until the Covid-19 crisis has passed, and some that you can get going on right away.

Renting a separate room in your home or on your property

• If you have a finished basement with a separate entrance, a full bath, and a kitchen or kitchenette, you’re in business. Or maybe you own a large home and with some simple modifications you can create a completely separate space for someone to rent. Or even an RV parked on your property, or an outbuilding you could convert to a tiny house.
• Clean the place up, throw on a new coat of paint, make sure everything’s in good working order, then take a bunch of pictures and post a listing on Craigslist.

Big house with small house attached for house hacking

• If you’re worried about renting to a stranger, put the word out through all your social networks and ask your friends if they know anyone who might be looking. Your friend’s nephew’s girlfriend might just be looking for a place to live in your area.
• Look at other similar listings in your neighborhood to figure out how much to charge.

Long Term vs. Short Term Rental

• You’ll also want to consider the pros and cons of long-term vs. short-term rentals.  With a long-term tenant, you only have to list the apartment once a year, or less often if your tenant renews.
• With short-term rentals through Airbnb, you’ll probably make more money than renting out the room or space to longer-term tenants.
• You’ll also have the flexibility of keeping the apartment tenant-free over the holidays or at other times when family members might visit.
• At the same time, though, you’ll have to furnish the room/apartment and provide bed linens, towels, and other amenities. You’ll need to factor in cleaners for doing the between guest cleaning, and managing turnovers.

Renting out a room in your house

• This one is much, much harder to implement in the age of corona.
• Shared living can range from the tenant you never see, who hides in their bedroom and rarely uses the kitchen, to your friend who shares meals with you and joins you for a game or popcorn and movie in the living room.
• You can rent out your son’s bedroom or a guest room. Extra points if the room you will rent out has its own bathroom, but you can make it work with one if you don’t mind sharing.
• When you do welcome a renter into your home, be sure to make your expectations clear, in writing, at the beginning.

Renting out your whole house and living somewhere else

• Do you dream of slow travel, experiencing other places and cultures by living there for a while rather than visiting for just a week or two?
• If so, consider renting out your house and borrowing on the equity to buy a small multifamily (duplex/triplex/fourplex) where you live in one unit and when you’re gone, your tenants pay your mortgage and generate extra cash flow for you as well.
• John, a retiree who’s living in style overseas, explains how renting out his house at home made this possible.
  • “I had a good-paying job in Hawaii,” he says, “but if I retired early (before age 62) we could not afford to keep living in our home there.”
  • Instead, he and his wife rented it out.
  • “The rent covers all expenses. Now we live overseas in a 3-bedroom, 2-bath ‘pool villa’ which means a garden home with private pool in a gated community near the beach.”
  • The post-Covid discounted price of $1400/month that John pays includes all utilities, weekly maid service, pool and landscaping maintenance. “Far cheaper than our cost of living in Hawaii.”
  • John and his wife plan on living overseas for the foreseeable future.

Sell your house and use those funds to buy a rental property to house hack

If you sell your house, and depending on how much you sell it for, you can buy a small multifamily property or an apartment building and live in one of the units.  Martin Stone, a repeat guest on the Old Dawg’s REI Network and the author of the Unofficial Guide to Real Estate Investing shared how he sold his primary resident to buy a nice sized apartment building where he and his wife have a spacious 3 bedroom apartment (177: The Unofficial Guide to Real Estate Investing with Martin Stone & 283: Real Estate Investing for Everyone: A Guide to Creating Financial Freedom).  Of course, he has a property manager who manages and takes care of the apartment so he lives there care-free and none of the tenants know he owns the building (so he doesn’t get knocks on his door in the middle of the night for clogged toilets).  Marty and his wife love to travel so they’re seldom home.  But, when they are, they have plenty of room, no lawns to cut, pools to clean, tenants to deal with so they can just enjoy spending time with their grandkids while the apartment and his other rental properties supply the funds to do whatever they want, whenever they want.  Plus they have a significant legacy to hand down to their children.

4/5/20 Strategy

One strategy many a house hacker uses to quickly build their rental property portfolio is what I call the “4/5/20 Strategy.”  In this strategy, you buy a new fourplex every year.  You meet the personal residence requirement by staying at each fourplex one-year and then you move to another at the beginning of the next year.  While living there, you upgrade as you can to be able to boost rents and therefore, boost equity.  At the end of 5 years, you have 20 cash flowing units and, if you did the improvements and increased rent, a big boost in equity.  Then, you can either stop and continue receiving the monthly cash flow or leverage your equity by selling or borrowing against the properties to buy apartments.  Anna Kelly shared in one of our podcast episodes 361: How a Girl from the Projects Became a Millionaire Real Estate Mom how she used a strategy like this to build a multimillion dollar apartment portfolio.

Are you a good candidate for house hacking?

• There are a few things to consider before you think about a house-hacking situation of your own.
• For one thing, you must live in the property. If you obtain a mortgage on a primary residence and you don’t move in after closing, it could constitute mortgage fraud.  You don’t necessarily have to stay forever, but most lenders have certain time requirements before you can move out of a property financed as your primary residence, so be sure you know the rules.  For an FHA loan, you need to stay at least one year.
• Also, you need to be willing to share your space. If you want a property that’s entirely your own, house hacking is probably not the way to go.
• There are also some big potential downsides you must be willing to deal with. For example, cash flow in investment properties can be unpredictable at times. Vacancies and unexpected maintenance expenses can quickly erase your income if you’re not careful.
• Furthermore, it can be a headache to live right next to your tenants (unless you do what Marty did).  If you own a rental property you don’t live in, tenants might call you if something breaks. If you live next door, they might just knock on your door and expect you to handle the situation right away.
• Finally, from a financial/mortgage perspective, it’s important to mention that you’ll need to qualify to buy the entire property on your own – unless it’s 5 or more units.

House hacking can work, even at your age, even in a pandemic

• There are many ways to house hack.
• We view our homes as our sanctuaries, but we can also look at them in a new way: as income producers – at least temporarily, while getting out of debt or saving those last few dollars in preparation for retirement.
• Look around your house.
• How could you configure it to work for a tenant? Would it be fun to have another person around? Could you rent out the whole thing out, house hack somewhere else? Can you rent storage space? Could you just sell it and use the proceeds to buy a cash flowing money machine where you can live when you’re not traveling the world, visiting family and playing with the grandkids.
• Some form of house hacking can help your finances, at any age, even during a pandemic.

In Conclusion

House hacking can be a great way to buy your first investment property without having to come up with a ton of cash. However, like most other investment decisions, it isn’t right for everyone. It’s important to weigh the pros and cons before deciding if a house hack could be a smart move for you.

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