A Guide to House Hacking in the Denver Market
Earlier this year, 35 year old Australian millionaire, Tim Gurner, made waves when he suggested that individuals are not buying homes because they spend too much money on avocado toast and going out to eat. Naturally, the twitterverse exploded with rage.
The main challenge facing new homebuyers is not, in our humble opinion, attaining home ownership (though there are, admittedly, barriers in place). It is building wealth and financial independence in a changing economic landscape.
Let’s step back for a moment and talk about the microeconomic significance of home ownership: what it means on a personal level. It’s not about owning your own space so that you can paint the walls any color you want. It’s not about status symbols and keeping up with the Johnsons. It is a path to freedom, independence, and flexibility. Through owning a home, you reduce your monthly rental overhead, your income taxes, and in the current Denver market, most home owners are banking tens of thousands of dollars of tax-free equity each year. Many would-be homeowners balk (understandably) at a 30 year mortgage commitment. When we work with buyers, our objective is to get them into a home that they can easily sell for a nice profit if and when they want to liquidate. (Few people actually own their homes for 30+ years.) Home ownership allows you to leverage your opportunities. You can use your home as a long-term or short-term cash machine, and we’re not talking about taking out more debt, we are talking about looking at a home as an investment that will allow you to cash in for education, building a career or business that you are passionate about, travel, or all of the above.
Today’s homebuyer can’t count on working for the same company their whole career and retiring with a pension. Many people are now working as independent contractors with additional side hustles. Getting into a traditional 30 year mortgage commitment can be daunting when the traditional workplace is in the midst of revolution. But… what if the home itself were a side hustle? We have seen savvy buyers find ways around the barriers to purchasing their first home when they have a business plan in mind for how they will use their house as a source of income.
New homebuyers are becoming especially brilliant when it comes to reinventing how home ownership can build wealth. We think this is a result of their experience maneuvering the current workplace revolution.
A few quick myths to debunk that are standing in the way of homeownership:
- You don’t need 20% down to purchase a home.
- Despite what some believe, as an independent contractor you *are* able to get a loan, but you will typically need 2 years’ worth of income tax filing as an independent contractor to get approved because you are considered “self-employed.”
- A 30 year mortgage does not imply that you are committing to owning the house for 30 years. (The average American homeowner sells their home after 7-15 years.)
So, looking at the challenge of building wealth, let’s revisit that avocado toast claim. Anyone
looking to save money while building wealth would do better to look at ways to cut spending from their most significant expenses, not reducing their avocado toast consumption. Here’s a look at the average consumer’s spending habits:
By far the biggest slice is housing, which occupies on average 33% of each individual’s spending. What if there was a way to dramatically reduce that slice of pie? What if we told you the key to reducing your housing expenses is to buy a home?
Sure, you are skeptical. Houses in Denver are more expensive than ever, requiring larger down payments, primary mortgage insurance (PMI), and crazy bidding wars. If you are only looking at the house a place to live, the barriers to homeownership look huge. However, there is now a lot of investment potential in buying a primary residence, via house hacking.
What is house hacking?
House hacking is the art of buying a home or multi-family residence, living in one of the rooms or units, and renting out the remainder of habitable space, allowing others to pay off your monthly mortgage payments. Some of our past clients who have unlocked this secret are living rent/mortgage free or have major portions of those costs subsidized for them. In Denver, one of the biggest revenue generators for house hacking is house/room sharing app, AirBnB, where out-of-town visitors pay to crash in a local’s space. Here are some examples of successful house hackers:
Desiree bought her first place, a garden-level studio condo in Congress Park for under $100k. She later decided that she would rather have more space. Desiree rented out the condo as a furnished apartment (for over $1K a month) and then bought a half-plex in Virginia Village that has a full mother-in-law unit in the basement. She lives on the main floor and rents out the basement on AirBNB. The income from both rental units provides Desiree with enough monthly income that she was able to quit her job while doing flexible contracting gigs on the side, on her schedule and her terms. She travels frequently, goes hiking and makes plenty of time for her friends. Meanwhile, she owns two properties that generate significantly more than the actual mortgage payments. She’s even able to contribute 10% of her income to charity! (To be fair, she does not go out for avocado toast every day, she usually makes her own at home.)
Ben started out looking for an inexpensive home with extra room to rent. After looking at few places and growing frustrated with insane bidding wars over properties priced under $300K, he decided to take a different approach—he increased his budget. The purpose of the increased budget was to afford a full duplex. Duplexes are often marketed differently from single family detached homes—most often to investors since most new home buyers only think about buying the unit they will live in. Given there is a smaller pool of buyers for these properties, the competition is far less intense than the single family home market. In addition, there are loan programs that allow first-time home buyers to buy multi-unit properties as a primary residence. Ben was able to get an amazing deal on his loan to buy a duplex, getting a conventional loan with just 5% down. His monthly payment is around $2,200 a month and he is able to live in one unit, while renting the other unit out, it is just one-block from a new light rail station, on AirBnB for an average monthly income of $2,000/mo. In other words, he is able to subsidize his mortgage to the point where his monthly mortgage costs him about $200/mo.
Some Things to Consider…
Rules for renting out a home on AirBnB vary from city to city. Denver and Aurora require the property to be owner occupied, which is why many of our clients look for homes with a mother-in-law unit, a carriage home, or a full duplex. AirBnB allows for increased rental income potential, but keep in mind that there is a lot more administrative work in managing a space rented out by the day, higher insurance costs, and general hassle of dealing with new tenants regularly.
As mentioned earlier, you don’t have to have a 20% down payment to purchase a home. Many of our clients can buy with 5%, some as low as 3%. Lower down payment loans do require primary mortgage insurance (PMI), but with Denver home values increasing by 10% each year, you may be able to refinance out of PMI in a few years, which will significantly increase your monthly income on your house hacks.
Lastly, house hackers generally keep an open mind about where they are willing to live and the type of property they are willing to live in. Most look toward emerging opportunities in “up and coming” neighborhoods, while others strive to find a good deal by finding the ugliest house on the block in a good location. Full duplexes have often been renter-occupied for a long time, which means they won’t come fully fixed up and updated as you’d find with single family homes. In addition, “good deals” often come with a bit of work to be done. This doesn’t mean that living in a house hack and finding your dream home aren’t mutually exclusive. It just means that you might want to keep an open mind about that dream home and be ready to visit your local hardware store.