How We House Hacked Our Way To FI

It’s fine to celebrate success but it’s more important to heed the lessons of failure. - Bill Gates

Long before we discovered this idea called Financial Independence, we knew that we had to do something above and beyond what we saw most people doing if we were going to get ahead. But up until our early 30’s, the only recipe for success that we knew about was:

Go to school and work hard
Get a good job and work hard some more
Buy a house and maybe some nice stuff
Keep working hard (notice the Gen X-er theme?)
Possibly retire at 65 (but don’t stop working hard!)

From our childhoods, we also were acutely aware of the stress around juggling cash to meet the seemingly never-ending parade of bills and expenses. Wanting to avoid that stressful scenario, our solution was real estate. We weren’t exactly sure how, but we figured that owning investment properties on top of our jobs was a solid step away from reliving that financial stress. And so began our foray into real estate investing.

It’s interesting to reflect on why one is drawn to someone's approach vs. another. For us, it is kind of strange that we ended up doing real estate given that Mr. MoneyPenny and I both had fathers who worked for themselves.

My dad started his own business when I was growing up, so I had a front-row seat to entrepreneurship. Mr. MoneyPenny’s dad was quite enterprising as well, taking extra jobs on evenings and weekends to help make ends meet. We could have tried our hand at investing in the market, or even in the infamous index funds. I didn’t know much about it, but Mr. MoneyPenny had just finished an MBA and so presumably he knew something about investing.

All that being said, the thing that was most appealing about real estate was the control. It was an investment that we could see and more importantly, have a direct influence in adding value. We knew that with some sweat equity and money we could improve the value of the property and cash flow. So, with little more knowledge than that, we started buying properties, renting them out, and ta-da! We’re real estate investors!

Dialing it up a Notch With House Hacking

What we didn’t realize was that the power of real estate investing can be super-charged if combined with something called House Hacking. This means reducing your housing expenses by living in one of your investment properties (check out Jonathan and Brad’s conversation with Coach Carson in episode 16).

There are other great benefits of house hacking:

You can take on any repairs or improvements that can directly improve your quality of life.
You can carefully vet and select tenants to live in the units around yours.
And you have a live-in property manager (you!) who can keep an eye on things

Let me show you how we have dabbled in house hacking in a couple of our properties. You can check out the little diagram to see a timeline of our real estate adventures. Let’s get into some details.

Property 1: Affordable Real Estate but Far Away

We live in a large and expensive metropolitan city. It’s fantastic---lots to do, very culturally diverse, and great food too! But buying a house there isn't easy. Can you believe the average price of a detached home is now around $1M? Craziness. Even back when we started on this journey, prices were out of reach. So we looked to where we went to university in a nearby town where prices were a little more within our means.

At the time, I was a graduate student working at a student residence where I got free room and board. Mr. MoneyPenny was only a few years into his first ‘real’ job and living with a roommate in a modest rental apartment. So, we pooled our pennies together and bought our first place. It was a two-apartment house that was probably close to 100 years old and in a great location. It needed some work and so began weekends renovating kitchens, painting, lots of landscaping, etc.

We have since sold this property but learned lots of lessons from our first step into the real estate world including:

Think outside the box (and outside your hometown) if it’s too expensive to buy.
Don’t underestimate the amount of time and work it takes to manage a property that’s not close to home (hint: it’s a lot!).
Having good tenants is everything. Make sure you screen applicants and stay connected to them (in a respectable way!). What comes across on paper is one thing--trust your gut when you meet prospective tenants.
Have an exit strategy to allow you to take advantage of other opportunities. This property could be a stepping-stone to other investments as it was for us. Be prepared to sell if needed.

Property 2: Triplex in the City

By scraping, begging, and doing financial gymnastics with our mortgage broker, we managed to purchase a triplex (three 2-bedroom apartments) in our home city. It was in pretty rough shape, but thankfully, Mr. MoneyPenny’s dad is very handy.

We spent many weekends renovating to get it up to snuff. Eventually, we moved into the top apartment and, ta-da! we were house hacking. We lived there for several years---even after the birth of our first child. More lessons from this property include:

Don’t be thrown off by an ugly house. As they say, location is everything.
Do your due diligence. When we bought this property it was a neighborhood ‘in transition’. We looked up the local police reports to see exactly how bad things were. We checked out school ratings and any news or reports that we could find. Our focus was on an upward trend. As long as things weren’t too bad at the moment the potential or upside made some of this rough-around-the-edges neighborhood attractive to us. Positive features of this property included being located near an under-utilized part of the subway line and being close to one of the largest green spaces in the city.
Having good tenants is everything. Even more important if you live there. Without taking this to an R-rated post, unless you have super-duper soundproofing you will get to know your tenants quite well!
Do not underestimate capital costs. We did all kinds of fancy financial models and spreadsheets as we were thinking of purchasing this place. What we didn’t have a good handle on was the cost of upfront and ongoing renovations. For example, when we moved in, we had to replace three water tanks, paint the whole place, sand down/refinish all the floors, replace doors, upgrade some electrical, etc. You can see what I’m saying--an initial walk-through with a contractor or someone knowledgeable on construction costs is essential.

Property 3: Another Triplex in the City

On a nice summer evening, we stepped out for a walk and noticed a "For Sale" sign on an identical triplex five doors down. We looked at each other and thought, “should we go for it?!” The commuting back and forth to Property 1 was starting to tire us out, so we decided to sell it. With the proceeds from this property and more financial gymnastics with our mortgage broker, we were now the proud owners of two triplexes on the same street.

Be ready to take action. Practice ‘going for it’ so that when an opportunity presents itself, you have to have the courage to take the leap.
Living close to your rentals is amazing! What a difference being able to walk down the street to do showings for prospective tenants or meeting with trades/service people.
Everything doesn’t need to be perfect right away. The backyard of this property was a total eyesore. Broken down shed, random concrete blocks, scrap wood, and cracked patio stones. Ugh. We wanted to clean this all up right away but had to prioritize the living space in the apartments. It took some deep breathing on my part every time I went into the backyard until we were able to address it properly a few years later.

Property 4: Cabin in the Woods

As the real estate market started going wild in our hometown, we wondered if we should look outside to another city as we did for Property 1. With two other partners, we located a beautiful home on a lake three hours from our city.

I had always dreamed of having a recreation property where we could spend summers swimming in the lake and having fun with our kids outside the city. This property had been on the market for a while and was partly unfinished. We seized this opportunity and started renovating.

We added two bedrooms, a TV room, and a full bathroom. This brought the home up to a 5-bedroom place. It had beautiful views and over 250 feet of waterfront. Wow, we had finally arrived---we had a recreation property too! We thought that by renting it out part of the time, we could use rental income to offset the expenses. Not quite house hacking in the traditional sense, but certainly leveraging that concept. Talk about lessons learned! Here are a few:

Short term rentals = hospitality/service business. There are very different expectations when folks are renting out a place for their holiday. Particularly if it’s considered to be a higher end place. We had to invest quite a bit to fully furnish the place including linens and a fully stocked kitchen with gadgets, pots & pans, etc. We had to ensure that internet was available and reliable, and that there were sufficient toys and equipment for folks to use. This is not trivial--we spent probably over $20K on appliances, mattresses, furniture, and everything else one would need in a large home.

Related to being in the hospitality business, we were quite unprepared for some slightly unreasonable (at least to us!) requests. For example, we got a call for an ‘emergency’ hair dryer (note: the nearest hamlet is 30 min away--and it’s a cabin in the woods, for Pete's sake!).
Identify who your ideal renter is before you purchase. Our property was ideal for two families or an extended family. Sounds great, and it was, except that kids are often not very gentle with their surroundings. Would a smaller place for a couple have been better?
Having your list of trades/service people in remote settings is key. When there are only 3-5 licensed plumbers in a radius of 50+km, you can’t just call one up if you have a pipe leak. That means that you need to have a good list of resources and be prepared to make the drive there and take care of things if needed.

Property 3 revisited: Triplex to a Duplex

As we started thinking about having our second child, we wondered if we needed to move out of our two-bedroom apartment. After many hours of ruminating, running financial models of all kinds, and driving our friends crazy, we decided to do the unthinkable. We changed our rental triplex to a duplex.

The cost of buying a single-family home in our city was just nuts. And buying another property and then renovating was going to be in the $1M+ range. So we undertook a major renovation (like down to the studs) of our triplex and created the house of our dreams: A two-story home with three bedrooms, an office, and an en-suite bathroom. After nine months of construction, we moved in. And we were very happy that one of our great tenants from Property 2 moved with us! They are a wonderful couple who now live in the apartment below us.

I’m sure that many of our friends and family think that we're nuts still having tenants. After all, we have two kids, great jobs, and are in our 40’s. But for us, it has worked out beautifully. The tenants are great and the income has been super helpful in offsetting the renovation costs as well as daycare.

So, folks, that’s where we are as of now in our real estate investing journey. Who knows if we have more properties in our future. For now, we are focusing on surviving two kids under five years of age.

Take Action!

If any of these lessons learned seem obvious to you, perhaps it means you are ready to take action. This could mean:

Reviewing your financial portfolio to see if you could/should branch out into real estate
Having an honest conversation with your significant other and some self-reflection to see if real estate is for you
Do a simulation purchase. Look for a property, do your due diligence, and run the numbers. This practice will help you when/if you are ready to go-for-it
Check out some resources and references from those who have done it

Resources

There are lots of folks who have done very well in real estate and most certainly know more than I do. You can check out these blogs/resources as a start:

Points to Ponder

For discussion: For those who are into real estate, do these lessons resonate? Do you have other key lessons to share? For those thinking about it, were you surprised? Any others that I might have missed? Would a ‘deep dive’ into the story of any of these properties be helpful?

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How We House Hacked Our Way To FI

Dialing it up a Notch With House Hacking