Why we live “small” in a big house, and you should too

Let me tell you one of the best ways to avoid being “house poor” and kickstart your real estate investing career in a big way; start living “small” in a big house. Wait, what?  Welcome to the concept of house hacking.

John and I live in the smallest unit of our biggest triplex. We live in a newly renovated, 900 sq foot, two bedroom unit and our tenants pay almost all of the property’s expenses.

In a nutshell, house hacking is an investing strategy where you purchase a multi-unit property as your primary residence. You live in one unit, rent out the other units, and your tenants pay most or all of your expenses.

If done correctly, you live in a property with all the amenities you want, for substantially less than you’d pay as a traditional renter or homeowner, and if you choose to move out you’ll maintain a positive cash flowing investment property.

Ignore the horrible strategy name

To be honest, I really dislike the term “house hacking.” The definition of hacking is negative no matter which way you slice it. The Merriam-Webster Dictionary defines hacking as, “to cut or sever with repeated irregular or unskillful blows; to clear or make by or as if by cutting away vegetation; to annoy, vex; or to gain illegal access to a computer network, system, etc.”

There is no negative here and no illegal access. Instead, I prefer to tell people I live “small” in a big house. We live in a multiplex house properly purchased, legitimately financed, and legally rented to respectable, young professional tenants.

We live in a less affordable world

Let’s face it, buying a home today is more difficult and more complicated than ever before, especially if you are a Millennial or the newly coming of age Generation Z. Recent mortgage qualifying changes which took effect in January 2018 means the average Millennial home buyer can afford $40,000 less than before. At the same time, housing affordability is rapidly disappearing.

“And it’s not like the typical peak millennial could afford much, to begin with.” Their average salary is only $38,148 which translates to a maximum home buying budget of $203,246, Daniel Trancer, Huffington Post

With a budget that low, there are many more cities crossed off the list than on it. No wonder peak Millennials in their late 20s and early 30s are prominently featured on tiny house living TV shows. According to Royal LePage’s Peak Millennial Survey, only 57% of peak Millennials believe they will be able to afford a property within the next five years. Approximately 64% of respondents were renting or still living at home.

As a landlord, I appreciate my Millennial renters and the demand they create for my rental units., As a fellow peak Millennial I can’t help but wince. Living at home in my early 30s? I love you Mom and Dad but no thank you!

So let’s make home ownership more affordable 

So let’s move past my dislike of the term “house hacking” and turn our focus onto the positives. Here are some of the main benefits of choosing to live “small” in a big house:

  1. You are building equity while paying less per month than the average renter.  Currently our expenses are less than half of what we’d pay if we were tenants and less than a third of living in a similarly sized single family home. While we are saving money, our tenants are paying down our mortgage and our property is positively appreciating.
  2. Most banks will consider the rental income when qualifying for a mortgage. When we qualified for our mortgage, the bank attributed 50% of the property’s rental income toward qualifying (consult with your mortgage broker or bank to determine how it will work in your situation)..Technically this allows qualifying for more property, but don’t overextend yourself. Instead of maxing out, be conservative. Smaller mortgage payment = more money in your pocket. 
  3. It opens opportunities for properties and/or locations you wouldn’t normally have access to.  Have you ever wished you can live in a great, trendy, popular neighbourhood without being house poor?  This strategy allowed us to live in our dream, high demand neighbourhood without the lofty monthly bills. While many of our friends are biding their time by settling in less desirable or less centrally located areas, we have leapfrogged ahead.
  4. It accelerates your real estate investing experience. If you are a new investor this is a great way to gain hands-on experience and build your confidence. Knowing what we know now, we wish we’d house hacked earlier.
  5. When you move out you can keep it as a cash flowing investment or flip it to a joint venture investor. Building a portfolio or attracting your first joint venture (JV) can seem intimidating. Imagine telling your JV you already have the perfect, cash flowing property already lined up? Even better, you can show previous performance, you know the tenants, and can vouch for the property manager. It’s a great way to build investor confidence.
Is living “small” in a big house right for you?

I love my two bedroom unit and the property it’s in. Our house sits on a large, double-wide lot that is close to downtown on a quiet tree-lined street. John got his double car garage for storage and easy access to the city’s cycling paths, while I got my large, deep covered front porch and the potential to renovate and design my dream kitchen (finally!).

But just because it’s right for us, doesn’t mean it works for everyone. Here are some things to consider:

  1. How small can you go?  If you were already considering tiny living or downsizing, are a minimalist, or just don’t need a lot of space then you’ll obtain the biggest benefit from this strategy. The strategy can work if you live in the largest unit, but obviously it works better if your tenants live in the bigger units because those normally garner higher rents. We compromise by living in the smaller unit, but we have extra storage space in the basement and garage. 
  2. Do you play well with others? Do you play drums in a band? Have expressive and loudly energetic children, or dogs that bark? Some lifestyles just aren’t well suited to sharing walls with tenants. Ideally, you will live in peace and harmony with your tenants throughout your homeownership. Consider how you live, where your unit is in relation to others, and how much space is shared. We chose the front, ground floor because I hate lugging groceries upstairs, but that means I do have tenants above me and beside.  We also focused on properties with separate entrances for each unit, in-unit laundry, and ample parking. 
  3. Can you separate business from friendship? Remember your tenants are your clients, not your friends. If you live in the same property, are you able to maintain a courteous, professional landlord relationship? Because there is less separation some people find this difficult but it’s important because it sets boundaries and ensures your tenants know they can’t get out of paying rent or take advantage of the situation in the guise of friendship. 
  4. How well do you know your numbers? House hacking doesn’t work well if you don’t understand how to evaluate rental properties or your own personal housing expenses. The purpose of this strategy is to live for less than you would renting or owning a single family home.  It allows you to live better, save more, while simultaneously growing your real estate investing business. Not understanding the numbers could lead to overextending yourself, so before you jump remember to measure the depth of the water.


Final Thoughts

In today’s real estate climate housing affordability doesn’t show signs of getting better any time soon. So many people, especially Millennials, feel destined to rent forever and live in fear of becoming house poor. If you are going to be a tenant, why not consider being a “tenant” in your own home?


Would you consider living “small” in a big house? Are you already using this strategy?


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