How To Live For Free (yes, it is possible)
3 Flat Building in Chicago
When it comes to the basic needs for us to survive, it really comes down to a total of 3 major categories: Food, water and shelter
When it comes to shelter, it tends to be the largest expense that most people have one a reoccurring/monthly basis. Where they live, what they pay in rent or mortgage payment due. Studies have down that it can impact between 30-50% of the average person’s income.
There is a constant battle of Rent versus Buy but we aren’t here to talk about that today. We are talking about tackling one of your biggest expenses in life, where you live.
Welcome to the world of owner occupancy aka house hacking
Current Renter: I am happy being a renter. I live in a great location and my landlord has provided me with great amenities, overall it is a decent place to live. The down side is that I am paying month rent to my landlord, I feel like this is just throwing money away versus building wealth. Maybe I should buy a house?
Current Home Owner: I love being a home owner. I live in a great location and have full control over my living situation. Owning a home allows me to do whatever I want, whenever I want. The tough part is that there are a ton of expenses that I don’t think about. When anything breaks, I have to fix it. I am constantly paying for property tax increase and my “equity” is slow to grow against the large interest payments. Worst of all, I don’t even own the home, the bank does. Owning a home isn’t as easy as it sounds.
Is there a good middle ground in which you can truly build wealth, get true tax benefits and lower your expenses?
What if instead of you paying your landlord, you had your tenants pay you to live?
What if you didn’t have to put 20% down to purchase your property?
You know that building that your landlord has? How did they get that?
A Multifamily building (2, 3 or 4 total units) can be purchased with as little as 3.5% down. On a $500,000 building, the total downpayment would only be $17,500. (FHA Loan)
Let’s say that the total Mortgage/Insurance/Taxes (PITI) came out to be $3,500 per month. Then the other units that you rent out go for a total of $1,800 each. You have a total of 3 units and stay in one of them yourself. $3,500 minus $1,800 minus $1,800 equals +$100 per month.
You are now being paid to live in your current building, that you bought with 3.5% down.
You are now building wealth without adding a dollar yourself to the mortgage. Your tenants are paying that for you.
You have access to tax deductions that are only available to rental property owners.
Nervous about who the tenants are you are sharing the space with? You are the landlord, you get to screen your tenants (legally of course) and make sure you feel comfortable sharing the space with them.
Some of you reading this might already own a property and wouldn’t be able/willing to leave your current house to take on this risk.
The great news with an owner occupied building that requires such a low down payment, you only need to live in the building for 1 year prior to renting out your unit. There are creative ways that you can make this work. Maybe you rent out your current house for a year while you move into this new property. Maybe you Air BNB your current property or bedroom to get some additional income.
Is this something that is peaking your interest? Sound too go to be true?
I would ask you to reach out to anyone you know who is in real estate to start to learn more. Or if you are open to learning more, head on over to the ultimate real estate resource at Biggerpockets.com They are an incredible resource on anything and everything real estate. From learning how to get started, to asking for help, listening to podcasts or reading books. They have everything you could ever ask for.
Owner Occupancy aka House Hacking has given me the ability to completely cut my largest expense in life, while building wealth at the same time.
Let’s go into a detailed example of the entire process and how to get started:
Person A is looking to purchase their first investment property, specifically an owner occupy building.
They start by reaching out their friends/family/colleagues to ask if anyone has a real estate agent they would recommend that has investment property experience.
After an introduction is made, Person A and the Real Estate agent connect on the phone, share goals and a MLS listing is generated. Total cost = $0
The agent sends over multifamily buildings that are 2-4 unit buildings only, since owner occupancy 3.5% loans only work with properties of this size. Person A begins visiting these properties, reading articles on how to properly evaluate these buildings and begins to get confident in making offers on the ones that work. Total cost = $0
After viewing several properties and putting in multiple offers, Person A succeeds and has their offer accepted on a 3 unit Multifamily building. They are going to put down 3.5% on a $500,000 property ($17,500) and after working through the closing costs, needs an additional $10,000 (Attorney, inspection, minor repairs). Total cash needed $27,500.
After Person A closes on the building and moves in, they begin to use the skills they learned from the articles they read to find, screen and secure tenants. Person A lives on the top units and quickly rents out the bottom two units for $1,800 each per month.
Person A’s PITI (Principal Interest + Taxes + Insurance) payment that they owe each month comes out to $3,500. The tenants pay $3,600 total each month, leaving Person A with $100+ in cash flow. They are beyond excited!
Person A is saving the money they used to spend in rent and is now making $100 per month. Here are additional benefits:
The equity that they are building (+)
Tax efficiency and advantages of owning an owner occupied building (+)
Actually getting cash flow without having to work (+)
And the building will (most likely) appreciate over time (+)
Person A is beyond excited and sees all this extra cash coming in. They wisely chose to save this extra income to invest in additional assets of their choice (real estate, stocks, businesses, etc.).
After living in the property for 1 year, Person A has multiple choices on what to do next.
Rent out their unit and look for 2nd property
Continue to make improvements to then property to raise its value
Look into refinancing the property if it’s value has gone up far enough
Countless others
The great thing that Person A has done is to purchase an asset that provides multiple options. There is a lot described in this article that may sound easy or too good to be true. I would challenge you to explore this option further via some of these resources.
bigger pockets article link
Book links
Podcasts links
YouTube links