What is Luxury House Hacking? I bet that’s not a question you think of asking too often…:)
I’ve been told at times that I ask too many questions yet provide too few answers. I suppose this is true, but only if you fail to recognize that answers must synergize with your life circumstances, otherwise they are not answers at all. What is appropriate for you is likely somewhat different from that which is appropriate for me. No “one size fits all” in life.
I am cognizant that I can’t have an answer that works equally well for everyone, and so the best I can do is ask the right questions so as to encourage people to think and come up with the appropriate answers.
Real Estate is more confusing than almost any other sphere. There are truly more opinions than there are people in the room, if that’s possible. For this reason, exposing all perspectives by asking the right questions is truly the best way to lead folks toward the answers. I ask – you answer, and eventually you connect the dots.
My brand of house hacking, which can best be described as Luxury House Hacking, certainly is a new concepts. So, let’s see if we can ask a few questions and get to a few of the answers today.
What Is Luxury House Hacking
To better understand Luxury House Hacking it is useful to first define the term House Hacking. So, what is House Hacking?
To put it simply, House Hacking is defined as the ability to produce income with the home you live in in order to off-set the cost of living there (the burn). Now, there are numerous ways of doing this with both income and equity. For example, you could buy a duplex, move into one side and rent out the other. In this case the income from the rented side will cover all or some of your burn, making your stay in this duplex much more affordable. I call this Cash Flow House Hacking, because the focus of the strategy is on the income.
Another way of handle this is to do a live-in flip. This is where you find a house that needs work, but can be sold for a profit after the work is done (that’s the flip component). However, while you work on fixing the house, you move into it (this is the live-in component). I call this strategy an Equity House Hack.
The question – How do YOU want to live?
While both methods are possible and valid, the big question is – at what cost? There are definitely costs associated with both. Let’s explore what those are a bit.
As it relates to a pure Equity House Hack one of the concerns is the risk. After 2 years in a home, the capital gains tax goes to zero, meaning that the best strategy for an Equity house Hack is to stay in it for 2 years and avoid capital gains taxes on the sale. However, two years is a really long time in terms of the market dynamics. A lot of things could happen which could negatively impact your exit. This is one of the grave concerns with this strategy.
The other concern is that you, your wife, and your kids would necessarily have to live in an on-going rehab, otherwise known as war zone. I don’t know if that would be too appealing for too many people. I am sure there are some people who would be OK with this, but most of us do not want to compress our lifestyle that much, which brings me to the Cash Flow House Hack.
The cost of a typical cash flow house hacking play all has to do with lifestyle. I’ve got some students who are renting out rooms in the houses. Let’s put that aside, because obviously this only works for youngsters. But, even if we take the next step and do a small multi-family house hack, think of how many compromises we’d still need to live with. A smallish unit, with neighbors on the other side of the wall. Shared yards. No privacy. And (this is big) small multifamily pretty much guarantees a step-down location – they just don’t build upscale small multifamily too often.
Who Does a Traditional House Hack
Essentially, folks doing traditional house hacking are electing to prioritize smart financial moves over their lifestyle. All of these folks recognize that in order to benefit financially they will need to compress their lifestyle, and they are OK with it.
I was not OK with that. Patrisha was not OK with that. Many of you likely are not either. And for us there’s Luxury House Hacking!
So – What Is Luxury House Hacking
Follow me on this:
Given the above described scenario, I said – no. If in order to make a smart financial decision I have to compress my family’s lifestyle then I’d rather just pay the darn mortgage and be done. I am at a point in life where I strive to live on my terms, because anything less is a waste. I want the finer things in life. My wife wants the finer things in life. And my kids need to be close to…well…everything 🙂
But here’s the thing – given the choice of buying exactly the home I want and paying the mortgage, or buying the home I want but letting someone else pay the mortgage, I would always choose the latter option. For this reasons I refused to accept that in order to be financially smart I necessarily need to compromise on everything. Instead, I kept looking.
And I found it! And the best thing is – it’s hidden in plain view the entire time.
I wrote a book about it, called House Hacking, in which I tell you all of the numbers, discuss the strategy, the asset, and the financing. Our House Hack has generated about $9,200 of cash flow in 7 months, and it doesn’t look like it’s going to slow down at all. We are living in a very nice house and a very nice location. We are not making any compromises to our lifestyle in order to house hack. And yet, we are living almost for free 🙂
The Big Distinction
There are two ways to conceive of house hacking. One way is to place the emphasis on the financial end of things, even though this will almost certainly mean that you’ll have to sacrifice your lifestyle. The other way is underscore that there will not be any sacrificing going on, which will lead you in a different direction as it relates to your search. You’ ll need to think outside the box, but it works, I promise.