Rent or Buy for FIRE? Why not try House Hacking!

Posted On July 23, 2020

Some time ago I got into a chat with one of my favourite FIRE bloggers, Dave from Strong Money Australia, about housing costs. After seeing my post on how to effectively track your spending for FIRE, Dave had twigged that I’m currently spending nothing on housing costs. He asked me what I was doing, and I explained the situation. He told me that it’s called, ‘House Hacking’, a term I’d never heard before!

What follows is my response to Dave’s questions about my approach to House Hacking, an approach that I kind of just fell into. It’s also cross-posted on Dave’s website here <link to come on Saturday>.

At the bottom of this post I’ve also included a link to a bunch of resources that might help you get started if you’re interested in giving House Hacking a crack yourself! (but you might want to read the whole post first, there are quite a few pitfalls to this House Hacking caper!)

Enjoy : )

Dave interviews Mr FiWithMe on House Hacking

  1.  Can you tell us, in a nutshell, what is this house hacking strategy of yours?

It’s quite simple. I rent a house from the real estate agent then I sublease the rooms individually. I also provide some services to the housemates, such as cleaning, management of all bills, fixing things, and all liaising with the real estate agents. Because the rent that I pay for the total house is less than what I get for the rooms combined, I end up in the green.

It’s just like if I were to buy a 5 pack of doughnuts for $5, eat one for myself, then put icing on the remaining four and sell them for $2 each. I’d end up with $8 – $5 = $3 profit, plus a doughnut! 

  1.  How did you get into it?  And what gave you this idea in the first place?

I have lived in share houses for many years. Last year, our landlord decided to sell the house and put us onto a month-to-month lease. All my housemates moved out because they didn’t want the uncertainty of month-to-month, but I stayed on and negotiated a 6-month lease, taking on the full lease myself. I then subleased all of the rooms at cost price (so I was paying the same as everyone else and wasn’t making any money).

I rented the rooms at cost price because I wanted to be fair, but I soon found that despite us all paying the same, I was doing the majority of the work dealing with the agent, managing the bills, cleaning the kitchen, taking out the rubbish, gardening, etc. It was me who had to find new housemates when some suddenly left, and I was covering the rental shortfall when this happened too. I also had to fight off the new owners and their lawyers when they put in a false claim that there was asbestos in the house to try to kick us out before the 6-month lease! In short, I was doing a lot of work and not getting any compensation for it. I realised I may as well make it official and set up my next share house with me as the head tenant and ‘house manager’. 

  1.  What kind of difference has this made to your housing costs and your savings rate?

The numbers: I rent a 5 bedroom house for $550 per week, and I rent out the 4 rooms that I don’t live in for a combined $785 (not including bills). This means that each week (when the house is fully tenanted) I’m up $235, plus I save what I’d usually be spending on a cheap room myself, putting the total benefit to me at a bit over $350 per week. 

There are costs that I bear out of this, like I just bought a second-hand washing machine for the house yesterday, I’ve organised a heap of the kitchen appliances, etc. But I’ve kept receipts for all of these purchases and they’re tax deductible so that helps too.

  1.  How profitable can this strategy be?  There must be a limit.  And are there other benefits besides financial?

It’s not about maxing out the profitability, it’s more about finding the right property then renting out the rooms at a price that is fair for the sub-tenants and worthwhile for myself. The prices I’ve set for the rooms are market rates (around $200 for a good sized room with aircon, $150 for a smaller room, etc), and it’s a nice modern spacious house with three bathrooms. 

The first non-financial benefit is how I now feel differently about all the things I used to do for free: manage the real estate agent, pre-pay all the bills then calculate and collect from the housemates their portions, clean up the kitchen, take out the trash, etc. Now that I’m providing this stuff as a service for the housemates, and I’m being adequately compensated for the time, I’m totally fine, and even happy to do it! It’s also enabled me to help other people from feeling put out or taken advantage of too. For example, my experience (generalisation) is that in share houses, it’s often the women who end up doing a lot of the cleaning and the guys slack off. This started happening in my current house too, so I’ve started to pay back some the rent to this particular female housemate at the end of each month as a ‘thank you’ for her help with the cleaning. This keeps her happy and also helps me to keep the house in good order. 

Another final benefit is reduced house politics. In houses with no clear manager, someone ends up doing the work for free, which causes resentment, and then there are always ‘house meetings’ and debates about who is going to clean what, who manages which bill, etc. It’s also hard to find a new tenant, because you need to go through all these interviews and find times when everyone can be there, then debate who will be the best new tenant. It’s just a mess.  I’ve found this approach much clearer and more harmonious for everyone.

  1.  What would you say are the main risks involved?

The first is financial. Renting out the house and not being able to fill the rooms. It took me about a month to fill all the rooms, so I was footing the bill for the whole house for that time. I then had someone move out in the middle of the pandemic (they went back to their home country due to the virus) and again I had to cover costs until I was able to find a replacement, and I’ve had to cover some of their utility bills that have come through since that person moved out. They’ve helped with this a bit with this, and it isn’t like they tried to dodge these bills after they moved out, but I covered for them because they had to move out due to financial hardship, so it seemed like the right thing to do given our relative situations and the fact that the house provides me with a buffer with which to cover things like this.

The potentially bigger risk is that you end up with one or more people in the house who are super hard to manage or disrespectful of other housemates. You can put measures in place (reference checks, contracts, see the links at the bottom of this post) but there’s no way to 100% avoid this. I haven’t experienced this as yet, which I expect is a mix of good planning and good luck, but I’m not going to pretend that it will never happen to me.

  1. Is there a certain type of person or skill set this is best suited to house hacking? 

Yes, this approach definitely wouldn’t work for everyone. You have to be assertive and a good communicator. I act as a mediator between the housemates and have on several occasions had to speak to people about appropriate use of the public spaces, either out of my own initiative or prompted by one of the other housemates. If you don’t feel comfortable having these kinds of conversations, this isn’t the right approach for you. 

You also need to be financially savvy and have a bit of general-purpose nouse. You need to develop ways to split the bills that are fair and match the situation, be on top of all the payments, communicate with the real estate agent, put in place contracts with your sub-tenants, etc. Splitting bills in particular can get quite complicated when people move in and out and you’re splitting costs across different people over differing time periods. Anyone who feels comfortable in a management role that requires a mix of financial and people skills would be a good fit.

Finally, I definitely wouldn’t recommend trying this if you haven’t lived in a share house before. I’d been in six different share houses over eight years before trying house hacking. You need to know how things in a share house work, and have a good basis of understanding for shared living before jumping in. 

  1.  How can someone get started with this strategy?

The best guide for whether or not you’re ready to get started is your own sense of preparedness to take this on. I was nervous at the outset, especially about not being able to fill the rooms, but taking a good look on Gumtree and Flatmates.com it seemed like there would be decent demand and I was willing to take the risk. It’s also important to model the downside too. Think to yourself, ‘How much would I be paying out of pocket if I could only fill one room?’ and that kind of thing. Try to get a sense of how you’d feel in a worst case scenario and whether it would be overwhelming for you.

The other key thing is being clear with the real estate agent about what you’re doing, and try to cultivate a relationship with them wherever you currently are. For example, in my prior rental in which I was acting as manager but paying cost price, I was very helpful to the real estate agents whilst they were trying to sell the house. I was really accommodating with letting them bring people through to check the place out, always kept it neat and tidy, and was really friendly to all involved. And it goes without saying that I always paid rent on time. 

Real estate agents like good tenants, so when that lease was up they asked me, ‘Do you need another place and what are you looking for?’ So I gave them my requirements, which included specifying a few suburbs and locations and adding,‘I need it to have the same number of hundreds in the weekly rental price as it does rooms’ (e.g., $400ish for a 4 bedroom, $500ish for a 5 bedroom, etc). Within about 10 minutes they got back to me with a property and within a couple of days I’d checked out the place and signed the lease (after re-negotiating the rental period). I will note that the house I’m in now is only a short-term situation, the landlord here wants to sell too, but I was happy with that because the return over the 9-month lease was enough to justify the inconvenience of likely moving again soon.

The takeaway from all this is to be a good tenant, a good housemate, and a good manager. If these three factors align, you should be able to get started with house hacking.

  1.  Is it better to do this with strangers or friends?

Three of the rooms here are filled with strangers and one with a mate from uni (not a best mate, but we got on well the couple of times that we hung out). The main thing is to be fairly transparent with everyone, and even more open with friends. With all tenants I clearly mentioned when we met that I act as the house manager and that I perform all the management duties and take on all of the risks so that they don’t have to. I wouldn’t suggest going into numbers, but they should get the impression that you are making money, or at least saving rent yourself, on the property. And they should feel that this is a fair trade for the time and stress that they save. If you price the rooms fairly, this will help avoid issues also.

With friends, be even more open. The way I brought my mate on board was: we just bumped into each other at the pub, he mentioned he was looking for a room and I mentioned I had one free. He said he was interested and we talked about where it was, etc. Then I said very clearly that I was setting up the house in a way that I would hopefully save on costs, and as a bit of a side-hustle, and then said straight up to him, ‘Just to be clear, if you move into this house I will be making money off you’. He was fine with that and still through it was a good deal, so we went from there. 

When it comes time to choose housemates, I have two main bits of advice. Firstly, don’t be impatient. You need to wait until you have a good feeling about someone before you let them sign on. Don’t let the fact that you’re worried about covering rent pressure you into signing someone on. Waiting for another two weeks and footing the bill is much better than signing on the wrong person and having to deal with potentially months of issues. Secondly, pay to keep your ad at the top of Gumtree. I wasn’t doing this for about three weeks and I had limited interest, as soon as I paid for the sponsored ad, I got about 5x the requests and was able to fill the rooms quite quickly.

  1.  How do we go about advertising and getting sub-tenants?

Just Gumtree and Flatmates.com. One person has come through Flatmates and the others through Gumtree. Make sure you ask for documents and referees too. You don’t want to skimp here. (see the advertising copy and the documents that I requested in the free downloads at the bottom of this page)

Then I just met people and got a sense for what they were like. I recommend going for quieter people who don’t drink or party. Checking references is important in some situations. Asking for referees, even if you don’t call them, also helps to set a professional tone.

  1.  How to find the right properties for this house hacking strategy?  And which locations are best suited?

As mentioned, the golden rule for a profitable house hack is to ensure that the total cost price of the house has the same (or less) number of hundreds in its weekly rent as there are rooms. Second to this, ensure that it’s close to public transport and walkable to shops and ideally a University or something like that. The people you’ll be renting to will most likely not have a car, so get onto google maps, put yourself in their shoes (which may be easy if, like me, you also don’t have a car!), and see if you’d be happy to live there if you had to commute to town for work, or do your shopping on foot. 

  1.  What are the main hurdles with this strategy?  And is there any way to protect ourselves against something going wrong? What kind of contracts do we need to have in place?

I got a template from online then modified it to match the sub-tenant situation. (download at the bottom of this page)

  1.  In your view, what are the most important aspects to understand before diving in?  

Aside from the points covered about what kind of property you need for house hacking to be profitable, and what kind of skills and dispositions you need to make it work, there’s one other thing I’d like to emphasise… Don’t be a dick!

House hacking puts you in the position of landlord, and this is also a position of power. There may come times when the people you have as sub-tenants experience financial difficulty, emotional distress or other similar challenges. When this happens, put yourself in their shoes and don’t do to them what you wouldn’t want the landlord to do to you. 

Interestingly, I’ve found it much easier to not be a dick since I’ve been in this current house as compared to the previous house (where I was renting out each room at cost price). When I didn’t have any financial buffer between the rent I collected and the rent I paid, I was super stressed out about people not paying on time and would be on their backs about it. Now that I know that there’s a buffer, I feel like I have the space to be a more compassionate head tenant. For example, when one of the housemates lost their job due to COVID and couldn’t get any government support as they weren’t an Australian citizen, I told them that no matter what, they wouldn’t be out on the streets because they couldn’t pay rent, and that if we needed to we could re-negotiate reduced rent for as long as they couldn’t find work. They were very grateful for this as they were feeling really stressed about this, and it felt good to be in the position to be able to help out. I’d encourage anyone taking on house hacking to take to it with this approach, and it aligns with our ethical stock portfolio for FIRE, and our approach to regular donations too.

  1.  On a personal note, do you have an end goal in mind here?  Will you be doing this until you buy your own house?  Or is this something you’ll do on an ongoing basis since the payoff is healthy and you’re getting rewarded for something you’re good at?

I very nearly bought a house last year. In November, I withdrew my savings from the First Home Super Saver Scheme, found a great house, found a builder to do it up, got financing, and was willing to pay a price higher than what it eventually went for at auction. But after a lot of reflecting, I decided not to pull the trigger. 

I’ve run the numbers time and time again, and reflected upon what’s important to me. I’ve come to the conclusion that at this point in my life, the potential for leveraged growth through a property just doesn’t outweigh the benefits I get from the freedom of renting. This freedom vs. stability tradeoff is also captured in Dave’s recent post about whether you need to own a house to retire early. For me, freedom wins out at the moment, and we can reach our FI goal either way.

Ever since I discovered house hacking, those house-buying benefits seem even smaller. I may buy a house at some point, but it won’t be until I’m really ready to settle down, and I don’t anticipate that will be within the next 10 years even. Until then, I’ll try to keep house hacking!

  1.  And do you have any final words of advice for someone who is looking at house hacking?

Key takeaways

  • Look for a property with the same number of hundreds in the weekly rental prices as there are bedrooms
  • Close to PT and shops (walking distance)
  • Know yourself and only take it on if you’re confident in your financial, management, and people skills
  • Do your homework (set up contracts, check references, etc)
  • Be fair, and don’t be a dick!

Good luck on your house hacking journey!

…

Download a sample contract and more for free here! And make sure you subscribe below if you’re keen to hear more from Come FI With Me!