Young Professionals Can House Hack To Achieve Financial Freedom
Denver's stratospheric housing prices have stimulated fresh interest in the concept of house hacking
The Denver housing market is roaring right now, thanks to Colorado's strong economy and the influx of new residents from around the country. As of mid-2019, Colorado ranks second in the nation economically and has the lowest unemployment rate in the contiguous United States.
As a result, the balance between available homes and the increasing population remains in the home seller's favor. As of July 2019, Denver has only 1.5 months of housing inventory; over six months is required for a buyers' market.
Rising prices are great for homeowners, but many Denver residents are presented with a dilemma. Prices are so high that many struggle to afford an apartment, much less buy a home. Nationwide, 32% of millennials owned a home in 2018 and that number is expected to continue rising in 2019.
For millennial home buyers in Denver, getting in on the housing boom requires finding creative ways to make homeownership affordable. House hacking has been proven to be one of the most effective strategies for buying property in expensive markets.
What Is House Hacking?
The concept of house hacking has gained traction due to skyrocketing real estate prices in metro markets where home prices are otherwise unattainable to many first time home buyers. It refers to buying a home with the intent of renting out part of it to cover some or all of the expenses. There are many types of house hacking, including the following popular strategies.
Purchasing Multi-Family Properties
This approach may involve buying a small building with two to four units. The owner would live in one unit and rent out the others. Buildings with four or fewer units can be considered a primary residence, which allows the buyer to pay a lower down payment than if purchasing a building as an investment property.
When finished basements have bathrooms and kitchenettes, they are great options for house hackers. The homeowner can live in the basement while renting out the main home, depending on his or her living situation and income goals.
Accessory Dwelling Units
Accessory dwelling units (ADUs) are separate from the house and have at least a bedroom area, bathroom and kitchen, making them rentable as a studio or full apartment. Before buying a home with an ADU, ensure that renting the ADU is legal in the area.
Imagine owning a four-bedroom house, renting out three of the bedrooms and living in the fourth. This strategy requires giving up some privacy and convenience, but it's a way to own an appreciating asset while also earning passive income from the property.
Homes With Convertible Areas
Many homes have areas that can easily be converted into extra bedrooms that can be rented. For instance, an unused work room or office could be converted into an income-generating rental space. Some expense may be involved, but in an appreciating housing market, it may be worth the cost.
Just last year, Forbes listed house hacking as one of the top methods millennials can use to make the most of their money, partly because house hacking takes an asset perspective on real estate versus a lifestyle perspective. Many people buy homes because they want a certain standard of living and end up not increasing their wealth as a result, especially when the price tag is high. This emerging trend helps young professionals create a reliable revenue stream while growing their nest egg.
An Asset Class Game of Chess
As a renter, you play housing checkers versus housing chess because renters typically think short-term. By becoming an owner, you play real estate chess, creating a long-term plan that builds real financial security and independence. Rather than tying you down, house hacking provides the financial freedom to set your own priorities, whether it's to change jobs, launch a business or start a family.
Additionally, in today’s growing sharing economy, house hacking appeals to young professionals seeking a more fluid, adventurous lifestyle. Having renters contribute to their property expenses allows them the freedom to move around, travel or work remotely.
Building Wealth is Liberating
With housing consuming 37% of the average American's budget, millions of people are living paycheck-to-paycheck and are tied down to their jobs as a result. House hacking provides a way out of this tiresome, mentally and emotionally draining cycle. Cash-strapped young professionals can generate passive income, achieve long-term wealth and liberate themselves from constant money worries through low/no down payment real estate investment, AKA house hacking.
In Denver, house hacking is a growing trend, and not just because of the hot housing market. The cost of living forces many working professionals to live far from their workplaces, resulting in stressful, time-consuming commutes in Denver’s increasingly heavy traffic. Through house hacking, many of these workers can live close to their workplace in areas with good public transportation. Plus, there are many more options for entertainment, restaurants and outdoor activities that contribute to an enhanced quality of life and a lower cost of living.
Owning real estate in a market like Denver is a great long-term investment, but buying a home without a strategy may leave you tied down. Instead, millennials would be wise to consider wealth-building house hacking strategies that enable them to enjoy life in the Mile-High City's vibrant neighborhoods.
Tony Julianelle is the president of Atlas Real Estate and Mike Hills is the VP of Atlas Investment Brokerage. Atlas is a full-service real estate group specializing in investments, brokerage and property management in Denver.