Tag: FIRE

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Reduce Spending

House Hacking: The Best Way to Save Money For Financial Independence

For most people housing is the biggest expense and it’s therefore extremely important to limit spending on housing so you can save money. If you’re on a path towards financial independence, remember you need to invest money and to invest money, you need, well, money. So you need to spend it wisely and save wherever possible. So back to housing and what exactly is house hacking and how can this help you?

House hacking is a term that has been famously coined by Brandon Turner, former podcast host at BiggerPockets and seasoned real estate investor. It essentially describes several creative ways to reduce your housing expenses.

Let’s go through the different ways you can save money on housing. Depending upon your personal situation, some may be easier or more convenient to implement than others but let’s go through them anyway.

House Hacking: The Best Way to Save Money For Financial Independence

Understanding House Hacking

House hacking is a real estate investment strategy that allows you to live in your property while generating rental income from other units or portions of the property. By doing so, you can significantly reduce or even eliminate your housing expenses, creating a path towards financial independence.

The Benefits of House Hacking

Reduced Housing Expenses

House hacking provides a unique opportunity to minimize your housing costs by leveraging the income generated from renting out a portion of your property. This can free up a substantial amount of money to be invested elsewhere, ultimately accelerating your journey towards financial freedom.

Increased Cash Flow

With the rental income from house hacking, you can generate positive cash flow. This means that not only are you living in your property for free or at a significantly reduced cost, but you’re also earning extra income that can be used for savings, investments, or even paying down debts.

Building Equity

As you make mortgage payments, the value of your property appreciates over time, allowing you to build equity. House hacking enables you to expedite this process by utilizing rental income to contribute towards mortgage payments. This can help you build wealth and create a solid financial foundation for the future.

Learning Real Estate Investing

House hacking serves as a stepping stone into the world of real estate investing. It allows you to gain hands-on experience in property management, tenant relations, and the overall dynamics of the real estate market. This knowledge can be invaluable as you progress towards expanding your investment portfolio.

Consider living with roommates

Rather than renting a studio, you may want to consider renting a house with roommates and split the cost. It’s often more cost effective. I lived several years with roommates at a time where a studio was renting for around $1,500/month in my area, while the rent split among roommates was around $1,000/month, saving $500/month or $6,000 per year. While it looks like a nice saving, it’s nothing compared to what comes next.

Buy a small multi-family

Probably the most popular house hack and considered as the traditional house hack, it consists in taking an FHA loan (if you live in the US) to buy a small multi-family building, for example a duplex or a triplex or quadruplex, live in one unit and rent the other unit(s). If the price is right, meaning that you do not overpay for the property, and the interest on the loan is low enough, it is possible to have the rent cover the loan and some of the expenses and you can pretty much live for free. This strategy works best when buying a home is more advantageous than renting and it usually tends to be in cheaper housing markets. In more expensive markets, the rent will usually not cover the expenses, so while it can still reduce your expenses you’d need to verify how much would pay, should you rent in your area to see if it financially makes sense.

Why an FHA loan you may ask? It allows you to buy a property with just a 3.5% down payment. So if you look at  a $100,000 property, that’s just $3,500 you need to put as a down payment.

When done properly that’s how you can get rid of your biggest expense. The earlier you can do it, the more money you can save and invest.

Rent out rooms

This is somewhat a combination from the traditional multi-family house hack and the renting a place with roommates. Essentially you can buy a home, live in the living room or if the house has a basement, turn it into a livable space. Then you can rent out he remaining rooms. By renting individual rooms it may be possible to cover the cost of the house: loan, taxes, insurance, completely covering your housing cost.

Live-in flip

A live-in flip consists in finding a home below market value that needs to be renovated. You would live in house while renovating it. Live in it for at least 2 years to reduce the amount of capital gain taxes you’ll need to pay when you sell it, if you live in the US, as this relates to the US tax code. Then you finally sell it. The amount of money you make when you sell can cover your housing cost for the past couple years.

Overall there are various ways to reduce or completely eliminate your hosing cost and it’s extremely important to take a hard look at these options as reducing the biggest household expense can go a long way to boost your savings and your investment power.

Sources

[1] https://www.biggerpockets.com/blog/6-house-hacking-strategies-you

[2] https://www.valuepenguin.com/average-household-budget

[3] https://www.forbes.com/sites/davidgreene/2018/12/04/house-hacking-how-financially-savvy-people-live-in-expensive-markets-while-saving-money/?sh=4cd1fc0470f0

Categories
Financial Literacy Investing

The Importance Of Investing And Investing Early

If you’re considering financial independence and early retirement, investing is not an option: you must invest if you ever want to have a chance to reach financial independence, by definition. In its simplest form financial independence means your money is working hard enough to cover your lifestyle so you no longer need to exchange your time for money, meaning you no longer have to work.

Also living of savings can only last for so long and there’s only so much you can save.

If you expect to retire at 40 years old, expect to spend $50,000 per year until you leave this earth, let’s say at 80 years old, to keep the math simple, that’s 40 x $50,000 = $2,000,000 you need to save by age 40. Assuming you start working at age 20, you’d need to save $100,000 per year for 20 years.

Assuming you live a lifestyle similar to what you expect in retirement, you’d need to earn a gross income of around $200,000 per year. Here goes the math:

  • At $200,000, you can expect to pay around 25-30% in taxes. That leaves you with $140,000-$150,000.
  • $40,000-$50,000 of living expenses
  • That lives you with $100,000 saved up.

While a few jobs can allow you to earn this much, it’s unlikely for most to earn such a high income at such a young age.

And that’s where investing comes to the rescue. Sure, you need to work to start earning and saving money, but this money should not sit idle and it should also work for you, so you can reach your goal. Investing will help you boost your income, until it eventually gets you financially independent.

Let’s consider a few scenarios to see how they compare. The first year we start with $5,000 and each year after that we assume the following:

  • Saving $5,000 per year
  • Saving $5,000 per year and investing half of the money at a 7% yearly return
  • Start saving $5,000 per year, and each year increase the saving by $1,000 (So the first year we save $5,000, the second year $6,000, the third year $7,000 and so on and so forth…)
  • Saving $5,000 per year and investing all the money at a 7% yearly return
  • Start saving $5,000 per year, and each year increase the saving by $1,000, investing all the money at a 7% yearly return

Here is the evolution over time:

By saving $5,000 per year, after 40 years you’ll end up with $200,000. Not too bad, but not enough to retire comfortably.

If you just invest half of the money each year, you’d double the money getting slightly over $420,000. It already shows how important investing is.

Now, without investing, but by increasing your savings by $1,000 each year (either by getting a raise, changing job or starting a side hustle), you end up with around $940,000. And this shows how important it is to increase your savings as your income grows.

Then, going back to the $5,000 / yr savings and investing everything, it beats increasing the saving rate and you’ll end up shy of the $1 million mark with around $998,000. Again it shows how important investing is as far as growing your wealth.

Finally, combining both the increase of savings over time and investing show the power of compounding and we’d end up with over $3,000,000 which is more than 3 times the next best results.

Now that growth happened over 40 years and this shows the importance of starting early. The earlier you start, the easiest it will be to grow your portfolio leveraging the compounding effect.

Now 40 years is still a long time, if we want to reduce the time it takes to reach our goal, whatever it is, we realize how important it will be to save aggressively to bootstrap the investment growth.

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Financial Literacy

Let’s Talk Investment

Investing in scalable passive income strategies is the best way to make more money and increase your net worth. Sure, money won’t buy you happiness but it will buy you freedom. Freedom to focus on experiences and projects that truly matter to you.

Step by step we’ll explain how to take control of your finances, detail several asset classes to help grow a portfolio.

Welcome to this journey with us.