It’s been a long time coming, but I have finally made the plunge and will be closing on my first house in a few months.
It’s hard to believe that after becoming debt free last year I have significantly increased my savings and I am in a position to make this purchase happen.
I moved to Austin in 2013 and have been a renter ever since. While I was on my debt free climb, I began living with roommates to make my monthly housing costs cheaper. This one change has significantly improved my savings rate and allowed me to pay off my debt quicker than I would have without roommates. Now, I want to take this to the next level on my own property.
I want to make one thing clear though: I didn’t purchase my house to live in a bigger space, have nicer things, or even because the Austin market is appreciating at a fast pace.
The main reason I bought a house is so I can start “House Hacking” – aka live in one room (with my GF) and rent out the remaining rooms in the home. The primary reason for wanting to start house hacking came from me wanting to reduce my largest expenses first. By buying a new house and beginning house hacking, I hope to free up additional cash flow so I can increase my savings rate going forward.
Initially, I was seeking out a duplex to buy. However, after four months of searching, I concluded that Austin isn’t the best place to purchase a duplex at this time in my life. Frankly, many of the duplexes were much older properties, poor locations, and most were way out of my price range. Right now I don’t have significant time/money to do a remodel project so buying a move in ready single family home in an excellent location became a better option for me. In the future, I like the idea of purchasing a multi-unit property (even a fixer-upper). However, for now, I want to get my feet wet with a single family home.
Finding My Realtor
When I knew I was ready to start house hacking, I immediately went to a recommendation from my blogger friend Javier – he mentioned that he knew a local realtor in Austin who teaches people how to house hack successfully. In April, I reached out to (my now realtor) Diego, and we started on the search for a new home. I felt confident that Diego was the best realtor for me because he knows exactly what I want to do and has a ton of experience in this area of real estate. He also runs a website that teaches people how to house hack in addition to him being a realtor full time.
The House Search
After a few meetings with Diego, we got started with an MLS search of the area I was looking for, price point, and size of a house. I spent a few months following up on potential matches and going to view the houses with Diego.
Due to the tech industry and the trend of many people from the east/west coasts moving to Austin the home prices have skyrocketed in the last five years. It would make sense to move to a cheaper cost of living city, but my GF and I both have good jobs in Austin and want to stay here for now.
We ended up targeting the northeast part of Austin due to the growing location, price point (newly developing area), and overall value and appreciation (even though I’m not banking on appreciation).
We searched many homes on the MLS, and most of the houses we saw were not only older but also pretty expensive. In fact, after a few months of searching, we realized we could buy a brand new home (new build) for the same price as what we saw older homes in the same area.
That’s what we ended up doing. We purchased a new build home!
Reason for New build vs. Used
We decided to go with a new build because of the following factors:
- The home warranty
- The home warranty covers almost everything in the home for the first year, and most big features are included for at least 5-20 years. Also, since everything is new the house should operate more efficiently.
- I will still have money for a House Emergency fund but it’s nice to know that I have a solid warranty on the house in case there are any unexpected expenses.
- Paying no closing costs
- I have two potential lenders I am working with that will both cover all closing costs. I will pick the one who offers the best deal. With a used home I would be on the hook for the majority of closing costs ($5k – $10k)
- More Attractive for “Business Professional” roommates
- I will be able to market my spare rooms to professionals who work nearby and also market that this is a new home.
- Gave me a few more months to save for additional housing costs
- Building a house is a 6-8 month process – this is giving me extra time to save for all my appliances (Fridge, Washer/Dryer), furniture, home inspectors, electricians, etc. It also gave my GF time to sign up for a travel credit card which we will quickly meet the minimum spend (and sign up bonus) due to our one-time housing expenses that I listed above.
The House and Numbers
Our house total cost is $242k. For the area and size, I would consider as average/below average price in Austin.
The house initially listed at $247k, and the builder offered us a deal after some negotiation. We also added on blinds for all windows and a garage door opener that the home warranty will cover.
I am putting 5% down with a conventional loan. The reason I am putting 5% down is to get me in a house faster, which due to house hacking will improve my cash flow right off the bat. If I waited to put down 20%, I am losing the opportunity costs of monthly cash flow/reducing housing costs now, and risking being priced out of the market and having to continue to rent for the next few years while I save ~$50k in cash.
House Attributes – 1 story, 1560 sqft. House comes with a large backyard with a fence, sprinkler system, vinyl plank flooring, gas and electric, covered patio, two car garage with driveway.
The master bedroom is in the back corner of the house with the two other rooms in the front of the house. Below is the layout:
My House Hacking Plan
Right now my current rent is $1232 a month, and I split that with my girlfriend. So my half is $616 a month in what I (and Mint) would call “Mortgage/rent” expenses. With the new house, my mortgage payment (with PMI (because I’m putting less than 20% down), interest, property taxes, insurance) will be somewhere around $1825 per month (this number is not confirmed yet). So right off the bat, my housing costs would increase by $493 if I lived by myself with no roommates or girlfriend ($1232 —> $1825). Fortunately for me, that isn’t the case.
After researching the area and working with my realtor/taking his course, I am confident that I can get $650 a month for each room I want to rent out.
So I plan to rent out the front two rooms of the house. When I rent out both rooms, I will bring in $1300 a month from rent, so that leaves me $525 for my girlfriend and me to split. In a perfect world, my net monthly mortgage payment would be $262.50 a month – a 62% reduction in my current housing costs.
I understand that this might not be consistent all the time. For months that we have a vacancy, I am still keeping my housing expenses reasonable. We discussed that my girlfriend’s rent would be capped at $600 per month so I would pay the remainder of $1225 which is under 30% of my net income per month. Spending 30% of my net income towards my housing isn’t ideal, but I can technically “afford” for this to happen if required.
Then there is also the option of only renting out one room. In doing so, I am keeping the same housing costs as I have now, with a more comfortable home that is gaining equity in a booming Austin Tx housing market (aka better than renting). Another option is having one roommate full time and trying out Airbnb the other room. Airbnb isn’t the plan right away, but it could be something to consider going forward.
Next Steps
Right now we are about two months away from closing. I don’t have an actual closing date yet, but it should be at some point in October. Coming up next: I need to get final locked in interest rates and choose who I want to be my lender.
I also need to hire a 3rd party inspector, buy my appliances/furniture, and buy various items for the house.
Ugh, I hate spending money. However, I’m glad that I have been automatically saving for this for over a year now.
Right now I’m just taking it one step at a time. I’m excited about the house progressing and starting up with my house hacking plan.
Question for You!
What are ways that you reduce your biggest expenses?
Do you have any advice or tips for me as a new homeowner?
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Gary is the author behind Debt Free Climb, a blog that shows how to live intentionally, pay off their debt, build a side income, and travel the world
Gary's favorite free financial tool he’s been using since 2017 to manage his net worth is Personal Capital. Each month he uses their free Investment Checkup tool and Retirement Planner to track his investments.
His favorite way to save automatically is Capital One Performance Saving, a bank that allows him to create multiple high-interest savings accounts and create an automatic savings plans for each account. He uses these features to meet short and long term savings goals.
His favorite way to save money on car insurance is by using Root, an app-based car insurance service. He saved $240 this year after switching from Geico to Root
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So awesome that you are doing this! I miss living in Austin. I’m in Houston area right now but plan on moving somewhere else soon. House hacking is something I’ve always been hesitant to try. My dad did it for years and the renters would always leave the place a disastrous mess upon leaving. Although, I do attribute it partly due to the type of renters he had in there.
Advertising the rooms towards business professional types seems like a good idea. Good luck and looking forward to seeing how it goes!
Thanks, Colin!
I was somewhat nervous at first, but I took a house hacking course that laid out exactly how to properly vet tenants. I feel more prepared that I will only approve the right type of person. I’ll be sure to post updates on the whole roommate part of this experience.
Building a new one makes sense if it’s your first one and you have the money in the bank. Apart from the points you made it also gives you a psychological uplift to start living in a new place that you yourself oversaw building. But of course you need to have a longterm plan because if you plan to leave soon you may have a tough time with tenants. Reselling is an option but I do not really recommend selling real estate. It’s the gold of the 21st century.
Thanks for the comment.
I agree about having a long term plan. We are planning on staying for the next 3-5 years then renting out full time.id like to continue to rent out by the room but might decide to just rent to one family.
My goal is to have a primary residence and 2 rental properties in the next 8-10 years.
That’s a good one. 2 rental properties in different locations should give you a great balance and two steady income streams. And since your potential tenants are families, it’s bound to be hassle-free. Good luck, Gary!
Having a long term plan is essential. You made a great point on that.
How long did it take?
That is quite resourceful. I like how frugal it is that you left the other rooms of your house vacated for bed spacers. That will reduce your expenses. My wife and I are considering doing the same thing since you have mentioned this, we could need some suggestions on where to find single family homes for sale.
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