Updated: Feb 15
Scenario: You have graduated from college, secured a decent job and started earning a bit of money, and you want to buy your first house. What do you imagine your first house will be like? Does it have vaulted ceilings? A huge backyard? Is it tucked away in the mountains? Does it have a beautiful outside pool?
… well, it shouldn’t. At least not yet. Your first home should not be your dream home, you probably can’t afford it anyway. You should treat your first home like a cash-flowing investment so that you can practically live for free. There are a few ways to do this, and you might have heard “House Hacking”, but honestly, I am not a huge fan of that term. I prefer “owning a damn house and renting it out”. It is not as catchy, but that is what it is, no need to sugar coat it or make it sound fancy. It is a smart, respectable decision that will pay off massively in your future and journey to financial freedom. So while it may mean living with some roommates, a little farther from the bars, or in lower standards than what you grew up with, the rewards down the line will absolutely be worth it. While your friends are paying overly expensive prices to rent an apartment in the high-rises downtown, you will be building equity in real estate with minimal expenses. You will literally be getting paid to sleep in your bed. And guess what, the best part about this is that it is not permanent. If you can live like a college kid for a couple of years after school (let’s face it, you will probably do it no matter where you live), your net worth will be immensely higher than by solely earning money from a salary. Now, let's get into how to actually do this.
3 Methods to Make Money Off Your First Home Purchase
The Duplex Method: This one is my favorite because I think it has the highest revenue potential. Essentially, all you need to do is buy a duplex, live in one half, and rent out the other. Since the payments from the rented unit would be higher than the mortgage payment (or at least a substantial portion of it), you would be living at a highly discounted rate. The absolute best way to do this would be to get an FHA loan, allowing you to put only 3-5% down on the property and secure a low-interest rate on your mortgage, and not only do you rent out the other unit, but you get roommates in your unit as well. If done correctly, the combined rents from all the rented units/rooms could be larger than all your living expenses, and you could make money just by living in the house. The only downsides for following this method (along with the other methods) are that it will mean you must live with roommates for a couple of years and manage housing maintenance/rehab out of your own pocket. Unless there are any major fixes/renovations needing to be done, this will be an incredibly lucrative way to live and will allow you to purchase a much nicer home when you are ready to start a family (or do whatever it is you would like).
The Roommate Method: Sometimes, depending on where you live and the real estate market, it may be hard to come by duplexes (or other multi-family houses). Fear not, because there is always The Roommate Method. Instead of having a split house, you could buy a single-family home with multiple bedrooms and charge roommates by the room. Again, you could use an FHA loan and live practically for free while building equity in the property. This could even be fun if you rent the rooms out to your friends who you know won’t be a pain to live with. The only downside for this method besides what was listed with the duplex method is that some counties have rules limiting the “renting by the room” technique, so check with your county’s laws as part of your research!
The Live-in-Flip Method: This method works best for those of us who work well with our hands and have a bit more knowledge about residential construction. To successfully follow this method, you need to find a house that needs a lot of work for a very low price. You need to be willing to live in a house with few amenities (besides the essentials, hopefully) and renovate it while living there. You will benefit from securing a property at a very discounted price, and hopefully, after you have finished fixing it up (or have contractors do the work for you) it will be worth multiple times what you paid for it.
I know living in a cheaper home with roommates does not sound like the sexiest first home purchase, but suffering through it for a few years is one of the most effective steps towards reaching financial independence. According to the U.S. Bureau of Labor Statistics, roughly 33% of individuals’ spending in the U.S. is spent on housing (not including payments towards taxes). Imagine if you could free up a third of your income! You could allocate that to paying down student loans, saving for your next home purchase, planning a big trip, or (my favorite option,) investing it in a total stock market index fund!
Side note: If you are interested in learning more about real estate either as a personal investment tool or as a career in the future, check out https://www.biggerpockets.com/. It is one of my favorite resources for reading about real estate and connecting with like-minded people.