Passive Investor Tips is a weekly series hosted by full-time passive investor and Best Ever Show host, Travis Watts. In each bite-sized episode, Travis breaks down passive investor topics, simplifying the philosophy and mindset while providing tactical, valuable information on how to be a passive investor.
For most Americans, the most expensive cost they have is housing. In this episode, Travis shares four strategies for using real estate creatively to generate passive income that can drastically reduce, and in some cases, completely eliminate your living expenses.
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Travis Watts: Welcome back, Best Ever listeners, to another episode of Passive Investor Tips. I'm your host, Travis Watts. I've got a really exciting episode for you here today. What we're talking about is the art of free housing, and how to cut your living cost. Disclaimers as always, never financial advice. I'm not telling you or anyone what to do. I'm not a licensed financial advisor, CPA or attorney, so please always seek licensed advice when it comes to your own investing. And with that top of mind, I want to start by saying that for most Americans, the largest expense is housing. In fact, according to a recent survey by Self.Inc, the data shows that a monthly payment on a 30-year mortgage costs 36.2% of the median household income in the United States, an increase of 23.8% at the end of 2021, and the highest share of income spent on mortgage payments since 2007, right before the Great Recession.
So in this episode, I figured I would share with you the four strategies that I've used since 2009 to drastically decrease living costs, and in some cases to even get paid to live in my own house. So my goal is to share these strategies in hopes that one of these may resonate with you or add value to somebody that you know, so feel free to share this episode with anybody in your network who you think could potentially benefit.
Without further ado, let's dive into strategy number one, the house hack. This is what I initially started with in 2009. What I did is I bought a distressed property, moved into it as a full-time owner occupant, and then I rented out a furnished spare bedroom to a full-time college student. My mortgage was about $641 per month, and the rent that I collected from my roommate was $600 per month, so effectively, I was able to reduce my living expenses by over 90%. Now understandably, not everybody wants to have a roommate, or you may not be in a situation because of being older, or having kids, or having pets, where you don't want to deal with sharing your home. And I totally get that. So the second strategy is something I used several years after 2009, and what I effectively did is I bought a single family home, and it had a completely separate outdoor entrance and exit. So essentially, what we did is we converted a single family home into basically a duplex, but instead of side by side units, it was up and down. So we took the basement, fully furnished it, and we rented it out on VRBO and Airbnb.
So strategy number two is the short-term rental. If you're able to buy a duplex or convert your home into two separate living quarters or more, if you can convert maybe a detached garage into a little studio or one-bedroom apartment, if you can build a guest house maybe in your backyard, or if you can buy a pre-existing house that has a guesthouse already on it, these are all great ways to generate additional income. At this stage in my investing journey, the mortgage payment that I had on this particular home was about $1,800 per month, and my rental income was about $2,500 per month. So effectively, I was getting paid about $700 per month to live in my own house.
And that brings us to strategy number three, the value-add. This is a strategy that by far has been the most profitable strategy that I've used over the last 15 years or so, and I've done this on nearly every single home that I've owned, with the exception of one. What this involves is buying a fixer-upper property that is priced below the market comps, moving into it as an owner occupant, and then having the flexibility to fix up the property and then selling with the market comps at a later time.
And there's a few things I really like about this strategy. Number one, no tenants, no roommates, no rental management component attached. Number two, you don't have to be in a big rush to flip the house, because you have at least two years or greater, and I'll explain that in just a second. And number three, you actually get to enjoy the renovated home while you live in it, something you can't do with a fix and flip. So it's serving two purposes - you're providing shelter and a place to live for yourself, and this is also an investment attached.
And number four, you can potentially have a tax-free sale. Section 121 of the IRS tax code states that if you meet certain conditions, you may be able to exclude the first $250,000 of gain from the sale of your home from your income and avoid paying taxes on it. The exclusion is increased to $500,000 for a married couple that's filing jointly. Now, please always seek licensed tax advice. Again, I'm not a CPA; I'm just pointing out that section 121 might be something to research, learn about and look into.
Travis Watts: Now, let me share a real example with you. For those joining on YouTube, you'll see these visuals, and for those on audio, I'll do my best to articulate the strategy for you... But this right here is a home that I bought in Colorado in 2013. It was bank-owned, I paid $185,000 for it, and I lived in this home for two years. I fixed it up during that process. I sold it in 2015 for $275,000, completely covering my housing costs for those two years and making a sizable profit on top of that. And today, by the way, at least according to Zillow, this home is valued around $535,000. That's pretty crazy.
And strategy number four is to rent and invest. We found ourselves, my wife and I, in a situation several years ago where we wanted to live downtown Denver in a highrise. And the condos - and this was, mind you, luxury condos, but they were very, very small - were selling for around $800,000 to a million dollars. So what we did - and by the way, it was hard to add value to these, because they were already nicer and newer, and we couldn't really have a roommate, nor did we want to have a roommate at this time in such a small space... So what we did is we took the proceeds and profits and return of downpayment from the last home that we sold - this was about $300,000 - and we invested it instead in multifamily apartment syndications or real estate private placements. So the cashflow that was generated off that investment was around $24,000 per year, and what we were able to do is find a nice, but small luxury apartment... I think it was 17 floors up, downtown Denver, beautiful views over the city, $2,000 per month. So essentially, our investments, $24,000 per year, were paying for our rent. So depending on the market you live in, depending on the time of the market, depending on interest rates, it might make sense in some cases to consider renting instead of owning.
Now listen, I want to take a step back here for a minute, because I never want to be the guy that's painting the picture to be too good to be true, or too rosy... And the fact is that there's risk in all types of investing, including all four strategies that I've described here. You've got the risk that your tenants or your renters aren't going to pay rent, or that they might move out unexpectedly, they might damage your property, you've got natural disaster risk, you've got political risk, you have renovation and budget risks... So please, always do proper due diligence before deciding to do any of these strategies or make any type of investment.
But with all that said, I hope I was able to add some value. And again, if you think someone else could benefit from this content or any of these ideas, please feel free to share the episode. And in conclusion, something to think about here for the week - what if you could drastically reduce or eliminate your living costs for the rest of your life? Thank you guys so much for listening. You're listening to Passive Investor Tips. I'm your host, Travis Watts. If we haven't connected, please reach out. I'd be happy to be a mentor or a resource for you in the passive income investing space. Have a Best Ever week, and we'll see you on the next episode.
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