Long-Term Modeling for House Hackers

The goal of this module is to walk you through a long-term financial model of buying house hack properties. The model balances key variables and simplicity. It’s designed to show you the long-term power of buying multiple house hacks and ask key questions along the way.

The goal of this module is to walk you through a long-term financial model of buying house hack properties. The model balances key variables and simplicity. It’s designed to show you the long-term power of buying multiple house hacks and ask key questions along the way.

This module covers:

  • House hacking spreadsheet model
  • Property #1: Aurora room by room
  • Property #2: Another Aurora room by room home
  • Property #3: Another Aurora room by room home
  • Property #4: Another Aurora room by room home
  • The long-term model

Four Learning Options!
Ultimate House Hacking Guide for Denver
  1. Order the book on Amazon or grab a copy from us
  2. Listen to episode “#211: UHHG – #8 Long-Term Modeling for House Hackers” on the Denver Real Estate Investing Podcast
  3. Watch the YouTube video (at the bottom.)
  4. Read this blog post, which is from the book.
Start at the Ultimate House Hacking Guide for Denver Overview for a list of all the modules.

“In preparing for battle, I have always found that plans are useless, but planning is indispensable.”

– General Dwight Eisenhower

General Eisenhower’s quote sums up the importance of planning and creating a long-term plan. It’s absolutely essential to do. You must also realize that what you plan for five years from today is going to change. You will change, the market will change, the lending environment will change, your goals will most likely change and the performance of your rental properties will change—basically, everything will change. One of Joe’s favorite quotes sums it up nicely:

“Everyone has a plan until they get punched in the mouth.”

– Mike Tyson

As a property investor, you will get punched in the mouth (hopefully only figuratively speaking), and so will your plan. This point is being stressed because many people try to create the perfect plan, which is a waste of time. I say that as someone who has been guilty of that myself.

House Hacking Spreadsheet Model

Here’s how the spreadsheet model works:

  • Buy a property, live there, rent out the bedrooms or other units to live for close to free.
  • Two years later, buy a new property, live there, rent out extra rooms to live for close to free. Keep and rent out the previous property.
  • Two years later, buy a new property, live there, rent out extra rooms to live for close to free. Keep and rent out the previous property.
  • Two years later, buy a new property, live there, rent out extra rooms to live for close to free. Keep and rent out the previous property.

I purposefully made it every two years rather than the required one-year occupancy to show that you don’t need to do a perfect execution in order to build long-term wealth. For the sake of simplicity, the model assumes that you’re buying the identical property all four times. However, prices, rents, expenses and interest rates all increase.

You can download the House Hacking Spreadsheet at www.DenverInvestmentRealEstate.com/HHSpreadsheet. This is different from Joe’s spreadsheet that we shared earlier. Joe’s spreadsheet is built more for an individual rental analysis. This spreadsheet is built for long-term modeling. There is a detailed YouTube tutorial on how to use it. This module focuses on the modeling, not the how-to of using the spreadsheet.

Property #1 Aurora Room by Room Home

Throughout this course, we’ve referenced the house in Aurora that our client, Austin, is renting out room by room. We’ll continue using this property for this scenario. Why? These types of house hacks are readily available. It’s not the house hack of the year (those often go to Jeff’s extreme house hacking!), but it’s a solid, long-term rental that works for the majority of investors.

For this model, we’ll use the exact same assumptions from earlier. Here’s the spreadsheet again:

house hack spreadsheet
house hack monthly rental income
house hack monthly operating expenses spreadsheet

So far, the spreadsheet looks about the same. Once you start buying properties, it’ll build out a “Summary” sheet to build out the long-term model. Here’s the “Summary” sheet for the first two years of property #1:

Property #1

house hack income analysis
Click image to enlarge

Column Descriptions:

Personal Savings – Represents the money the client is putting towards their real estate investing savings account. It comes from the reduced living expenses and other money that he can save. For this model, we’re assuming he can save $1,000/mo.

Cash-flow – Represents the cash-flow from the individual property. In this example, we’re using 0. To keep things simple, the personal savings rate was adjusted to account for his minor monthly living expenses.

Total Property Cash-Flow – It’ll add up the cash-flow from each property to create a total cash-flow.

Cash in Savings Account – The total cash in your real estate investing savings account. The amount is calculated from adding the property cash-flow, the personal savings rate and the previous year’s balance. When a new property is purchased, the total cash to close is subtracted from this amount.

In the first two years, property #1 is fairly simple, but notice that the net worth and savings account cash are increasing! That’s the trend we like to see.

Property #2: Another Aurora Room by Room Home

To keep things simple, the spreadsheet assumes that he is buying an almost identical house. However, he’s buying this in the future, so prices and rents have increased by our assumption inputs. Also, all expenses have increased at a 3% annual inflation rate.

This house now costs $397,838. The good news is that property #1 has seen an equity increase from the appreciation. Now, this second property costs more money; however, the down payment only increases by about $1,142 since he’s using another 5% down conventional loan.

By now, you know I like to plan conservatively. The spreadsheet has a variable built-in so you can increase the interest rate percentage between each time you buy the property. In this model, it’s assumed the interest rate will increase by 0.5% every time a new property is purchased. Property #1’s rate was at 3.875%. Property #2 is at 4.375%. In reality, the last couple of years, we’ve seen interest rates drop. Again, I always like to plan conservatively.

Here’s the summary sheet for property #2:

house hack spreadsheet analysis
Click image to enlarge

First, look at the “Cash in Savings Account” at years 2 and 3—it goes down. At the end of year 2, you’re moving out of property #1 and moving into property #2. The down payment and all the other cash needed to close is coming from the savings account. The table above doesn’t show this, but on the spreadsheet, a warning pops up because the $24,000 in the account is less than the total cash of $28,388 needed to close on the property—that’s a difference of $4,388.

In reality, that doesn’t mean you can’t buy it; it means you’ll have to pivot with another option. Here are a few things to consider:

  • If you’re able to increase your personal savings rate.
  • The purchase of property #1 included around $3,000 in interest rate buy down. The spreadsheet assumes the same interest rate buydown for property #2. You can skip it.
  • We could raise the purchase price by $5,000 and have the seller give you a credit at closing. A credit means the buyer (you) has to bring less cash to the closing table.
  • You could wait a couple more months to save the money.

Those are only a few of the options available! To keep things simple in this example, we’ll leave it as is.

Look at the cash-flow from property #1 in years three and four. It’s pretty damn good around $7,000/yr.! The net worth is now over $100,000. Wow! It’s hard to believe, but it’s been a very common story in Denver.

Property #3: Another Aurora Room by Room Home

It’s now time to buy house hack #3! To keep things simple, we’re assuming that property #3 is just like properties #1 and #2. At the end of year four, it costs $422,066. Since we’ve left all the assumptions the same, that also means that properties #1 and #2 are worth that much too, which is great news because there is more equity.

It also means that property #3 costs more money. At the end of year four, there is $33,643 in the savings account. You can’t see it on the summary page, but the spreadsheet highlights the cell in green because it’s more than the total cash needed to close for property #3, which is $30,109. Great!

The spreadsheet is also assuming that the interest rate increases by 0.5% from 4.375% to 4.875%. The increased interest rate increases the monthly mortgage payments.

Let’s take a look at the “Summary” sheet results while living in property #3 and renting out #2 and #1 on a room by room basis.

denver house hack spreadsheet
Click image to enlarge.

Look across the row for year 5:

  • Property #1 is cash-flowing $9,209 a year!
  • Property #2 is cash-flowing $5,676 a year—not bad for just moving out.
  • It’s over $1,000/mo. in cash-flow from two properties. No one is retiring yet, but it’s good cash-flow that is significantly increasing your savings rate.
  • The net worth is now over a quarter of a million dollars. Wow!

Property #4: Another Aurora Room by Room Home

Hopefully, by now, you’re realizing the pattern here. It’s time to buy property #4, which is similar to the other properties. At the end of year six, there is $57,304 in the savings account. The property costs $447,770 to buy, but because of the power of leverage, only $31,934 cash is needed to close.

In addition to the price increase, all the expenses and rental income has increased as well. Like the other properties, we’re adding an additional 0.5% to the interest rate, which now sits at 5.375%.

Let’s take a look at the “Summary” sheet results while living in property #4 and renting out the other three properties.

house hack analysis living in property
Click image to enlarge.

Look across the row for year eight, your second year of living in property #4:

  • The total property cash-flow is $25,075.
  • The cash on-hand is close to $100,000!
  • The net worth is now over $500,000.

These numbers are starting to look impressive. Remember, it took patience (we’re at year eight), the extra management work of self-managing room by room rentals and living with your tenants. Is the sacrifice worth it? It depends, but for most people, the answer is yes.

The Long-Term Model

At this point, the spreadsheet model assumes that you’re done with house hacking. Looking back at the previous “Summary” table, you should have a great foundation laid. In real life, after a few house hacks, most people have “house hack fatigue” and transition to a more traditional investor role. In this situation, you can with the cash-flow, equity and experience that you have gained!

The next “Summary” sheet shows results up to year 40. Spend a few minutes and review the rows for years 10, 20, 30 and 40. Every year, your cash-flow and equity are increasing!

house hack cash flow spreadsheet
Click image to enlarge.

The numbers in year 40 start becoming unbelievable: A house in Aurora will be worth $1.2 million dollars! Remember, this is in future inflated dollars. Throughout my life, I’ve also talked to a lot of homeowners who bought properties decades ago and for what seemed like an unbelievably low amount. The story that comes to mind is one from a few years ago when I was out walking my dog. It was in a community built in the 1950s. I started talking with an older gentleman who owned his home. Sometime in the 1950s, he purchased it for $14,000. He told me that, back then, it was a lot of money and that he couldn’t believe he was spending that much on a home! Now all the houses in the community sell for $750,000 or more.

As you get into the future, what should you do with the properties? Should you start paying down the mortgages? Should you sell and trade-up into bigger properties? As with many answers, it depends! Does the cash-flow from four paid off properties provide you the income that you need? The last module of this guide will go into detail on what you can do with all the equity that you’ve earned in the properties.

We covered a lot in this module. If you have further questions or need help customizing this to your situation, reach out to us. We’re here to help.

YouTube Video: Long-Term Modeling for House Hackers

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Authors
Chris Lopez
Chris Lopez is a Denver area real estate entrepreneur and investor, as well as the host of Bigger Pockets’ House Hackerz and the Denver Real Estate Investing Podcast.
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