House Hacking 2.0 – Using Crowdfunded Real Estate to Pay Your Mortgage

“House Hacking” is talked about by a number of personal finance bloggers.  The concept is to buy a 2-flat house with a mortgage, live in one unit and rent out the other unit.  Depending on the circumstances, the rent from the one unit ends up paying for a significant part of the mortgage.  Over time you get the mortgage paid off for free.

Millennial Money is a big advocate for House Hacking and has a great breakdown of how to do it with the numbers behind House Hacking. I will leave it to him to break down the details since this isn’t something I have done myself.  However, this did make me think of a different type of house hack that builds on the same concept … Let’s call it House Hacking 2.0!

House Hacking 2.0

This scheme, hack, or accounting game is not anything fancy but sometimes the simple ideas are the ones that make the biggest impact.  It builds on a couple of concepts that always get talked about on personal finance blogs:

  • To pay off your mortgage early or not
  • Have someone else pay your mortgage (House Hacking 1.0)
  • Real Estate Investing (Landlording)
  • Crowdfunded Real Estate

Paying off your mortgage early is part of budgeting and personal finance 101 tips.  You save money by paying less in interest, free up cash flow once the mortgage is paid off, and it’s just the right thing to do. Now the counter argument is usually based on the concept that mortgages are low-interest loans with a fixed nominal payment so its cheap money that can be invested elsewhere and play the arbitrage game.  House hacking 2.0 focuses more on the latter.

The next big thing is to have someone else pay off your mortgage for you through a house hack or renting out a room in your apartment on Airbnb.  Now, this requires work by being a landlord, living next door to or with your tenants, and probably living in a place that is smaller than you truly want.  It’s still a great investment scheme that puts you well ahead of other traditional homeowners

House Hacking 2.0 is a blend of the 2 concepts.

What to do with my Wife’s Bonus?

This all started with my wife getting a significant bonus at work and me having some extra cash waiting to be invested.  I wasn’t excited about shoveling more money into the stock market and I didn’t have the energy to manage another real estate property.  This left us with 30K to pay down our mortgage which made the most sense.

I logged into my bank account and was getting ready to make a payment when I saw an email come through from RealtyMogul notifying me of a dividend payment.  For those of you that have not invested in a Crowdfunded Real Estate, essentially you get dividend payments every month or quarter and since I have automatic reinvestment turned off these are paid directly to my checking account.

This email alert got me thinking … I could set up a checking account with the bank where I have my mortgage and then have all my crowdfunding dividends routed to that same account. Part of my mortgage payment would be covered by the dividends effectively lowering my mortgage payment.

Let’s Do The Numbers

Make the following assumptions:

  • House Value: $250,000 with 20% Down
  • Mortgage Balance: $200,000
  • Interest Rate: 4%
  • Monthly Mortgage Payment: $1000 / month

That extra 30K could go towards paying down the mortgage and save you 4% in interest but still have the same mortgage payment per month.  With House Hacking 2.0 you would invest the extra money in a Crowdfunded Real Estate which is currently giving an ~8% return (~$200 / month) and apply the dividend to the mortgage.  It’s not hard to see how you can set up your own arbitrage system to take advantage of the rate differences, get 20% of your mortgage covered and free up some cash flow.

Now there are some things to account for, the 4% mortgage interest is tax-deductible (if you itemize) and the 8% crowdfunding dividend is taxable.  The 8% return from crowdfunding is not guaranteed but probably more reliable than rental income from a condo.

Either way, I believe this is a good way to set up your finances so extra money can be paired up to pay off your mortgage.  This also provides some real estate income without getting into the landlord business which can require a lot of time, work, and the risk of losing it all.

Check out my post on how I Invested in Crowdfunded Real Estate and our Real Estate Reports to see real numbers for the monthly dividends collected from the various investments.

What do you think?

Cheers!

–Dr. Linus

6 comments

  1. Hmmm… I don’t think you can call it house hacking. It’s just another way to invest. You can invest in a good REIT and use the income to pay down the mortgage too.
    I invest in real estate crowdfunding and my investment is doing well so far. The real test will be when the real estate market softens.

    1. Haha I confess it’s not rocket science and just another investment idea. it was a way to introduce crowdfunded real estate and reframe those investments to see value in adding them to the portfolio. Also, it shows the importance of interest rate arbitrage compared to paying down the mortgage.

      To a certain degree, house hacking 1.0 would be guilty of the same. Most of the time the person is buying a more expensive property (2 flat vs single unit condo) and using the return on equity to fund their housing bill.

      I plead guilty to click bait but now that you are here feel free to browse around.

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