House Hacking: Analyzing Your Best & Highest Use On Your House Hacks

House hacking and renovations. Such a powerful way to improve your house hacks not just from the value end of it, but also from the rentability standpoint.

Today we'll talk about forced appreciation on your house hacks, how to analyze the best and highest use, and how these strategies could catapult your wealth, and accelerate your returns.

Just like home flippers, you can increase the value of your house hack properties by making improvements, and remodeling. The difference - you're not selling it. We house hack it.

First off, what is forced appreciation

Forced appreciation is just a fancy way - of saying remodel or rehab. It's forcibly, or proactively, increasing the value of a property through renovations and improvements.

The underlying goal is to elevate the property's worth. But not just increasing the property value, but at the same time bringing it to its "best and highest use" in both the resale market, and also the rental market. 

Best and highest use is kind of self-explanatory - but its when you're figuring out what to do with the renovations, that will give it the best and highest value.

This is super relevant in the world of flipping properties. After the flip is done, the investor will look at what is its best and highest use. Is the return higher to sell it today? Is the resale market good? Or, are the returns on the investment - better to actually rent the property out, and wait to sell later on

So there's what that is

Now, as a house hacker, there's a little bit different process to this.

because it's your primary residence, and already have the intent to rent it out afterwards, you can make upgrades and renovations that are tailored towards, overall quality - like new floors, paint, the cosmetic stuff

Or - tailored towards increased rent or rentability. smart home features are great, like smart thermostats, smart locks, the new MyQ garage openers you can see and control from your phone, motorized window shades, i mean the list goes on.

Or, you can do a mix of both quality for resale and rentability

So with this in mind, although the intent is to rent the property out - this is where you look at that best and highest use. Of course, the intent is to rent the property out, but maybe after the renovations are done, it makes more sense to sell!

if you remember from a month or so ago, where I talk about house hacking on steroids - instead of selling after year 1, you could enjoy that property and the work you've done, for another year, and sell after year 2 to avoid short term capital gains

Either way, whether moving out and renting makes more sense, or selling after 2 years makes more sense, the good news - you have options!

So with this all in mind - what is the best way to get to that point?

Here is my absolute favorite strategy I've come across - that dips into a little bit of both scenarios

Let's say you find a nice 2 bed 1 bath for $200,000. You purchase with a 5% down payment, which comes to $10,000 down.

This place has a decent sized unfinished basement, and also has plumbing for a bathroom, Plus enough space for an additional bedroom.

You decide to finish the basement, and it takes 8 months in adding another living space down there, and also add another bedroom and bathroom - and we'll say this all costed $25,000

Now all of a sudden, your old 2 bed 1 bath house hack is now a newly renovated 3 bed 2 bath, with a finished basement

it's now 9 months later, and you're getting ready to house hack it out. This is where we look for the best and highest use!

So, Similar 3 bed 2 bath properties in your area are currently selling for around $275,000.

Your $25,000 investment in renovations has given you a $75,000 boost in property value!

That's a 200% return on your investment in renovations, plus you have your $10,000 in equity from your down payment.

Another factor to consider here before we continue, is if you remember where we talk about refinancing, or the cash-out refinance, this could also be an option depending on where the market is at that time.

If you need to keep 20% in the property, for a cash-out refinance, on $275,000, you would then keep $55,000 in equity in the home, and be able to pull out the difference of what is leftover after your initial loan is paid off - which was $190,000.

$190,000 + $55,000 = $245,000

meaning, off of a refinanced value of $275,000, you would be able to pull out $30,000 in a cash-out refi scenario - which if you think about it, you are getting back almost your full $35,000 you had invested in that property. 

In simple terms, you just bought this home almost for free and still own it!

Anyways, this is getting long isn't it.. I'll start wrapping this up here

With the addition of that extra bedroom and bathroom, your house hack property now offers three rentable bedrooms instead of two. This will increase your rent, especially if you are renting your house hacks out by the room.

Lets forget about the cash-out refi for a minute - and say you decided to just move out and house hack it. 

Cause this is the best part.

While your property's value has increased by a whopping $75,000, you are STILL only paying that original mortgage based off of a $200,000 value, or $190,000 loan balance.

You now have a 3 bed 2 bath, that is renting out as a 3 bed 2 bath, worth $275,000, with the same.. original..mortgage..

If you're upset about where rates are today, and think the payment is way too high - 

in this exact scenario you're getting almost a 28% discount on your payment every month, by having a $275,000 property and only paying a mortgage on it worth $200,000!

The bank isn't upset, they're getting paid back what they were owed - don't just work the system, but work WITH the system!

You're in a partnership with the bank and the government, not rivals. Everyone can benefit, if you play your cards right