How House Hacking Can Eliminate Your Mortgage Faster

Andrew:: Hi, I'm Andrew Wright, principal of Professional Southport, and this is the Andrew Wright Property Podcast. I've built a multi-million dollar property portfolio generating a seven-figure annual rental income, and led my real estate team through thousands of sale and lease transactions. In each episode, I share real deals and strategies that will help you find, fund and operate profitable property deals.

The aim of this show is to provide education and build a community of like-minded investors who can collaborate, share insights, and help each other in each other's journeys. You can make excuses or you can make money, but you can't do both. So come and join us.

Andrew:: Hello and welcome back to the Andrew Wright Property podcast. Today we're diving into a strategy that's practical, powerful, and something almost anyone can start with — house hacking. This is about turning your home or even your business premises into an income-producing asset to reduce or eliminate living costs.

Adam:: I've never heard of it, and I'm sure a lot of you out there haven't heard of it so I'm really interested to find out what this is all about. Andrew, welcome back to the podcast.

Andrew:: Thanks, Adam. Good to see you, man.

Adam:: You too. Now, Andrew, you've used this across both residential and commercial property, haven't you? So let's start simple: what exactly is house hacking in simple terms?

Andrew:: Well, the most common house hacking strategy is in a residential context when you think of the rooming accommodation legislation, and it's just simply renting out some rooms in your house. Now, I wouldn't have been able to survive the first couple of years after university if I didn't house hack myself, and I was able to do it, not with my own property, but I did it with my Mum and Dad's property.

So we had a large six-bedroom house down the Gold Coast, and Mum and Dad left for three or four years to build a business. Felt sorry for us and said, well, Andrew, do what you want with the house. We just want you to pay for the rates, the water and the insurance, and if you can generate a bit of income, then go for it.

And my brother and I lived in two of those rooms and we rented out the other four and there was that cashflow that got us through because I didn't have a job straight outta uni. And then I got into a commission only real estate job, and I just literally wouldn't have survived. But in those days, I rented out downstairs for 150 bucks. And there was two rooms upstairs that we got $50 each for. And that $250 a week back in 1990, 35 years ago, is probably the same as getting $800 a week now in today's dollars. And it made a massive difference.

Adam:: So this is the good old-fashioned, you know, when you are young, buy a property, get your mates in to help pay for it.

Andrew:: It's exactly what it was. Look, it was just a good experience too. I basically became a property manager at that time and it was a good experience to learn how to manage property. And you know what you do with that cash flow? Well, you either pay for the bills — that's what we did, the rates, the water, the insurance. If there's anything left over, well, if you own the property, you can pay off a mortgage or you can put it into some other investments. But in all honesty, my motivation to do this podcast was mainly for young people starting out now who are using this 5% deposit scheme, borrowing 95% with massive repayments, and with interest rates going up. In all honesty, you don't have a choice but to consider house hacking.

Adam:: Yeah, it is the best strategy a first home owner can use, not only to cover their mortgage expenses, but actually pay off their mortgage as soon as possible. Okay, now I've got a lot of questions that come to mind. But first of all, why do most people treat their home, you know, as a liability?

Andrew:: Well, because it is — it just doesn't cash flow. I mean, you hear all the big property gurus saying your house is not an asset, it's a liability. Whether it's Grant Cardone or Robert Kiyosaki, they all say the same thing and they're absolutely right. Interest on your home loan, if you own it in your own name, is generally not tax deductible. Your rates are not tax deductible. It's just a liability.

So you know, there's a lot of podcasts out there about rent vesting in Australia. Buyers agents in particular talking about rent vesting. But for people who wanna buy their first home, I actually believe that house hacking is even more powerful a strategy than rent vesting.

Adam:: What's rent vesting?

Andrew:: Well, that's where instead of going to buy your first home, you just go and rent somewhere, pay rent where you wanna live, and go out and invest and buy a property, maybe in a cheaper location where you can afford to buy at that time. So that's that strategy. It's well documented. We could do a whole podcast on rent vesting, but we won't because it's been covered by a million other podcasts. But house hacking's a pretty big term in America — I was doing it in 1990 with a property I didn't even own. And I've done it ever since with other residential and commercial properties that I own today.

Adam:: That brings me to a little side question. Can you do it with properties you don't own? Can you go and rent?

Andrew:: You can. Well, provided you have the owner's permission, you can do it. As a residential real estate agent, we often get prospective tenants make application to lease properties on the basis that, oh, can I sign a two-year lease on this and go and Airbnb the property by myself? Now, you can only do that if the landlord approves of it. Some landlords have no objection to doing it. In a residential context, they call it Airbnb arbitrage, where people will go and rent 10 houses and use them all for Airbnb. And they can profit quite handsomely with that arbitrage. So that is house hacking on steroids.

Adam:: Wow. How much realistically can this sort of reduce your living costs?

Andrew:: Well, it depends on how many rooms you wanna rent out. In my case, we rented out four of the six, and it more than covered all of the expenses. It put cash in our pocket to buy some food. They covered everything. Just to give you an example: I had an ex-employee ring me a little while ago saying, Andrew, can you help find a one-bedroom apartment for my son? He wants to take advantage of the incentives with the first home buyer scheme and the no stamp duty up to $700,000. And I said, well, why would you want a one-bedroom? There's no leverage in a one-bedroom. What you should do is borrow an extra $150,000 or an extra hundred grand, buy a two-bedroom and house hack it. You get the leverage of your tenant paying off half the mortgage for you. And you're gonna end up with a two-bedroom apartment with the same cash flow that it's gonna cost you to pay for a one-bedroom. Why wouldn't you buy a two-bedroom?

Adam:: Will lenders take house hacking into account as income towards being able to service your debt?

Andrew:: Look, great question. For a finance broker, I don't currently operate a finance brokerage, but I suspect the answer is no. If it's an owner-occupy loan, it's a bit different. If you're buying an investment property, of course they will take that cash flow into your capacity to repay. But for an owner-occupy property, I suspect the answer is probably no. They won't take it into consideration.

Adam:: I guess one of the questions is it's a lifestyle decision too, isn't it? About who you're gonna be sharing your home with?

Andrew:: Absolutely. I have a large house myself and I was looking at doing the home stay thing at some stage. My kids are half Japanese, they speak the Japanese language. We were looking to maybe get one or two Japanese students over on a home stay and it pays pretty well, but we didn't go down that track because of the time commitment. I'm interested in a passive cash flow from house hacking, but not the home stay type of model. And personally, I'm not interested in the Airbnb model where you've got all the cleaning and all that sort of management involved. But for some people, it works quite well.

Adam:: I have a friend I know who's been doing home stays for some time. The benefit is that it's usually fixed term — 3, 4, 6 months — and you're being paid well above normal rental rates. She said it was the best thing ever. They generally stay to themselves a lot of the time. Lovely people, and has generally never had a problem. It was almost like they were renting a room that just sort of stayed out of the way.

Andrew:: Yeah. And I'm sure a lot of those relationships, particularly with international students, end up in lifelong friendships as well.

Adam:: What about your advice around the legalities, paperwork — you know, getting mates in on a handshake deal or do you put in place proper boundaries and paperwork?

Andrew:: When I was 20 years of age, I didn't, but obviously I would recommend that you do. These days, legislation has grown around the rooming accommodation business and there's a separate part of the residential tenancies legislation specifically for rooming accommodation. So yeah, you should have a rooming accommodation agreement. You've got compliance around having the interconnecting smoke alarms in every room. But what's more important is that you probably get advice from your accountant and your lawyer because this income needs to be declared on your tax return. That can also have implications on your capital gains tax exemption for your principal place of residence. Even from a land tax perspective, there is specific legislation around the amount of the floor plan of a house that you can rent out and still keep your principal place of residence exemptions for land tax purposes.

Adam:: So a big takeaway here is obviously get advice from the right professionals.

Andrew:: I'll tell you why I'm qualified to agree with that comment — because I didn't get advice on one particular transaction. I got accounting advice on something, but I didn't talk to my lawyer, and I ended up with a $53,000 land tax bill. Accountants are trained in federal law being the Income Tax Assessment Act, but they're not all trained in state law around land tax. Now, I don't want to go into that particular problem, but I actually took them to QCAT to fight that $53,000 land tax bill and I lost. If I had sought legal advice upfront with what I was doing, I'd be $53,000 better off plus another five or six in legal fees. So it is important that you get tax advice and legal advice when you're going down that track.

Adam:: What about another situation I've seen before — someone was getting flatmates in, being paid cash to help. So they were leasing the property, just a normal rental, renting out a couple of rooms to people who weren't on the lease. Had been doing that forever. What's the scenario there if you were to do it properly?

Andrew:: Of course it's possible. Our particular property management business does not allow subleases. What we do allow, if someone has a three-bedroom or four-bedroom property and they want someone else to come into the property, we make sure they fill in a rental application and they can become what we call approved occupants. We generally do not allow subleasing in our lease contracts, but every real estate office is different. Yes, you can sublease if a lease allows it. And that's exactly what happens in those Airbnb arbitrage situations where someone signs a two-year lease and there's a clause built in that allows them to advertise on Airbnb.

Adam:: Now, let's talk about commercial house hacking. I've heard you've used this strategy too.

Andrew:: Well, even when I first rented a property at 16 Ang Street Southport for Professionals Southport, I was trying to expand that business, and what happens when you have intentions to grow is generally you'll lease a property that's a little bit bigger than you need. So when I negotiated that first five-year lease, it was a lot of money — $120,000 a year just in rent. And I said to the landlord, look, I can't really afford this at the moment. I'm leasing your premises because I want to grow into it. I don't wanna move every two years when I put on more staff. Will you allow me to sublease some of this area? And I did. I had a migration agent in there and they rented a small area of our office. It might have only been a thousand dollars a month, but that's 12 grand a year over five years — $60,000 less expenditure.

Even more recently, my office now where I've moved to, I've subdivided, put a wall down the middle. I'm getting $45,000 a year for renting the office next to where I am now because it's surplus to my needs. Plug that into a calculator — $45,000 a year extra into your mortgage and see how much interest you save over 10 or 20 years.

Adam:: Great idea. Granny flats — that's gotta be another form of house hacking, isn't it?

Andrew:: Yeah. I bought my personal residence in 2005 and I have house-hacked my personal residence for the last 20 years. I get $420 a week or whatever it is, rent every year. That's 20 grand a year for 20 years — that's 400 grand extra income just from house hacking. I've declared it every year on my tax return. I'm not hiding it, that's 400 grand there, just from my residence.

You know, I faced some scrutiny from my wife in the early years. I don't want someone else living next to me. Shouldn't we keep that for our family when they visit? I said, well look — I'm paying the bills here. Somehow we gotta pay off this mortgage. And sometimes as the man in the house, you gotta stamp your foot down and say, forget about the lifestyle. When we get super rich, we'll worry about the lifestyle. For now, let's house hack. And this is what every first home owner needs to do as well. If you buy a property with 2, 3, 4 bedrooms, you're not gonna want someone else living with them. But you do what needs to be done. If you are borrowing 95% mortgage on your house with interest rates going up, let me tell you — you've got no choice. House hacking is the best thing you can do to get through.

Andrew:: Now, I'm only gonna cover the land tax implications very broadly because it is very complicated and every single state in Australia is different. But what I can say is that if you're renting out more than 50% of your house as a floor plan, it's no longer a principal place of residence — you're no longer gonna get the principal place of residence exemptions on your land tax. Now in Queensland, individuals can have $600,000 each of land value which is the threshold. So for a couple, if your land is worth less than $1.2 million, you're not gonna be affected anyway. But if you do own lots of land in your own names and you're over that $1.2 million threshold, you could be caught out.

Adam:: If someone's listening and thinks this is something that they're wanting to do, but they're sitting on the fence — what's your final piece of advice?

Andrew:: The two types of people that benefit most: one is the first home buyer. Rent every room you can, develop some passive cash flow. Don't waste that money on alcohol when you get it in. Put it into your mortgage. Pay off your mortgage quicker. House hacking is a far better strategy than rent vesting, in my opinion.

And if you're a self-employed business person paying rent on a commercial premises — go out and buy it. Consider buying a commercial property for yourself. And if it's too big for your needs because you're wanting to expand, rent out some of that spare space. Look, my office now, I've subdivided, put a wall down the middle, I'm getting $45,000 a year. Plug that into a calculator — see how much interest you save.

Adam:: Fantastic, Andrew. Thank you very much. It's been a very comprehensive breakdown of something I don't think a lot of people have really thought about. It's practical, it's accessible, and something people can actually implement pretty much straight away and very easily.

Andrew:: Thanks, Adam. And thanks listeners — please forward this podcast to some other people. We've gotta get our subscribers up, so pass it on. Thank you.