The Best Way to Own a Home

The personal finance / early retirement / financial independence space on the internet admittedly draws quite a bit of my attention. I’ve become an avid reader of sites like Mr. Money Mustache, Mad Fientist, Travel Miles 101, Money Boss and a few more. My wife calls it my new obsession.

There’s so much on these sites that I really enjoy, agree with and have applied in my own personal life. We’ve quite dramatically cut back our own expenses, upped our savings and changed our investment style. I wish I had had the sense in my 20’s and 30’s to follow the advice of some of these writers, but in truth it’s never too late to start. I’m sure today’s 20-somethings don’t generally want to bother with this type of information, but I sure would like to convince all of them to subscribe to sites like MMM and learn. It’s immensely more empowering to live within your means than to go into debt and cross your fingers that your income will go up.

So that all said, it’s been fascinating to me to see a couple of areas where even in the financial independence world blind spots still exist. Of course I know why they exist, since they are deeply embedded in American society, but nonetheless it surprises me from time to time that folks who so deeply question everything tend to overlook what our grandparents and great-grandparents used to do.

For this piece, I’ll simply focus on housing, and the topic of owning a home. Housing is the #1 expense for nearly every household. Some really smart pieces by JD Roth, Bigger Pockets and Paula Pant have laid a great foundation for questioning the assumption that owning a house is always a wise financial idea. I concur, and wrote something similar a few years back. Although in retrospect I could have been more eloquent, I’d simply reinforce the thoughts of others and say that, in my opinion, buying a typical single-family house with a 30 year mortgage and 5% down, is almost never a good idea. It takes incredible discipline to turn that into a wise financial choice, and hardly any of us have it. At best, it’s a forced savings plan, but at worst it’s a lifelong money pit or a terrible money loser. 

A lot of advice starts with putting more money down and shortening the loan, which is definitely smarter. A 15 year mortgage is many shades better than 30 for you, and the more cash you can put into it the less you are giving to a lender. Renting in many markets is a smarter move financially if you can force yourself to save money – there's no doubt I agree about that. As many also have stated, it also leaves you flexible to chase opportunity wherever and whenever it pops up. I think all of these choices should be carefully examined. Use a spreadsheet if you must, and look at different scenarios. It's only your money and your future - consider spending more time evaluating that choice than you would the latest smart phone.

But even then, there’s another way. It’s a way that was extraordinarily common before our country became silly with money. Chances are your grandparents or great-grandparents did it. If you’re a recent immigrant to this country, your own parents or family may have done a version of this.

Very simply – it’s using your home as a way to leverage more income. More income, you ask – do you mean renting rooms out? Turning my home into an Airbnb?

Well, maybe. That might work for some people. But there are more obvious ways (and be sure to check your city’s zoning to see if they are allowed). Here’s a few, with pictures:

1.     Buy a house that has a carriage house (sometimes called a granny flat, a mother-in-law quarters or the wonky Accessory Dwelling Unit. Rent it out for income to offset the mortgage.

These face an alley behind the main house, which faces the street

Main house to the right, carriage house to the left.

2.     Buy or build a duplex. Live in one unit, rent out the other and watch it eventually pay for your mortgage.

Over-under duplexes

Better-looking, but the same over-under idea

3.     Do the same with a triplex or 4-plex.

Beautiful little 4-pex

These types of 4-plexes are everywhere, hiding in plain sight

As John Anderson notes on his excellent blog, anything 4 units or under can be financed as a home with conventional FHA financing.  That’s right – you can buy or build up to a 4-unit building and pay a standard residential mortgage. John helps teach others through the Incremental Development Alliance on how to do just this – what the steps are, and what you need to know. The courses are cheap – check one out in your region, or ask them to come teach one.

Why on earth would you want to do something so unusual?

Because it makes money, and truly builds wealth. It takes something we think of as an expense, and at a minimum reduces that expense significantly. If it’s played intelligently, it can be a lifetime source of income. It’s not unfair to note – this is how people did it for generations in this country. Rooms or units were added or rented as a means to generate income and pay the mortgage. We have such abundance nowadays that we have forgotten about this time-proven path.

A tri-plex that had one apartment on each floor

Just as a personal example, I’m on my third property where I’ve done this.  The first was a triplex. I lived in one unit, rented out two, and the rent paid my mortgage. That income stream allowed me to start my own architecture firm at the tender age of 30, when I otherwise would have had no money to do it. It allowed me keep going in that firm during the first year when I basically made no money. I certainly had income concerns, but I didn’t have to worry about making my mortgage or making rent.

You can get a hint of the carriage house behind the main house here

I later had a home with a carriage house in back that paid a very nice sum. In that case, it paid off about 40% of my mortgage. 40% wasn't nearly as lucrative as 100%, but that income allowed me to own a nicer, larger home than before. Since the carriage house was detached in back, the renter never disturbed me or my guests, and it frankly becomes a situation at times where you forget that someone lives there.

Oh and here’s one other thing – you get to choose your renters. That means you can apply your own values to the situation (within the law) and often get the chance to live next to some really great people. When you’re out of town, someone is there to look after the place. The lights are still on. People still come and go. I’m sure you can understand the benefits. Some of my renters later became friends long past the time they rented from me.

You can see the carriage house here behind our current house. It's a second floor apartment, over our garage. This is pre-yard renewal; trust me, it looks much better now.

Our current arrangement also is a carriage house behind our townhouse. It’s a 1 bedroom place that will pay anywhere from 50-80% of the mortgage, depending on how we rent it. With today’s options, you can also try short-term rentals such as Airbnb or VRBO (check your city’s zoning rules) as another way to bring in some revenue.

I’m a very big fan of going this route, and using the favorable debt terms of today to generate income. Using 30 year mortgages to just create large debt? Count me out. But using it to leverage a second income stream is an incredible financial boost, very easy to manage and knocks a huge hole in your monthly expenses. You know what – it can also be really fun. If you own it, you control the unit, you control its design features, how it's used, and you can make some lifelong friends and have great experiences with guests.

If anyone reads this and you’re in your 20’s, my advice is simple. Buy or build a duplex. It’s the easiest step towards trying something different, and you might even find yourself owning a real estate asset that produces cash for you for the rest of your life. Forget the typical definition of a house. Get radical, and go truly old school.