The Millennial Method: A Guest Blog By, David Mackin
What is a Millennial? Let’s set a definition. According to “The College Investor” website, Millennials are those that were born between 1982 and 2002. In the year 2022 that would mean anyone from ages 19-39.
For the sake of this topic, let’s talk about those that are ready to buy homes. The real estate website “Zillow” pins the average home buyer at the age of 34 years old. Millennials are gearing up to dominate the buyers market for years to come.
Millennial Home Buying
So what is it like to buy a home as a Millennial? Here’s a look at some data:
According to “Federal Reserve Economic Data” or “FRED”, the median sales price of a home at the end of 2021 was a whopping $408,100. Twenty years earlier in 2001, it was $171,100. That’s an increase of almost $250,000. Even when adjusting for inflation, it is safe to say that home prices have increased at a rate that is leaving some millennials behind.
At the end of 2001, mortgage rates were at just about 7%. Today they have just climbed above 5%. A 30 year mortgage at 7% and a purchase price of $171,100 has a monthly payment of roughly $1,138. That same purchase today looks like this:
A 30 year mortgage at 5% and a purchase price of $408,100 has a monthly payment of roughly $2,191. (Note: this doesn’t even include the cost of mortgage insurance and taxes).
Using this example, it costs just over $1,000 more per month to own a home than it did 20 years ago.
What’s A Millennial To Do?
Now that the stage is set, what are millennials doing to counter the increased cost in owning a home? Some may say that increased wages are the simple answer to this problem. Others would argue that it is far too risky to rely on such a thing when making the largest purchase in a lifetime. So what’s the real answer?
Introducing: The House-Hack.
Millennial Method AKA The House-Hack
What is House-Hacking? For some of you, this may be a familiar concept. For others, this could be totally new.
House-Hacking is when someone buys a home with multiple rooms and the intent of living in one room, and renting out the rest to supplement, or even cover their mortgage payment.
Some take it so far as to even make a little money. Let’s look at an example:
Kevin buys a home with a mortgage, and his monthly payment is $2,000.
Kevin’s home has 4 bedrooms and he plans to occupy one of them. Kevin finds tenants to lease out each of the 3 remaining bedrooms. He leases said bedrooms for $600 each. This means Kevin receives $1,800 per month in rent payments.
Kevin uses this money towards paying his mortgage, leaving him with a measly $200 out of pocket to make his mortgage payment.
Kevin gets all the benefits of home ownership like home appreciation and no monthly payment increase, at a fraction of the cost. Kevin can now comfortably pay his mortgage whilst being able to save even more money for the future. All he had to do was learn how to be a landlord, and he was willing to do so to be a homeowner.
Let’s take this example even further:
Kevin has now lived in his home for over a year. This means he now qualifies to make another purchase as his primary residence.
In his current property, he has the same 3 rooms signed for another year long lease. He has also just gotten a lease signed for the room he was previously occupying. Each renting for $600. Some quick math and Kevin is now net positive $400 after covering the mortgage payment.
But wait, there’s more!
Since Kevin has proof through signed leases that he is receiving rental income, he can now use that income to qualify for his next purchase. Kevin makes the next home purchase. What does he plan to do? You guessed it. He’s going to House-Hack it!
This time it’s a duplex. His monthly payment for the duplex is $2,400. Kevin wants more privacy this time around so he keeps one half of the duplex to himself and plans to rent out the other half. Kevin decides to rent out the other half as one unit for $1,500 per month. So, Kevin makes $400 from his first property, take that and the $1,500 rent payment from his duplex and Kevin can put $1,900 towards his new mortgage payment.
Altogether Kevin pays $500 per month out of pocket and now owns 2 properties.
Kevin is now what most would consider a real estate investor and he did it with no other motivation than to be a homeowner without breaking his wallet.
Some of you may be familiar with this method as it’s not necessarily a new idea. It’s now a popular idea. So much so that the term “House-Hack” is common jargon in the real estate industry. Nowadays you could reach out to a real estate agent like Bob Gordon and he would be able to help you find a property that allows you to be a House-Hacker as well.
Popular Millennial Method Driving The Market
In closing, millennials have had to find creative ways to afford home ownership. This creativity has gone far enough to create a new generation of not only home owners, but real estate investors. It will be interesting to see what other ideas will come out of this housing market that shows no signs of cooling down.