On our Mortgage Freedom series today we're going to introduce someone who paid off their mortgage through house hacking. What is house hacking you might ask? Well, we're going to learn more about that today.
Steven Donovan is our guest today. Steven is a money coach and his financial advice and his inspirational story have been featured in GO Banking Rates, Bigger Pockets, and Rockstar Finance.
Andy Hill: Why did you buy your home in Miami?
Steven Donovan: Actually, I didn't purchase the home. My wife, the smart one in the family, actually purchased the home in 2009 before we were married. She was single and we might have been dating. It was kind of right in between.
She purchased that home in 2009 as a foreclosure in Miami, Florida, as an investment property. Really she was looking for someplace to put her money, and as we joke, to “stop buying clothes that were for work”. So she started putting her money towards an investment.
When did she make this purchase?
She bought it in June or July of 2009.
I understand you had a second home in Chicago. Why did you buy that one?
So we got married in 2011, and then we lived in Chicago for a year and tried to figure out Chicago in general. There were many places in the big city and a bunch of different neighborhoods. We ended up coming across a neighborhood we really liked, and we found a home that was a multi-unit. There are a lot of Chicago brick homes, and this one was a multi-unit with two different units. So we lived on the top floor, and then it was rented on the first floor.
We actually fixed up the garden and basement as well and included that as part of the rental and then lived on the top, rented the first and the garden apartment. We bought that in 2012, so a year after our marriage.
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Why did you decide to go with a multi-family for the place in Chicago versus a single-family?
We started out looking for single-family homes, multi-family homes, and I feel like we were all over Chicago. We started looking and then what it came down to was knowing that we would eventually be more involved with real estate.
We'd look at a $200,000 single-family house, and then we'd look at that same $200,000 multifamily house. So you're essentially comparing apples to apples, but now you have the opportunity to rent it to someone else and really reduce your mortgage further. I'm one of those people where if it's a common-sense type thing, I'm probably going to go with it.
When did you decide to pay down the mortgage?
I wish that's how it started and we were like: “Yes, we need to pay this off immediately.” That didn't happen. So I had a lot of personal debt, student loans and credit cards. And I was on my financial journey to pay off my student loans. I was very serious about it, and I was kind of looking ahead a little bit. My thought was, “Okay. I can pay this off.” But I saw a little window into it and started reading a lot more about financial independence and said “This seems like a good idea.”
We weren't making any extra payments on the mortgage so I said, “Okay, we could pursue financial independence. How can we do that right this second with what we have?” And it ended up being the house and paying down the mortgage because if we could pay down that mortgage, we'd then be able to earn more rental income once that house is paid off.
My wife also was on board with that, especially because we did have these additional funds and unfortunately they weren't doing anything. We were just making a regular payment.
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Why did you pay down the house in Miami versus the one in Chicago?
We decided to go about it that way because of two reasons really:
- Nobody hates your debt more than you do, so my wife did not like this mortgage payment very much
- It made sense for her. She was really on board with it and it was a motivating factor.
How did you find tenants from a distance and manage the property?
She handled everything from thousands of miles away. She was her own property manager and found the renters. I'll say some luck involved with it, of course. We lived on a street that had more traffic so you could put a sign out there and you'd get calls. That's not going to happen with every property.
Her family took a big part in it and they essentially played meet and greet when they needed to show the home. They cut the grass for a little while, things like that. So they were definitely helpful. Without them, I can imagine it would just reduce a lot of the income that was coming in.
How does house hacking help you pay off your mortgage?
House hacking is when you live in one part of your house and you rent out the other part, whether it be a floor or something like Airbnb. You can also rent out if you have extra space in the back, your garage or any other extra space you have. There are multiple things you can do.
In our case, it worked out as it was set up. We're essentially set up like an apartment building. We bought the house and did a little bit of fixing up. Our loan was different than your regular mortgage: a 203k loan, which essentially allows you to lump it all together and make one payment before you really you ever move in and get everything done.
We got a nicer kitchen, we tore down a garage that probably should've been torn down before anyways. Fixed out the old pipes. Stuff like that, which helped us to get higher rent.
The first guy rented the first floor for three or four years. Great guy, a Chicago cop. We ended up also fixing up that garden unit later. There were some family members and a few contractors as well that helped make space work. We ended up having that rental income for both units while we paid our regular mortgage.
Did the house hack cover your mortgage payment and how much money did you send to Miami to pay down that house?
We decided that we're debt-averse people and said, “No matter what, we're going to make the payments to our Chicago mortgage out of the salary that we earn.” So my wife took half and I took half and we would make the payment. Since she was responsible for the Miami home, she made that full payment to the Miami mortgage as well. So she was essentially paying one and a half of a home. One and a half times for the mortgage.
We took essentially everything else that was going to be earned from the first floor in Chicago, from the garden Unit in Chicago, and from the Miami property and added that on to Miami for the additional principal payment.
If she bought this place in 2009, how long did it take for you to pay it off?
From 2009 to 2013, it was just regular payments. Then we kind of put it in fast forward, and in over three years our mortgage was paid off. It was paid off in 2016.
How much was the mortgage that you paid off?
The mortgage was around $189,000.
What did you guys do to celebrate your house hacking mortgage freedom?
It's funny because we had these big plans. I was like, “Hey, we're going to pay off this mortgage. You know what? Let's do a big trip. Let's go to Italy.” Then for whatever reason it just went “All right, good. We paid off the mortgage. Good job. High five.”
One thing that we talked about is once we paid off that Florida home, we would then consider if a move was possible. Now we no longer had two mortgages and we started to have extra income coming in. So what we ended up doing was selling our Chicago property and moving to Miami, Florida, where we now live there full-time.
Just like Drake's song “God's Plan”, everything worked out. We actually had a pastor living in our home in Florida, and through whatever dealings, he actually ended up getting a calling to another Church in Washington, D.C. right around the time that we were even considering selling our property.
Everything worked out. He ended up moving a little under a month before we moved in. Now we live in Miami, Florida. Pretty big changes; that was our big celebration, our change in life. We're very happy living in Miami, Florida and really adapting to this new life and new lifestyle for us.
You guys aren't house hacking that Miami house now, are you?
Yeah, we're just regular people just living in a house.
How much was the house in Chicago? And what did you sell it for?
The $200,000 market is apparently our magic number. We bought it for right around $200,000, but we actually put $50,000 into it upfront. So our mortgage is really right at around $250,000.
Then when we ended up selling it and we actually got way more than we had anticipated. It ended up selling for $485,000.
What are your future financial goals living in Miami now that you're done house hacking?
I would say our financial goals are mainly the pursuit of financial independence (FI) and changing our lifestyle.
We want to be able to do more things together. I don't know if that's going from 60 hours to 40 hours, or going to a position that's entirely different, but that's really our financial goal. To go from financial freedom, which I really think that's where we are today, and transitioning into financial independence. FI is where you stop worrying altogether and really change your lifestyle, so you match how you want to live rather than how you have to.
I don't know if we're going to “retire early“, but the idea of really just having that option is something I'd really like to pursue.
What advice would you have for someone if they wanted to pay off their mortgage?
Start with tracking your expenses.
You just have to do it, and it's not that cumbersome, it's not going to hurt you, it's not going to pain you. If you know that you're spending a $1,000 on groceries each month, you can decide if you want to spend $2,000 or you want to spend $500. You just have to know where you are today and then you could decide where you want to move forward.
But just tracking your expenses alone isn't going to pay off your debt or pay off your mortgage. Focus on the “Big Three” and make sure that those are eliminated or at least reduced. The mortgage you want to reduce that as much as possible, but there's then your car. Our car is 2007, it's got over 100,000 miles and works fine.
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The third one would be your groceries and eating out. Those are really going to be your three biggest expenses. If you can find ways to cut that, you can then take the money and apply that to your mortgage. What matters most to you? It might be your mortgage payment and spending more time with your family, it could be traveling, it could be a number of things. If you really start to knock out the Big Three, you're going to make a big dent in the things that matter more to you.
Have you ever done house hacking? Do you want to pay off your mortgage?
Please let us know in the comments below.
My husband and I did house hacking of sorts. We had three rental properties (2009, 2012 and 2013 each one was bought). We bought our dream home in 2013. Our intention was to use these rental properties as our retirement plan. I won’t go into the details of our retirement plan at that time but after having our first child in 2014, and then second in 2016, we started to feel the strain of both working, parenting and owning three rentals. We also had two years of difficult renters and/or situations. I planted the idea of selling and paying off our mortgage first. My husband wasn’t keen on it but after awhile, he decided he wanted more time for fishing and less time for tenants. So we sold all three in 2018 (we were hoping to selling in two different years buts we don’t always get what we want!) and we paid off our dream home mortgage in July 2018.
That’s an incredible story! And I love how you decided to make the transition from landlording to enjoying more time with family and hobbies.
Please let me know if you’d ever be interested in sharing your story on the podcast Mandi.