Have you ever thought of building a house specifically for house hacking? Specifically house hacking to maximize STR returns? There are so many benefits – financial and lifestyle.
Let me show you how we do it.
What is House Hacking?
House Hacking is a fairly new word but the concepts behind it have been around forever. This is where you own a multifamily property, live in one part of the building and earn income to pay the mortgage. This isn’t like renting a spare bedroom to a lodger but stand alone rentals under the same roof. This could be a duplex or a larger complex where you live in one and you rent out the other spaces. This could be either short term or long term rentals. The rental income pays the mortgage and you still have capital gains as your equity grows and hopefully the property is appreciating in value.
What I love about Short Term Rentals is that you can design your business to suit your lifestyle and your family. There is just simply no right or wrong way to do anything, but house hacking is definitely something to look into.
For us, we designed our home from the ground up. We included a fully self contained studio apartment in the designs for renting as an STR or use for family when they visited. This has a private entrance and when it is rented out to guests, we rarely see them.
Our day-to-day family life is unaffected but our mortgage is paid by the rental income. Nifty right?
We were already earning a significant portion of our household income from STRs so this made sense.
See this post about how I got started as a host.
Timeline for our House Hack
In 2016 we were living in an apartment in Tokyo – it was a lovely apartment and had no plans to move. However, out of the blue, the building ownership changed and we received notices that our rent would be increased by around ¥80,000 (Approx $800 USD) a month at the next contract renewal. An INCREASE of ~30% on top of a fairly hefty monthly rent!
They were not planning to renovate our apartment inside but they had made some cosmetic changes to the lobby and the outside. It made no difference to us. We had lived in the building for over 7 years at this point and been very happy. But this massive hike in rent felt predatory so we started to think about moving.
But we were fairly well established in our community. Our young son, Max, went to the local school on foot each day plus most of our 25 STR’s were in the area too. We primarily used the Rental Arbitrage or Rent-to-Rent business model in those early days.
So we started to look around at places to move – another rental or taking the plunge to buy. We only wanted to stay in this area of Tokyo as we love it and our son was really happy at his school. I ran the numbers by the real estate agent and looked at our options. It just made sense to buy land and build our own place that we could design just as we wanted.
SIDE NOTE: Japanese Real Estate
I won’t get into the weeds here about comparing the costs of getting into a rental property in Japan or the process for getting a mortgage with a Japanese bank as a non-Japanese who is self-employed. But if you are interested, drop me a line or follow me on my weekly YouTube panel – Japan Real Estate Professionals – JREP. We really get into the nitty gritty of all things Japanese Real Estate. Let me just say, that it is VERY VERY different from buying, renting and getting finance in other countries.
Finding our Land
So, after we made the decision to buy, the real estate agent really went to work finding a suitable property. We had some really unusual requests. It had to have the right zoning for getting a hotel licence, it needed to be close to transport, walking distance to the school and be of a suitable size for our budget and also for our comfort – this is our family home after all. It was a fairly tall order.
It took a while of looking, planning, scheming and I won’t lie, tears and frustrations. As non-Japanese residents, we are rare birds and this does create a challenge in a country where everybody seems to fit neatly into a manageable demographic.
OK – I am saying that this was a “challenge” – it was really hard – like really hard. But I think the struggle that we went through has made the result all the more sweeter.
We found land with an existing house on it. It was even used by a previous house hacker with 3 apartments under the main house. However, because of road widening regulations, we needed to pull it down and start again. It wasn’t really well built anyway.
We signed the contract and paid the deposit in December of 2017. EEEK! We were so scared and yet so excited. This was a HUGE mortgage – over $1m US. So we had to make it work.
Planning and Design
We spent most of Q1 2018 designing the house. Q2 was spent building it and we moved in the first week of October 2018. It was that quick. But oh boy, did we have design fatigue. Every detail was meticulously planned and we were with the architect every week for months.
Once we signed off on the designs, our house was cut out by a huge laser cutter in the building company factory. The slab was poured and then when the pieces were delivered, it was just snapped together – like Lego.
Below you can see photos of the process.
We built a single L-Shaped building but it is classed as a two family home. This is fairly common in Japan as many homes have apartments for multi-generations to live together. We built ours with two front doors and a lockable internal door.
For our space, we have an office on the ground floor – mostly filled with cleaning supplies and maintenance equipment for our STR business. Our private kitchen, living/dining area and bathroom are on the second floor. Then the third floor has two bedrooms and half-bath. Then the 4th floor is a roof terrace with our bbq.
The ground floor studio is fully self contained. It has a kitchenette, washer/dryer, bathroom, small dining table and double bed. It is only 12sq m. Which is TINY by western standards but fairly common in Tokyo.
I named this North Cottage. 🙂
Once we got the keys in Oct 2018, I immediately applied for the proper licences for Short Term Rentals (Minpaku) and then upgraded this licence to a hotel licence (Ryokan Gyuo). So our house has a single room hotel on the ground floor. Again, I will not get into the weeds about the regulations for STR in Japan but if you are curious, just ask.
Value of House Hacking
So all through 2019, North Cottage was basically paying for our very large, scary mortgage. Plus as an income producing asset, it created some excellent tax minimization options which is not normally possible on a private family property.
THIS is the value of the House Hack.
If you are planning to house hack, speak to your lawyer and accountant and really dig into your options for your local laws.
During the Pandemic when the Japan borders closed, we were able to find a series of longer term tenants. The rent wasn’t covering the mortgage in full but it was certainly helping out when our world was crashing down around us.
Looking back, I am thankful to my past self for taking the plunge into house hacking. When the rest of our income dropped into the dumpster fire that was 2020, North Cottage became our lifeboat.
Now that the Japan borders are open again, we are so happy to have family and friends and also our STR income back. We are nearly 5 years into our mortgage and have never missed a payment or renegotiated. But now we are looking to refinance and leverage all of this lovely equity in our house.
Benefits of house hacking
- Offset mortgage costs
- Tax write offs for common area
- Income producing asset
- Convenient location for family/friends
Another benefit is that on the rare occasions when it is not used for guests, I can sit in this lovely little room and quietly appreciate what I was able to build for my family.
Celebrate all the wins…. You deserve it.
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