Unlock Hidden Wealth: The Low-Risk Housing Market Moves Experts Don’t Want You to Know About

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When real estate investing seems tougher than ever, and the traditional BRRRR method of recycling cash to accrue fixer-upper rentals is like walking a financial tightrope with no safety net, sometimes the easiest methods for investing are hiding in plain sight.

If you want a tried-and-trusted method that allows you to keep investing, two no-brainer strategies immediately come to mind.

House Hacking

House hacking is a hedge against leveraging because it accomplishes two objectives at once: getting your rental income to offset your highest monthly cost, housing expenses, as well as giving you a place to live.

“The biggest lever you can pull, bar none”

Cody Berman, who wrote the book Retire by 30, is a firm proponent of using house hacking to start your real estate investment career. He told Business Insider:

“I think house hacking is probably, on the expense front, the biggest lever you can pull bar none. One-third of the average American’s paycheck goes into housing. If you can eliminate that or vastly reduce it—or, even better, if you can turn your housing into an income—all of a sudden, you gain a third or more of your monthly expenses back to invest in other things and build your financial freedom.”

Low-down payment strategies

Another advantage of house hacking is the low-down payment strategies you can employ to purchase your first rental. Here are some of the most common:

1. Use an FHA 3.5% down payment program to purchase a two-to-four-family home. You must live in one of the units for at least 12 months.
2. NACA (Neighborhood Assistance Corporation of America) offers home purchase programs featuring zero down payments and closing costs, as well as below-market interest rates, without requiring private mortgage insurance (PMI). Because NACA allows members to purchase multifamily properties up to four units—as long as the buyer lives in one unit—investors can purchase cash-flowing assets while preserving their liquid capital.
3. Stack down payment assistance programs. In addition to these programs, state housing finance agencies across the country offer forgivable down payment grants and soft second mortgages that can be combined with standard loan products. By stacking local down payment assistance with FHA or conventional multifamily loans, small investors can keep cash on the sidelines to offset repairs or vacancies. As of June 2023, there were 1,676 fully funded DPA programs in the United States, according to research by the Urban Institute. The majority of DPA grants are set up as “forgivable” grants and apply only to owner-occupants of their primary residence.

These loans don’t compel homeowners to stay in their primary residences forever. As with FHA mortgages, there is usually a one-year requirement for owner occupancy before homeowners can refinance out of the loan if rates are favorable and repeat the process—at least the FHA component—on a second property, thus using a low-cost method to accrue a rental portfolio.

Capital Gains Harvesting: The Two-in-Five-Year Primary Residence Strategy

As discussed on the BiggerPockets podcast, in the current housing climate, expecting to build an avalanche of cash-flowing rental properties through leverage is wishful thinking. Instead, the strategy should be more about accruing a high net worth, which you can then liquidate and buy rentals for cash. This generates cash flow and equity. 

One of the most effective ways to attain a high net worth is not to pay capital gains taxes when you sell a personal residence that has gone up in value. The two-in-five-year primary residence strategy allows homeowner taxpayers, under Section 121 of the IRS tax code, to exclude up to $250,000 (if single) and $500,000 (if married) of capital gains on the sale of their primary residence. The homeowner must have occupied the property as their principal residence for at least two out of the five years before the date of the sale.

“If you set your LLC up as a partnership, you’ll lose your ability to benefit from Section 121, which allows you to avoid taxation on $250,000 in gains ($500,000 for a couple) from the sale of your principal residence,” writes attorney and real estate investor Clint Coons in Forbes. “You want to leave that 121 door open if you decide to sell the property.”

Serial House Hacks and Stacking Strategies

Here’s where things get interesting. Small investors can execute a “serial house hack” strategy by buying a small multifamily home using a low-down-payment, low-barrier-to-entry purchase method. They can live in it while renovating units and renting them out. Once they have met the two-year residency requirement, they can sell and repeat.

Things get even more interesting if, once they sell, they use the tax-free profit to start accruing rental properties while living in another primary residence for two years before rinsing and repeating.

This method allows leverage-wary investors to use the proceeds from each sold house to purchase a rental with large down payments, thus mitigating the risk. All the while, they are living rent-free (due to house-hacking income on their primary residence), generating cash flow from their rentals—and, of course, benefiting from depreciation and tenant paydown.

Innovative Niche Models: Co-Living and Medium-Term Rentals

Increasing rental income

When this model is combined with methods for increasing rental income, such as leveraging co-living platforms like PadSplit or managing room-by-room rentals independently to workforce tenants, traveling nurses, young professionals, or even grad students, the gross revenue of the rental can increase significantly.  

Medium-term rentals

Furnished rentals catering to 30-to-90-day stays, such as for corporate relocations, insurance displacement clients, and healthcare workers, also increase rents by 20%-40% over traditional 12-month leases while avoiding the high maintenance hassles and restrictive municipal short-term rental regulations and hotel taxes.

Accessory dwelling units

Add ADUs (backyard cottages, garage conversions, or basement suites) into the mix of your rental, and you can substantially increase your rental income without paying top dollar and incurring closing costs for the acquisition of a new home.

Final Thoughts

By stacking these strategies on top of one another, you can, over time, build a low-risk real estate cash-flowing machine that takes advantage of homebuying programs and government tax laws to minimize leverage and maximize profits.

The strategy depends on a few critical components. While building your portfolio, you never decide to buy a single-family home just for your own personal use, because it removes the house-hacking component, and you always live in the primary home for at least two out of every five years.

Also, for this strategy to work effectively, keep an outside source of income, such as a W-2 job. Not only will it stabilize the rentals with extra cash, but it will also help you qualify for low-down-payment government programs and mortgages. There are a few assumptions you can tweak to suit different realities—that houses continue to appreciate and that you can comfortably release a large amount of tax-free equity when you sell every five years.

As the tables show, when this strategy is adopted over two decades, even with high interest rates, it can result in $200K a year in passive income and almost $2 million in equity by only owning three duplexes.

Parameter	Value	Details
Base duplex purchase price	$400,000	Scaled up by 3% annual market appreciation every five years
Duplex rent (optimized MTR/co-living)	$4,500/mo	Baseline ($3,600) + 25% optimization premium
Operating expenses + vacancy	35% of gross	Property taxes, maintenance, capex, insurance, vacancy
Interest rate/terms	6.5% fixed (30 yr)	Applied to remaining balances
Sec. 121 gain tax exemption	$250K/$500K	100% tax-free capital gain extraction every five years

Metric	Year Five (First Sale)	Year 10 (Second Sale)	Year 15	Year 20
Properties held	One new duplex	One fully held + one new	Two held + one new	Three properties retained/scaled
Total units	Two	Four	Six	Six
Cash harvested (tax-free sale)	~$106,900	~$162,500	~$224,000	Hold phase
Reinvested down payment	50% down ($231K property)	50%+ down ($537K property)	50%+ down ($623K property)	Portfolio stabilized
Total portfolio value	$463,710	$1,001,613	$1,625,581	$2,349,384
Total debt balance	$231,855 (50% LTV)	$418,200 (~41% LTV)	$585,000 (~36% LTV)	$680,000 (~28% LTV)
Total equity	$231,855	$583,413	$1,040,581	$1,669,384
Gross monthly rent	$5,217/mo	$12,098/mo	$21,042/mo	$32,328/mo
Monthly operating expenses (35%)	($1,826)/mo	($4,234)/mo	($7,365)/mo	($11,315)/mo
Monthly debt service (P&I)	($1,465)/mo	($2,643)/mo	($3,698)/mo	($4,298)/mo
Net monthly cash flow	$1,926/mo	$5,221/mo	$9,979/mo	$16,715/mo
Annual net cash flow	$23,112/yr	$62,652/yr	$119,748/yr	$200,580/yr