The Personal Finance Podcast - House Hacking: How to Live Rent Free (Seriously!)

Episode Date: August 26, 2020

Episode 16: House Hacking: How to Live Rent Free  In this episode we cover:  What is house hacking  Benefits to house hacking  How to Run the numbers on a house hack  Best House Hacking Properties Managing Your House Hack Resources in this episode: The Book On Managing Rental Properties I recommend (Affiliate Link) House Hacking Book to Dive Deeper (Affiliate Link) Mortgage Calculator How to Buy a House Article M1 Finance Best Place to Invest  Personal Capital Free Wealth Management and Budget App  CIT BANK (Best Savings Account)  ** Some links may be an affiliate link and we earn a small commission at no extra cost to you. We only recommend products we truly believe in.  Learn more about your ad choices. Visit megaphone.fm/adchoices

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Find your advisor at IG Private Wealth.com. On this episode of the personal finance podcast, we're going to talk about house hacking and how you can live rent-free forever. What's up everybody and welcome to the Personal Finance Podcast. I'm your host, Andrew, founder of dollar after dollar.com. And today on the Personal Finance Podcast, we're going to be talking about house hacking. And this is a way that you can actually live rent free. And if you've listened to the Personal Finance podcast for some time now, you understand that housing is one of the biggest expenses that you can have in your budget.

But what if you could completely eliminate your housing expenses? What if you could completely take that out of the equation? How much more money could you save or how much more wealth could you build? And that's exactly what we're going to talk about today because there's a way for you to be able to actually knock out your housing expenses, whether it's your mortgage or whether it's just paying rent. This is a way for you to have ownership and property and also be able to live rent free. And the concept is called house hacking.

And if you're in the market to buy a home, this is a fantastic option, especially if you're in the market to buy a starter home. because this is a great way to get started into real estate, and it's one of the best ways to get started into real estate investing if that's something that you're looking to do. And it truly is the perfect strategy. And it's just something that a lot of people don't think about. It's a concept that most people have never tried or they've never even thought about trying because they don't know it exists.

But it's one of the coolest ways to begin building wealth. Because if you don't have a mortgage and you don't have that biggest expense within your budget, you're going to have tremendous growth if you put that money towards investments. So what is house hacking? What the heck is house hacking? And the easiest way to describe it is what you're going to do is you're going to look for small multifamily properties. Now what that means is you're looking for say a fourplex or a triplex or a duplex. Those are small multifamily property. So a fourplex is four units. It's four apartments side by side. A triplex is three units. So it's three units side by side. And then a duplex is two units, it's two units right next to each other. And what you're looking for here is you're looking to

buy the duplex, the triplex, the fourplex, and be able to live in one unit and rent out the other three units. So say, you're buying one property now and you're renting out the other units. And what did those other units do for you? They're paying your mortgage. And sometimes you're going to be making money just for living in your own property. Because you got to think about it this way. Here's what most people do. They go ahead and they buy a starter house. And it doesn't really make them any money. They small home, maybe with a small yard for their dog to run around in or whatever. But they buy the starter house, you know, five, six, seven years down the line, they grow out of their house and they sell their house. Well, what if you did this strategy, this exact strategy right here?

But instead, when you move out of your starter house, you just hold on to it. Now you have four units or three units or two units that you're able to cash flow on, which is going to allow you to be able to build wealth. And now you have a sound investment for your future here. And this is something that's going to allow you to buy more property or buy more investments in the future. And see, this is sometimes the best way to build wealth. You have to think differently than everybody else because doing this is going to allow you to build that tremendous wealth because you're eliminating your biggest expense. So here's a great example. Let's say, for example, we have a guy named Johnny two times and he's ready to buy his first house and he's been saving for quite

some time and doing some research in the market. So he has two options here. He can either buy a condo or a house, and let's say he pays $150,000 and the property has a $950 mortgage. So in that typical situation, that's not a bad thing to do. There's nothing wrong with doing that. And he's putting an investment with his hard-earned money towards his future. But if he spends that same 150 grand on a multifamily, and then he rents out the other two units for $800 each, well, now all of a sudden, he's cash flowing and he's making money while living in his property. And there's a massive difference between these two options. And there's a number of benefits of doing this option instead of just going in and buying rental properties or just going in and buying your starter

house. Because like we said, you're going to eliminate your biggest expense, which is housing. Another reason is you're going to get awesome financing terms. And when you live in the property, you get significantly better financing terms than if you don't live in the property. So a lot of times the owner-occupant is going to be way better off than someone who's just going to buy a duplex or a triplex just to live inside. Lenders, banks, and people who hand out mortgages, they are much more friendly to people who are going to live inside of the property than to investors. Another reason is you can reduce your down payments because you can get an FHA loan on these because these are residential properties. These small multifamily properties up to four units are still considered residential

properties. So you can actually reduce your down payment. If you don't have a lot of money or you're not making a lot of money, but you want to start cash flowing more and you want to eliminate that big expense so you could save more money for your future, this is a great option because an FHA loan, like we talked about in the last episode on how to buy a house, you only have to put down 3.5 percent. So you can actually reduce your down payment. And sometimes you can put down zero percent if you want to go towards like a VA loan if you're a veteran. But any other typical investment, you'd have to put down 20 to 25 percent minimum. But this gives you a smaller down payment option. But it also allows you to learn how to invest in real estate while you're

living in the property because you have nothing to lose. So now you're living in the property and you you have multiple tenants and you're learning along the way. You're learning how to invest in real estate because if you want to scale this up and you want to start a real estate investing business, this allows you to dip your toes in the water without much risk. And once you dip your toes in the water, you're just going to have a smooth transition into buying more rental properties because you're going to know how to handle certain situations. And you're going to make mistakes along the way, but you're going to learn and work through them and you're going to be on site actually on the property. So you're going to be able to fix it.

things immediately instead of having to worry about things happening while you're not on the property. So this gives you like a comfort level, a smooth transition into the next phase. So you can see there's a number of tremendous benefits to house hacking, but let's see how you can run the numbers on a house hack. I remember when I needed to hire someone fast, but finding the right person quickly felt impossible. And if you've ever been there, you know how stressful this can be. That's where Indeed comes in. When it comes to hiring, Indeed is all you need. Instead of struggling to get your job post noticed, Indeed's sponsor jobs help you stand out and hire faster. Your post jumps up to the top of the page, making sure it reaches the right candidates.

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but I'm going to give you a quick lesson here on exactly how to do it. Because if you understand the concepts, you're going to be much better off than someone who just goes out there and tries to buy a house that thinks that if they cover their mortgage, then they're fine.

They're going to be able to cash flow. That's not going to work. So let me show you exactly how to run the numbers on a rental property. So the biggest thing to understand is how much income you're bringing in. So let's say that you live in one unit and you have a triplex. So you have two other units rented out. And each unit rents for $800 a month. Well,

you're going to bring bringing in $1,600 a month. And what you want to do is make sure that you account for expenses that are going to come up, not just your mortgage, but other expenses will be out there. So let's say, for example, your mortgage is $900. That's not where you stop, because you have to make sure that you consider other things, such as your property taxes. You have to account for your property taxes, maintenance. So if one of your tenants faucets leak, or if one of your tenants has issues with their toilet or they have issues with lights or anything like that, you're going to have to go ahead and fix that. You're going to have to have money put aside to be able to fix that because you don't want to be digging into your pocket. You want the property to pay for itself and cover its

own expenses. You have to account for insurance. You have to account for vacancy. And a lot of people miss this piece because vacancy is when you have your property vacant, say a tenant leaves, lease is up and they want to go move on. Well, your property is going to be vacant for some period of time, whether it's a month, two months, maybe it's two weeks. But you have to account for that vacancy because you're not earning an income during that time. You still have to pay your mortgage, but you're not earning an income during that time. And then if your property is not separately metered, you're going to have to look at paying for utilities as well or you can add it on to the lease and any other additional items that may come up. So how much would you do for each of

these items. Well, for example, on the vacancy, I usually budget right around 8% because that covers about a month per year if somebody leaves. Other expenses such as capital expenditures, which are things like your roof and your water heater, those type of replacements. I do another 8% for that of the income. Property taxes are easy to find. You can actually go to your property appraiser's website, which is just your county website, and you'll be able to find the property taxes right there. And then to find your property insurance, all you have to do is just call local agents and they'll give you quotes, you know, pretty quickly. Within an hour, they'll give you quotes and you can have the exact quote right there. So all these things need to be accounted for before you go ahead and buy

the property. So when you're looking at properties or you're looking through trying to decide if you want to buy a rental property to see if it's going to cash flow, make sure you account for all of these expenses because if you don't, you're going to be in a whirlwind of trouble. So what are the best house hacking properties? Which properties should you really look at and target to be able to have a great house hack. And I'm going to list these in order of greatest to least in my opinion. And it's actually a simple formula because the more units there are, I think is a better house hack than the less units because more units equals more income coming in. So a fourplex would be your best first option. Now a fourplex is at its height for house hacking because it's the

largest property that you can get and it still is a residential property in terms of getting a mortgage. So a fourplex will allow you to have four units side by side and you can live in one unit and rent out the other three. Then the next best would be a triplex. And a triplex is three units side by side, or they can be stacked. It depends on how it's set up. But that's where you're going to live in one unit and rent out two. And then the next best would be a duplex. And a duplex doesn't have to just be two units side by side. It could also be a front house with, say, a back, smaller apartment. Some, like I've had properties set up where there's a house in the front and then there's a mother-law suite in the back and people rent out the mother-in-law suite in the back. It's a separate

building and they do a house hack that way. So they actually live in a normal type house, and then in the back, they house hack by renting out the mother-in-law suite. And then the worst situation would be house hacking, but you're in a house, and then you're renting out rooms. Now, that's not my go-to way to house hack. I don't think that's the best way to house hack, but if that's something you want to swing, maybe you want to live with roommates or things like that, then that may be a good option for you. But deciding what type of property you want is a big step. And some of it's going to depend on your budget. Obviously, a fourplex is going to be more expensive than a duplex. But at the same time, if you're going to be cash flowing more, then potentially that's a better business decision for you

in the long run. Now, one thing that may be coming up in your head is you're saying to yourself, well, I don't want to live next to my tenants or how am I supposed to manage tenants? I've never even done this before. So I'm going to show you a couple of tips that I use to manage my tenants. And I highly advise everyone to go pick up the book. It's from Bigger Pockets and Brandon Turner. And it's how to manage rental properties, I think is what it's called. I'll link it in the show notes so you guys can see it. It's a big yellow book and it's an amazing book because I use that book and I use a lot of their templates and their systems out of that book to be able to manage my rental properties. And that book will literally cover everything you need to know about managing rental properties. And in addition,

he actually gives you a lease and he gives you a bunch of forms that you can use to get your business started because having the systems in place is a big part of being successful with a house hack because if you don't know what you're doing, then having these type of systems in place is perfect for you because all you have to do is just plug and play. It's just formatted already for you and all you have to do is just use those forms to be able to go through the process and he walks you exactly through each piece. But the biggest part is especially if you're going to be living next to these people is you need to screen your tenants and you need to screen them like a job applicant. So what I mean by that is you need to run your tenants through a screening process.

Now, one great one that I love to use is called rent prep.com. And what you do is you're going to give your tenant's going to fill out an application. You're going to give the information to rent prep.com. They're going to run a background check and they do like criminal checks. They do credit checks and things like that. And it shows, you know, if you have a financially stable tenant and if they have any criminal history or anything along those lines, that will show you exactly what type of person that you are potentially renting to.

And the next thing is to have a written policy. to refer to. And that's along the same lines as I said about having those systems in place so that you have policies to refer to when somebody ask questions. Like if you don't want to allow pets and somebody wants you to allow pets, but you say, listen, it's in our policy. We just don't allow pets. The next tip is to outsource anything that you don't want to do. If you don't want to fix toilets, if you don't, if you're not handy, if you don't like doing anything like that, then don't do it. Outsource it. But just make sure you bake those costs in when you're running your numbers. Make sure you understand your personality and understand what you're like.

because if you found a great deal, then the cash flow will pay for those things. And that's why you have to find a great deal when you're looking at these properties and why you have to run the numbers. Because the cash flow is going to take those problems away from you. It's going to take that out of the equation. If you don't even want to manage the people, even though you're right next door to them, if you don't want them to know that you're the owner, then you can hire a property manager and you could bake those expenses into your numbers. The next tip is never rent to family or friends. Trust me, just do not do it. It never. It never ends well. It's never a good situation if something goes wrong. So say, for example, your family or friend doesn't pay you the rent one month. Well, you still have to pay a mortgage. And now you're in a situation that's not going to end well. And if you want to keep that family member close or if you want to keep that friend, then I highly suggest don't even consider doing that. And then last tip is to just treat it like a business. Treat this like a business. If you're going to be successful in your house hack, you have to treat it like a business. And that goes back to the lines of setting up processes and systems so that you have them in place to reference for whatever

is going to come your way. Now, before we wrap this thing up, I just wanted to talk a little bit about where you can find these properties because there's a few ways that you can do this. And one of the best ways is obviously to get with an agent and have an agent start looking and helping you find some of these properties so you can tell them exactly what you're looking for and what your budget is. And they're going to help you try to find properties within the MLS. But if that starts to not work and if you're in a real hot market and you see some of these properties are just too expensive for your budget, there's some other ways that you can look and find deals creatively.

One of my favorite ways is called driving for dollars. And what driving for dollars is you're going to go around neighborhoods that have these type of properties that duplexes and triplexes and quadplexes. And you're going to look for properties that may need some work. So you're going to look for some of them. that maybe the lawn isn't mowed or they need a new paint job or things like that. And you're going to write down the address. And then when you get home, you're going to find out who the owner is and you're going to write them, literally handwrite them a letter and say,

hey, I invest in real estate. I would love to buy your property. Would you be interested in selling it to me? And then you leave your phone number and your contact information. And what's going to happen is if you do this enough and if you find enough of these properties, you're going to start sending out a bunch of these letters. Now, I would say this, success rate on this is about 2%. So you're going to have to send out 100 letters to get two responses. But those two responses could turn into a deal. And the thing about this is, this is a way to find some of the best deals on the market. And I promise you, if you do enough of these, you're going to get responses. It may feel like you're doing nothing at the beginning. You're just churning and

spinning your wheels. But you will get responses if you continue to do this enough. That's one way to do it. And that's the cheapest way to do it. But another way is that, that you can look for lists in certain neighborhoods. You could just go through neighborhoods. One thing I used to do was I would go through Zillow and just grab a bunch of addresses in a neighborhood that I knew had a bunch of these, and I would send letters to all of them.

So I would actually handwrite them and send letters out. Because handwritten letters are more likely for people to open because they look at the envelope and it's got handwriting on the front so they think, hey, maybe it's a card from Grandma or maybe it's a card from Becky or whatever. And they are more likely to open the envelope if it's handwritten, especially if it's handwritten on the front of the envelope. And on the inside, they're going to know that you're a serious person if you took the time

to actually write and handwrite a letter to them. And then the last way that you can find these properties creatively is by word of mouth. So you can actually just tell everybody that you're looking for a property like this. Tell everybody you know. Tell your friends. Tell your family. Tell your mom. Tell your dad.

Tell your uncle. Tell your cat. It doesn't matter. But tell everybody you know. And eventually what's going to happen is people are going to, through word of mouth, know that you buy property, that you buy rentals. And they're going to start bringing them. to you. But these are the types of things that you have to do is you have to take action. If you're not

finding properties in a hot market, and as I'm recording this, I'm in a flaming hot market right now. And if you're not finding properties, you have to get creative and do things other people won't do to get those properties. You can't just sit back and wait and say, I'm going to wait for the market to dip while you're paying out thousands of dollars in rent every single year. Instead, if you take action, then you're going to reap rewards that other people don't get to reap because you did things that they are not willing to do. And that's where the true wealth is built. It's finding these properties because they're going to be undervalued. And usually when sellers respond to handwritten letters, they're extremely motivated. Maybe they're a struggling landlord.

And you can get in there and you can fix up the property and you can get better tenants into the property. And now you've added extreme value to that property and you've increased the value of your investment. And you're going to be building true wealth and really appreciating that property because you found a struggling landlord who needed help, someone who needed help and needed to get out of the property, you helped them out, and you built wealth at the same time while doing it. And that's one of the amazing things about some of these strategies and the amazing thing about real estate is you're improving neighborhoods and you're doing great things for communities. So if you're truly interested in real estate and you're looking to buy your first house at the

same time, this is a fantastic strategy for you because you can do this over and over and over again. And I think house hacking is one of the greatest wealth builders, especially for people who are young and just graduating from college, but really for anyone. Because you can find duplexes and triplexes and quadplexes that one of the units is much larger than the other. So some of them you can go through and look at them. And there are 1,600 square feet in one of the units. And the other three units are much smaller. But you can live in the big unit with your family and then house hack the rest, the other three. And you have no mortgage payment.

You have no housing costs. What does that mean? you can buy more property if you want to really get into real estate or you can buy more investments and that's going to change your life and change the trajectory of your wealth building process. So if you're in the market for a house, I truly hope that you give this strategy some thought because it's an amazing way to change your life forever. Thank you guys so much for listening. And if this is your first time listening, consider subscribing so you never miss an episode. And hey, if you get value out of

show, consider sharing it with a friend because we believe that every person in this world can build true wealth and build financial freedom. We want to share that message with everyone else because it starts right here. It starts with financial education. And it's not taught in high schools. It's not taught in colleges. So we want everyone to understand exactly how they too can build wealth and how they can go about building an amazing financial future. Again, thank you so much for listening and I hope you guys have a great day. minutes. Sounds like Ojo time. Let's play.

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