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David: Hi guys, welcome back to the discount property investor podcast. We're going to jump right in today Mike.

Mike: Let's do it.

David: They know who we are at this point.

Mike: They know who we are.

David: I think it’s episode 187.

Mike: Awesome man.

David: If you don't know that Mike and I host this podcast by now-

Mike: Then you probably are a new listener, welcome.

David: Jumping in, house hacking man, house hacking. I love it, I think it's one of the easiest ways to get started investing in real estate.

Mike: Well house hacking, so what is house hacking Dave? Let's just cover that right off the bat if you know- if you've not heard of the term house hacking before, it's essentially buying a house- and it can be even as simple as buying a single-family house and renting out some of the rooms in that house to cover your mortgage or to help you pay that mortgage. So, it's as simple as that. Using real estate to live for free.

David: Yup.

Mike: We, I think more often than not, at least in my brain anyways, I think of it as buying a multi-family property either a duplex, triplex, quad and living in one unit and then renting out the others and having the other units pay for yours- pay for your part of the mortgage or your portion of it. So, you get to again, live in a house for free.

David: I love it. It doesn't have to be a single family.

Mike: Right. That's what house hacking is in the simplest terms. So, I know that Dave, I think you started your real estate investing journey doing a house hack, didn't you?

David: Yeah, I did. It was single family, lived in it, rented out three rooms, basically broke even. I had to pay utilities-

Mike: Yeah, awesome.

David: But so what? I was paying that anyway, everyone's paying that. And did it two more times, three times while I was in college.

Mike: Awesome.

David: But it was a 4-bedroom, a 3-bedroom, and a 3-bedroom.

Mike: Did you keep those properties? You said you did it 3 times.

David: I own 2 of the 3 to this day. I lived- I moved into them basically and then rented out the other rooms and then when I moved out, I would just rent them out.

Mike: Yeah, so you were a serial house hacker.

David: I was.

Mike: That's awesome man.

David: So, you did it a different approach though?

Mike: This has got to be 10 years ago, right?

David: 15, dude I was 21, yeah.

Mike: Yeah, so that's awesome man.

David: Yeah.

Mike: Very cool.

David: Most of those houses are like, it brought out 40% of the debt left from when I originally bought them.

Mike: Time to refinance baby.

David: Pull them out.

Mike: Get some of that money.

David: That's right. Time is on my side with those for sure.

Mike: That's cool man.

David: But you are absolutely right Mike, you don't have to have a single-family to do this. You can do it with small multis, I think probably up to 4.

Mike: 4 is where the FHA, I think stops.

David: Okay.

Mike: If it's 5 units or more, I don't think you can get an FHA loan. The reason we mentioned that the FHA loan is a beautiful thing for-

David: New-time-

Mike: For first-time home buyers because you can put as little as, I think-

David: 3.

Mike: Yeah, 2 and a half, 3 and a half percent down. It's very little.

David: Right, and a veteran can do it for zero.

Mike: For pretty much nothing if you have VA loan.

David: VA, right.

Mike: So, what that means again is up to four units and that's what I did so my story is very similar to Dave. I started 2009, so I graduated college before I bought my first piece of real estate, don't know why I waited. I just did, didn't have-

David: Most people do. Most people wait till they're 30 years old to buy a piece of real estate.

Mike: Exactly, so what I did, I bought a 4-family in a decent little area here in St. Louis and I lived in one of the units and I was the on-site property manager for the other three units, and I learned a ton from that experience.

David: So, let's talk about some of the advantages of doing this Mike.

Mike: Let's do it.

David: I think this is really one of the best ways to get in because little to no money if your first-time buyer. This is going to be you buying a home to live in but also you can get some investor experience. I love this. So, you instantly become a landlord when you do this. If they're in the home with you in other bedrooms, or if they're in a unit that's above you or next to you, you now are the landlord, so you are going to be dealing with these people and collecting rent and signing leases so boom, you're getting into the investor games paperwork and deals. Like you can't be an investor if you don't make offers on properties and you know what I'm saying like, you got to get in it, you got to get invested and you're going to start managing the property. Again, doesn't matter if it's bedrooms or if it's that 2nd unit, 3rd unit, 4th unit and hopefully you would be able to break even. Even if you don't though, let's say you live in some crazy place like there are places in the world where a building costs 600 grand, but it rents for 600 bucks a unit and there's two or three of them, like there really are. It's crazy. I don't know why it's like that but there are.

Mike: It doesn't make sense.

David: It doesn't make sense, right? In England, for example, cuz they have rent controls.

Mike: I was gonna say rent controls.

David: Yeah, and it won't let you do market rate above and people that have been there for a long time, but even if that's the case though, right? and it can cover half or three-quarters of your mortgage and not all of it, it's still a better way than just going and buying a house and living in it by yourself, right?

Mike: Yeah, I agree 100%. I mean to me, why not? Again, if you are- if you can make additional income, why wouldn't you?

David: Right, absolutely.

Mike: Period.

David: So, I love it. I mean, there's- the only disadvantage of it would be you're gonna have strangers in your house, not strangers, but like you know, tenants.

Mike: Well, and that-

David: In it if it's a house or in the building, but that's okay.

Mike: That's- and that's kind of depends on your age and how you do it too though. If it's a single-family house and you're going to rent out rooms. I mean, if you're going to have a roommate, I mean think about it just like that. I mean if you have a roommate, that's not a big deal.

David: No, not at all.

Mike: Like if you were going to have a roommate, they can pay part of the rent.

David: You're gonna have a roommate in an apartment anyway, or whatever you're doing.

Mike: Exactly, you might do that anyways so what's the big deal? If you were planning on living by yourself and you're going to rent it to a stranger, that's a little bit different.

David: A little different but if it's a unit, I mean that's- if it's a different unit, a duplex, or a triplex, that's probably what's going to happen anyway you know.

Mike: Exactly. You're going to have somebody in there.

David: That's not gonna matter but the cool thing is if you do have friends you want to live with, why live in an apartment with them? Live in that. Let them help you get your rent cheaper and/or you know build equity and sometimes even cash flow.

Mike: That would have been really fun to rent a-

David: Did you cash flow?

Mike: A multi-family to your friends and all live in them, same units.

David: Oh, it would be awesome.

Mike: Yeah.

David: Yeah, like a little 4-family.

Mike: Yeah, that'd be great.

David: That'd be awesome.

Mike: I'm going to do that.

David: You should.

Both laugh. 

David: That's right.

Mike: No, no, no, so mine- I was pretty much breakeven when I was living there.

David: But that's perfect though. I mean, anywhere else in any other situation, you'd be paying rent.

Mike: You would have a mortgage to pay.

David: Right.

Mike: Yeah, so the fact that I could live there without-

David: Living is expensive.

Mike: Living is- it's most people's most expensive item on their budget, it's just living.

David: Just living, getting through.

Mike: Just having a shelter is most people's biggest expense. That's crazy, right?

David: Yeah, that's nuts man. Mine is Amazon, I think.

Both laugh. 

David: Shit.

Mike: Yeah, so if you can eliminate your biggest expense through house hacking, why not? It's a great way to get started. It's- it can be humbling though too again, to rent a room to a stranger. I've done that before too.

David: Yeah.

Mike: So, I also my next house I bought and rented a room.

David: Yeah, subleasing. Our current property manager does that with tenants now. They may break up, they man get a divorce, I mean shit happens man.

Mike: Yeah, it's crazy.

David: And they just say, okay well, you know, as long as you're responsible for the lease still, you want to get someone else on the lease? great, they're moving out, they're moving in, it happens but that's just part of it. I think a lot of lessons are learned because it teaches you to also be flexible, you know, we got to wheel and deal in business. You gotta- you bend a little rule here and there but that's okay, you're in the game. There's so much analysis paralysis out there and it sucks because we don't have it, maybe we have a little bit too much of the opposite, we just jump in like oh, let's do it.

Mike: We definitely do not analyze as much as we used to.

David: We bought a house today, you didn't you didn't even see, I did.

Mike: Woah, woah, woah, we both saw it. It's cool. Our rule is we gotta get two eyes on it before we buy.

David: No, you look at the photos that's why I went there to take them.

Mike: Woah woah woah, yeah yeah yeah, no no  no. We do, but again you get a certain comfort level and that's something we built up over five years working together and just our experience in the industry.

David: l liked the house.

Mike: Yeah, you like the house.

David: It's a really nice house.

Mike: There you go.

David: I'll keep it for myself.

Mike: Solid, it's brick man.

David: But you got to get in the game so that's why I think it's really important.

Mike: So, let's circle back to house hacking and let's talk a little bit more about what you did which is really cool. So, say you start out and you can afford one house, so you buy-

David: I couldn't afford one house. I got a loan for 20% from my grandparents.

Mike: Awesome.

David: And they co-signed.

Mike: Wow.

David: So, they're really awesome people.

Mike: So, you were 100%-

David: No longer with us at this time, but they were the best. I loved them to death. They hooked it up, you know, like they didn't give me money, I paid them back. Paid them all that money back.

Mike: That's awesome.

David: I did it three times.

Mike: So, that was a hundred percent finance though really.

David: Actually, on the second and third one, I had other people co-sign and other loans, but I was getting- giving them an interest rate. My grandparents did the first one and there was no interest rate, but I was basically in the game with hard money lenders back then, you know but didn't know what I was doing, that didn't matter but I borrowed the 20% so it's a lot of money. It was 30 thousand bucks for $150,000 house and I would pay them back over you know, 4, 5, 6 years.

Mike: Why'd you have to borrow the 20%? I guess you wouldn't qualify for the FHA loan or something.

David: Oh no, you know what? I didn't- I don't even know why, I went conventional. I just went conventional- here's the thing, I didn't know.

Mike: Yeah, you just wanted to buy a house.

David: It wasn't analysis paralysis, it was just negligence or whatever like I've not knowing those options. Oh shit, you know, just not knowing so I just figured this is how people do it. I didn't know.

Mike: You got to have 20%.

David: I banked at Bank of America, still do and I walked for just day-to-day cuz there's ATMs everywhere. I walked into the bank that I was just going to at the time in college and I go: I need a loan.

Mike: And they said here's what you need.

David: The guy selling it was probably like I can sell him an FHA and make 2%, I can sell him a conventional- I mean who knows dude. That's what happened though, yeah. Did it 3 times basically while I was living there and I had you know, a 100k of debt but it was good debt that that I was just paying these people back and I paid them off in like 5 or 6 years, just the 20% part of the house and then since then I just haven't even touched them really. I've been kind of- I've been making double payments on the- cuz they're 30-year loans.

Mike: Dude, they're probably almost paid off then.

David: No, not double payments so that that's the caveat, when I say double payment in payment 600, I'm not paying 12. The principal on that payment would be 200 so I'm paying 200 over the 6.

Mike: Ah, gotcha.

David: I'm paying 8 or 9 or 10 or whatever it is but essentially, it's doing double principal so it's just speeding the curve up on the amortization table, like I said, I got about 40% debt. Usually, I'd be at 55 to 60% over 12, 15 years, right. Exactly, so I'm just trying to speed it up a little bit. But in each of those cases Mike, you were right. They were houses, they weren't different units, right? We all lived together and shared the kitchen sink and the toilets and everything.

Mike: And the bathrooms.

David: Right, right. And the front door and the garage, who's parking here, who's parking there but we just made it work. We're all friends. I didn't have any strangers living with me because it was just a single-family house.

Mike: Yeah, and that's a huge different dynamic if you're gonna rent to a stranger, basically sub-rent a room and then still share common spaces. I mean that is a big- it's just a much different dynamic, but again, there's ways to do that, so if you want to do that, if you want- if you don't have people that want to live with you or whatever, you can rent a room on Craigslist. I did it, I rented a room to a stranger, not a big deal. So, you can actually put an exterior door on bedrooms or if it's a solid wood door, you wouldn't need to do that, and you can put locks on it.

David: Just put a lock on it. Locks 29 dollars.

Mike: Put an exterior lock then you've got your privacy and you've got your- your security so that there's a common key for the front and the common space and then in your bedroom, you can lock away any of your private items or things that you don't want people to have access to.

David: Speaking of that, there's apartment complexes. I don't know if they're doing it still, but they were in Columbia when the enrollment like cut in half.

Mike: Right.

David: Cuz all the drama they had down there so apartments like weren't filling up. There's like 30% occupancy in some of these apartments and they were doing that. They were offering discounts, because they didn't want to give one person a three-bedroom apartment, so they're giving people discounts and just saying hey, there's gonna be 3 individual rooms with individual locks. Everyone's going to share the kitchen and the family room and instead of them paying 1200, they'd pay 550 and maybe three of them in there and they get the same amount as if they had just leased it. It was interesting, but I'm going with though is the same thing.

Mike: Absolutely.

David: You can still offer that privacy and have the common areas. And a lot of big buildings have common areas, they're just not the more intimate common areas. Like you're going to have common laundry in a big building anyway, right?

Mike: Exactly.

David: So, and common entry and all that other type of stuff so- I absolutely love it though. Did you go FHA?

Mike: I did.

David: Okay, cool.

Mike: Yeah, yeah, yeah, so when I bought mine, I was able to do the FHA loan and again, because I was out of college, I had a job, so I was bankable by myself which was great. Had a couple-

David: Yup, W-2.

Mike: Yeah, had a year and a half or so of W-2 and I had a great real estate agent. She helped me find the deal and helped me through the whole process cuz I didn't know nothing either. I mean, I still don't know that much. To be totally honest, you know.

David: Hey, we fail fast and forward though.

Mike: We do, and so it was- it was very interesting. We had a problem tenant from day one that the previous owner said yeah, they're delinquent so I bought this property three and a half percent down.

David: So, they were delinquent when you bought it.

Mike: Yeah, one of the four units was.

David: Okay.

Mike: Cuz it was- it's a 4-unit building.

David: [inaudible]

Mike: Huh?

David: Isn't it baller?

Mike: It is.

David: Okay.

Mike: Yeah, so he was delinquent so my first experience as a landlord was evicting someone.

David: Oh, that's fun.

Mike: Yeah.

David: Hey, like I said though you were in the game from day one.

Mike: So, it was just a very interesting experience and he was, I don't really know but I mean, at the time I thought woah this guy is crazy, he's like the worst possible tenant. I don't really know, I mean with today's eyes after 10 years of dealing with people and tenants.

David: Yeah.

Mike: I don't know.

David: I'm happy I don't have to deal with the tenants.

Mike: The other people in the building didn't like him. He causes problems so again, he was definitely a problem tenant and he was behind on rent, so we had to evict him. So, that's what I did I mean, that was one of my very first experiences.

David: What'd that process look like?

Mike: I don't even remember. I just remember him not paying and I had-

David: He had a lawyer, I'm assuming.

Mike: Yeah.

David: Usually the lawyer does everything.

Mike: Pretty much.

David: They just tell you when to go put your place back.

Mike: And the real estate agent, if I remember correctly, helped me with that process too.

David: That's cool too. Yeah, yeah.

Mike: So, we got one of the units vacant and then as a rookie, I don't know what I'm doing. The other three started paying me rent, that was really cool, and I wanted to go in and fix up the apartment, you know.

David: Oh cool, did you?

Mike: I did and I way overimproved it.

David: Oh, always do that.

Mike: Way overimproved the apartment.

David: My first rehab- $40 a foot in Ferguson.

Mike: Yeah.

David: That's what I spent.

Mike: Perfect.

David: I still own it, eh it's okay.

Mike: No, I've been there. It looks great.

David: Over-the-top, yeah. Shit.

Mike: So, it's a 2- they were tiny little apartments, they're two-bedroom, one bath, about 700 square foot and I wanted to you know, I wanted to rehab it, you know, it was exciting it was my first home.

David: You were watching the flip the shit on TV show.

Mike: Yeah, so I did. So, we ripped everything out, put in new kitchen cabinets. I put in a dishwasher, none of the other units had dishwashers so that was great. Opened up a wall, you know, it's 700 square foot.

David: You got dusty, dirty.

Mike: They're 700 square foot, there's not many walls you can open up.

David: Yeah.

Mike: But again, just opened it up and made a little bar area so I mean, it was great, and I really liked living there but yeah, so again, I learned a lot of lessons. Don't over improve the property. Still own the property.

David: Yup, cool.

Mike: And that's what why this one's emotional and be hard to sell because it's your first.

David: Yeah, I know.

Mike: But you know, if there's a big fat check in front of me, maybe I will.

David: I know. It just depends on what's going on at the time.

Mike: And then what did I do next? I mean, that's pretty much it. Then my next property was when I moved. I moved to another one and sub-leased a room. So, I mean, that was- I really only kinda- and my intent wasn't even to house hack again, it just ended up I did that.

David: Yeah, you were in the Airbnb game before the Airbnb game was a game really. Just like renting out a room, savvy.

Mike: The house hacking thing. Exactly.

David: It's a great way to get started too guys because if you don't wanna house hack multiple times, you don't have to. By getting the first one, you're building really good credit with your banker, assuming it's a local banker but anyway, you're going to get credit out of it. So, your mortgage being paid every month's going to start getting green checks on your credit report not red checks and then whenever you go to get another loan in the future, as a personal loan or as an investment loan, the odds of you getting that loan is going to be higher. Wouldn't you agree Mike? like greater because you have shown you can do it. That's the experience.

Mike: 100%. I was gonna say it's the experience. So, you now have the experience of being a landlord, so hopefully you're smart and you start putting that money in a separate account and you're able to show a payment history to bankers, then when you go- when you're ready to go for the next property rental finance, you've got a track record and that's huge for banks, is a track record.

David: And if you want to quit your job, do that two years in a row and get financials on it, right? So, now you have tax records to show there's profit and loss and you can start getting loans on your business. Now that's going to depend on the numbers on the sheets that you're providing but filing the taxes on those businesses is a way to jump start quitting your job in my opinion. I mean, it's related in a way. If you just quit your job, boom nothing, you're not going to be able to get a loan.

Mike: Well, my advice we guys keep the W-2 job as long as you can handle it. I quit my W-2 job earlier than I should have and I didn't learn that until 5 years later you know, I mean, it's one of those things where that W-2 income is super super important for getting loans and leveraging yourself in real estate, so house hacking.

David: House hacking. I love it though man, it's such a great strategy.

Mike: Yeah, anything else you wanna talk about Dave?

David: I think that pretty much covers it. Keep it simple, you know, you're just renting out rooms. The goal would be to break even or even make a little bit of money and getting to the investment world guys, start managing the places, start managing the people, learn the documents that are involved, it's simple stuff and that's going to be- that's going to be a way to kind of kill the analysis paralysis of oh I want to be a real estate investor or landlord, just jump in.

Mike: Just do it.

David: Love it. Signing off guys. 

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