Guide to House Hacking Your First Investment Property
One of my favorite Tony Robbins’ quotes, among many, is “success leaves clues.” This applies to a wide-range of things, and real estate investing is one of them. If we want to learn how to get started, we don’t need to reinvent the wheel, because there are “clues” we can leverage to shorten the learning curve.
For those who are on the outside looking in, what you must do is quite simple: find someone who has successfully entered the real estate gauntlet and follow the breadcrumbs they’ve left behind.
Sunny Burns, a 26-year old real estate investor, purchased a fourplex for his first deal, and in our recent conversation, he outlined exactly what he did to successfully enter the real estate arena, which a newbie can use as a guide to purchasing their first investment property.
The Real Estate Strategy
Sunny’s first real estate investment was a fourplex, which he purchased using the house hacking real estate strategy. House hacking is when an investor purchases a two, three, or four-unit property, lives in one unit, and rents out the others. “I definitely recommend the house hack,” Sunny said. “If you buy a single-family house, depending on how much you make, half your income could be going straight into that house (mortgage, taxes, repair costs).”
“Buy at least a duplex,” Sunny continued. “You don’t want to become a slave to your house. You don’t want half of your paychecks to go there because it’s hard to get out of that and grow from there. But if you can buy something like a duplex, a triplex, or a quad, you can really start to almost live for free.”
By following this house hacking strategy, Sunny says, “we actually live for free, and then make a couple hundred dollars after that.” He gets the benefits of both an investment property (cash flow, appreciation, etc.) and essentially a free primary residence.
Sunny’s House Hacking Deal
Sunny found the fourplex deal on the MLS. “We were just looking at Realtor.com, and I got regular emails from them. One day, I got an email for this 12-bedroom, 4-bath quadplex, and I look at my email and was like ‘wow, this is the property we’ve been looking for.’”
When searching for properties, Sunny’s criteria was simple: $1,000 per month in cash flow after moving out of the rental and fully renting it out. It took a while to find the property, but the patience paid off when they found the fourplex.
Most investors who purchase a property via house hacking use a FHA loan, which is an owner-occupied loan that requires 3.5% down. However, the drawback of the FHA loan is PMI, which is an additional monthly fee for mortgage insurance. Sunny, understanding that the PMI cost would decrease his monthly cash flow, elected to pursue conventional financing instead. “We actually did conventional financing through a smaller bank,” he explained. “We put 10% down. We went to the smaller bank because they don’t charge you borrower-paid PMI – they take care of the PMI – and we got a great rate at 4%, which I’ve since financed to 3.5%.” The down payment was higher, but since the bank covered the PMI, Sunny was able to save a couple hundred dollars each month. That being said, for the first-time investor, make sure you shop around for a loan to ensure you’re getting the best loan that fits your investment strategy.
Sunny purchased the fourplex for $430,000. He put down 10%, which is $43,000, and put in and additional $20,000 in repairs, so $63,000 all-in. Once they completed the renovation, Sunny and his family moved into one unit, rented unit two for $1,000 per month to his in-laws, and rented out the other two units for $1,700 and $1,710. He said, “we can definitely get $1,500 for our unit easy, and then another $500 for my in-laws unit easy once they move out.”
As for the renovations, Sunny was able to cut costs by doing the renovations himself. Besides the fact that he and his wife already had some handyman skills (his wife grew up in an old Victorian with her family that constantly required repairs and he had experience working on cars), they learned how to do the majority of the repairs using YouTube. “YouTube really helped a lot in a lot of things,” Sunny explained. “Learning house repair, that was definitely a learning curve, but YouTube, and [my wife] having a lot of knowledge [was key].”
10 months after purchasing the property and after completing all the renovations, Sunny was able to refinance the property and pull out all of the money he put in, both the down payment and the renovation costs. He said, “It worked out great. We purchased it for $430,000, we put that $20,000 into it in repairs, and I think it was under market when we bought it, so it appraised for $550,000, so that was $120,000 over what we purchased it for. We did a cash-out refinance, so we pulled out $67,000, and that was pretty much the $43,000 that we put into it and the $20,000 repair costs, and some closing costs wrapped in.” Not only were they able to pull out all of their initial out-of-pocket costs, which they will use for their next investment, but they also have 20% equity, which is double what they initially put down.
Additional Factor When It Comes to House Hacking
Besides the tactics behind house hacking, there is one additional factor in play that applies to those who are looking to get into investing via house hacking, but have a family: convincing your significant other! Sunny said he had some issues convincing his wife in the beginning. “She was really hesitant about working with tenants. She was really scared about tenants – they’re going to sue you, they’re going to cause all these headaches.”
Rather than go another investment route, Sunny implemented policies and procedures to mitigate the risk of tenant issues. “We did credit score checks on every single tenant. We did background checks on every single tenant. We made sure that they had a least two times the rental income coming in.” As a result, he was able to lower his wife’s fears and now, he says, “she’s a huge fan and tries to tell all our friends to do the same thing.”
One of the best ways to get your start in real estate investing is house hacking – live in one unit and rent out the others.
Sunny followed this strategy by finding a property on the MLS that fit his criteria, performing the renovations himself, refinancing and cashing out his initial investment, moving into one of the units and renting out the others, and implementing policies and procedures to mitigate his wife’s fears of owning and living in a rental property.
Newer investors can use Sunny’s story (either in its entirety or pick out useful clues) to guide them through their first investment property purchase.
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