JF1917: How To Leverage House Hacking To Get Your Start In Real Estate with Josh Mitchell
Josh and his wife used the house hacking method to purchase their first investment property. They were able to leverage that strategy to grow to over 5 units. We’ll hear some challenges they faced along the way, and more importantly, how they overcame the challenges. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
“You start to realize that with small sacrifices, you can build generational wealth” – Josh Mitchell
Josh Mitchell Real Estate Background:
- Real estate investor with his wife
- They own 5 units with another unit under contract, used house hacking and cash out refinance to get started
- Based in Chicago, IL
- Say hi to him at josh.mitchell525ATgmail.com
- Best Ever Book: Rich Dad, Poor Dad
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Josh Mitchell. How are you doing, Josh?
Josh Mitchell: I’m good, Joe. How are you today?
Joe Fairless: I am doing well, and I’m glad to hear that. A little bit about Josh – he is a real estate investor and invests alongside his wife. They own five units, with another unit under contract. They used house-hacking and cash-out refinances to get started. Based in Chicago, Illinois. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Josh Mitchell: Yeah, absolutely. As you mentioned, my wife Sarah and I have used many different techniques and styles to get us started. We bought a condo out of school, and moved into that, and with the focus of eventually renting that condo out, as we kind of got into that condo, we got married and used our wedding funds to actually purchase our first investment condo in the same building that we had our first condo in. The association then kind of switched the rules on us and allowed for rentals all throughout that complex, so that’s when we moved into the next phase and started our investing journey there.
Joe Fairless: Was that a decision that you both wanted to do, where you invest the wedding funds into your first investment property?
Josh Mitchell: It took a little convincing on my end from just a numbers’ perspective and getting my wife on board. She’s always the more analytical one of the both of us, so she definitely needed to see the numbers… And it was a blessing in disguise, because it really made me jump in and dive deep into every little thing and explain to her what I envisioned and what these funds could do for us moving forward.
Joe Fairless: So for someone who has a significant other and is in a similar position where they have funds that they’ve either received or just saved, what would you say would be some specific things that you did that would be helpful for them?
Josh Mitchell: My wife and I both are along the same mindset of joining finances; it really helped us stay on track and really focus and dive deep into our finances and see where we were spending money, where we could maybe cut back… And then falling into the money that we got from the wedding, which really obviously was a blessing from our family and friends, that they were generous enough to do that… Really just kind of focusing on where that lump sum of money could be best used. We didn’t want to use it on cars or things that would depreciate. We both were in the same mindset of putting this money to use and really using it to the best of our ability to create generational wealth and get us started on that journey towards financial freedom. Our goal has always been to retire by the age of 40, so that’s kind of what pushed us to jump in and get started.
Joe Fairless: What are the numbers on that first investment property?
Josh Mitchell: The numbers on that one – we bought that one for 85k and rented it for $1,400, again, in a suburb of Chicago here. That is pretty much the going rate on a 2-bed/2-bath condo in this area… But we got in on that one in 2013-2014 range, and since it’s probably doubled in appreciation, so it was a good time to get into that complex.
Joe Fairless: Yeah, that sounds amazing. Now that it’s doubled in value, have you done anything to capture some of that?
Josh Mitchell: Yeah, we actually financed both of those condos that we had. We’ve moved out of the one we were living in and sacrificed for a year; we moved into a 500 sqft. one-bedroom/one-bath apartment, with the dog… So newlyweds in that small of a space, you can imagine how that year went… But we did a cash-out refinance on both of those and we were able to purchase our first single-family home in the same city, and go to the next step with some of those funds that were available in those condos.
Joe Fairless: When you take a look at the purchasing condos versus single-family homes, what are some of the pros and cons that you see?
Josh Mitchell: The biggest con was any townhouse condo is gonna be the association deuce. They can really eat into that monthly profit that you might see on a single-family home… But I always kind of hesitated that as well, because you do have that management company in place, you have people that are at a drop of the fat gonna be there to fix certain things and be able to repair things that the HOA covers. You’re not gonna have the roof expenditures, for instance, that you would have at a single-family house.
So the accounting on the single-family side might a little bit more involved from your individual perspective, but the condos – some people shy away from them just because of those HOA dues, and kind of having someone else maybe control or change those rules at any given time.
Joe Fairless: So what gives you comfort, given those potential disadvantages for condos?
Josh Mitchell: We’ve really kind of gotten to know a lot of the board members on the condo association, being that they’ve just changed the rules to allow rentals. It was in 2014… They’re very new to doing that, so I think that that kind of gave us a little bit more comfort that they were gonna at least give this a go for the foreseeable future. They capped the complex at 15% rentals, so we actually got in at a great time, with allowing those rentals up to two units that we had. But most of those are owner-occupied, and we’ve actually built good rapport with some of the neighbors as well, to allow them to have a little bit of say; or not say, but a little feedback on “The renters are good” and maybe keeping an extra eye on them, and just kind of helping us, be our eyes when we’re not there all the time.
Joe Fairless: On the first two properties – and I know you’ve got more than that, so we’ll get into that… But on the first two, what was a challenge that you came across, and how did you overcome it?
Josh Mitchell: Well, the first investment condo we bought there, the tenant was moving their stuff in and we had a sewer back up on day one after closing.
Joe Fairless: Oh, goodness gracious…
Josh Mitchell: So that was… [laughs] Yeah, that was lovely; I had to go through insurance, getting a claim filed, they tore out all the carpets, cut the drywall two feet up from the floor, replaced all of that… So we were in a little bit of a difficult position from day one on that one. But we got it all resolved, and got the tenant comfortably living in there now. She’s been in there since we’ve had it, so we’ve had no turnover in that unit, which helps a lot with [unintelligible [00:07:47].25] some of those costs and not having any vacancies as well to go along with that.
Joe Fairless: When you say “sewer back up”, it’s one thing to say that, but can you describe exactly what happened?
Josh Mitchell: Yeah. A sewer back up — and again, I don’t exactly know what drain it came back-filled into, but… It was either the shower, or the toilet… The sewer line was backed up, and a lot of nasty stuff was in that unit that had to be mediated and taken out by SERVPRO, who came in and did all that work for us. It was just kind of a nasty week or two to get all that resolved. And it doesn’t smell very good, it’s not very fun to be in and to be a part of, that’s for sure.
Joe Fairless: So this is your very first investment property that you and your wife put your wedding funds into… And you finally get a tenant, and day one of them moving in, there’s sewage running through the unit. What did your wife say about that?
Josh Mitchell: “Are we idiots for doing this?” [laughter] That’s pretty much what she said. I had to do a lot of more convincing and tell her “Insurance is gonna cover it. We’ll be fine.” Just kind of give her that comfort. But it was definitely something that we had a little apprehension and hesitation on going forward… But we’ve seen the benefits of it, getting it fixed and making sure that we stay with the course there.
Joe Fairless: And what was it like for you navigating the conversation with the resident as they were moving in day one and this is happening?
Josh Mitchell: Yeah, we really just tried to go above and beyond to them, to give them everything they needed. Luckily, their lease on the apartment that they were at and currently living at wasn’t up yet, so they had a place to go, just for those couple days while we were getting things fixed… But we tried to go above and beyond and help them. We offered to help move anything that they needed for the time being back into the apartment for them. We tried to make sure that they were comfortable, and if they needed anything, it was pretty much all hands on deck; anything we could do to keep them happy and just assure them everything was gonna get fixed correctly, and make it a happy place for them to live.
Joe Fairless: Those were the first two units… Now let’s talk about the next one.
Josh Mitchell: So then we jumped into our first single-family, and – wouldn’t you know it – week one we had a little water back up in that one as well. So we had no sump pump at that single-family, which – that’s one of those learning things that we look for now at our places that we purchase… But this one did not have a sump pump, and of course we got torrential downpour and had a little water back up into that specific residence… But again, had to get it removed, and dried out… We actually did install a sump pump at that residence to never have that problem (hopefully, knock on wood) ever happen again to us… But again, had to go through pretty much the same thing on that one as well, which is coincidental, I’d have to guess, if you wanna call it…
Joe Fairless: Let’s hope so. [laughs]
Josh Mitchell: Yeah, yeah.
Joe Fairless: We won’t say you’re cursed quite yet. We’ll wait to hear what happens with future properties…
Josh Mitchell: Yeah, yeah… Those are our two horror stories. But we pushed through, and like I said, stayed on the course and kept going here.
Joe Fairless: And what are the numbers on that third property?
Josh Mitchell: We bought that one for 230k, and it rents for $2,100-$2,500 right now a month… So cash-flowing roughly just over $500/month after expenses and everything are paid. So that one has been a very good one for us, and has appreciated as well to roughly about 315k-320k in value.
Joe Fairless: What about the next deal?
Josh Mitchell: The next one we jumped into we went back to the same condo building, if you believe it or not… [laughs] We bought another condo in that same building, this time on the second floor. We were trying to forward-think and think about any water down-flowing to the first floor; the first unit had some sewer back-up problem… But we went back to that condo and got one on the second floor this time, and it’s been just as good, if not better than the other ones, with no problems, to this day at least.
Joe Fairless: And you have five, right? So we’ve got one more?
Josh Mitchell: Yeah, we’ve got one more. It’s a townhouse a little bit further away; it’s still in the same town, on the South side of the town, I have that one as well. Just bought that one for — 150k I think is what we paid on that one, and got that rented at that 1% rule, with $1,550.
Joe Fairless: How are you finding these properties? I’ll be specific – how did you find the fifth one?
Josh Mitchell: Actually, all of these properties have come off the MLS. We actually have a great realtor that we work with. She’s done all of our purchases here for us, but she’s awesome at sending us usually leads that are about to come on the MLS, to kind of give us that first glance, which has actually helped us build rapport with other realtors in the area as well. They send our realtor some leads and ask if we wanna go look at the properties before they even put it on the listings… And it’s been awesome to have that, and maybe have a first crack at making that offer to a seller. The seller always feels good when they can get their properties sold before it even is listed for anybody to come look at… So it gives us a little bit of negotiating power and helps us get that started and get the ball rolling on making an offer.
Joe Fairless: With any of the deals – pick any of the five – was there any major negotiating between purchase price or terms?
Josh Mitchell: I’m trying to think if there was any real negotiation… We did have on the first single-family we bought – it was listed a little bit higher than what we were able to purchase it for. The only thing that gave us that leverage was, again, getting in before it went on the market… But this property in itself had a converted garage, they had an in-law suite that they weren’t going to convert back for us… So we kind of gave them a little bit lower offer, and just kind of justified it in the sense that it was the only house on the block, and within a five-mile radius — actually, our appraiser had a little bit difficult time finding comps, just because it didn’t have the garage, like the rest of the houses did. So again, we kind of took that into account and gave them a little bit lower offer than maybe what they had it listed for.
Joe Fairless: And do you remember the numbers?
Josh Mitchell: I think they had it listed for 249,9k. And again, I know that it’s a big difference there, but it did need a little bit of updating; nothing huge, all cosmetic stuff… But we got it, like I said, for 230k. I feel like that was a good negotiation and we got it at a good price for what they had it listed at.
Joe Fairless: Did you have anything under contract that didn’t happen?
Josh Mitchell: We have not, actually. We’ve been lucky that everything we’ve offered on has happened. I have actually just started sending letters to multifamily owners, and just kind of researching them through the tax portals and through a title rep… I’ve just started sending letters, and actually just got my first rejection letter; I’m kind of proud of that, actually…
Joe Fairless: Oh, congratulations. [laughter]
Josh Mitchell: Yeah, I know that that’s kind of the next step, right?
Joe Fairless: What did they say?
Josh Mitchell: “Hey, we got your letter. We’re not interested in selling. Please don’t contact us ever again.” So a little slap in the face, but nothing we can’t bounce back from. I plan on maybe trying again in a year or two and seeing where they’re at, and trying to overcome any objections… Maybe their circumstances change.
Joe Fairless: What’s been something that you thought would be easier than what it actually is?
Josh Mitchell: I think that I thought it would probably be easier to find good, reliable tenants. Luckily, we’re in an area that tenants are usually very good. It’s very competitive in our area though; there are a couple complexes that allow people to get in for maybe a little bit cheaper prices than what we have… But we feel like our unit — we shoot for the B+ to A property, so we’re willing to pay a little bit more premium for those properties, and it kind of comes with the territory of trying to find better tenants as well, though. So it kind of works hand-in-hand, and we wanna make sure that we get the best people in our properties. We’re always willing to maybe wait another month or two to find that right person. I guess that’s been one of the bigger challenges that we’ve faced.
Joe Fairless: What’s been something that’s easier, that you thought it would be a little bit harder?
Josh Mitchell: I think that the managing of it — I do all the managing myself of the properties, so I’ve found that that’s been very smooth. Obviously, there’s things that come up, there’s things that happen – for instance, all the things we’ve discussed previously… But other than that, the renters pay on time. As long as you keep your properties and things organized, well-documented with everything, that process has been very smooth, and we’re more than happy that we’ve kind of chosen this road to go down.
Joe Fairless: Based on your experience, what’s the best real estate investing advice ever?
Josh Mitchell: My advice would be just to make that first sacrifice to get the first property. We sacrificed living in a nice condo down to a 500 sqft. apartment, we sacrificed our wedding funds to get started… I think once you start and get that first property, as you probably know, Joe, you get the bug; you get the real estate bug and you start looking for the next property, and the next property, and you start to see the benefits from a cashflow standpoint versus tax advantages, and you really start to realize that with the small sacrifice that you can make, you can really envision your future and see the generational wealth that real estate can bring, and help provide for you and your family.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Josh Mitchell: Let’s do it!
Joe Fairless: Let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve recently read?
Josh Mitchell: I’ve gotta go with the cop-out answer. Rich Dad, Poor Dad has been the life-changer for me. That’s what got me started and going here.
Joe Fairless: Best ever deal you’ve done so far?
Josh Mitchell: I’d have to say that it’s gonna be our single-family. Regardless of the water back-up and stuff…
Joe Fairless: Was it really a water back-up?
Josh Mitchell: It was really a water back-up, yeah…
Joe Fairless: Oh, that was water — yeah, I’m getting them mixed up with the condo.
Josh Mitchell: Yeah, so that single-family one – $500/month in our pocket, and we’ve had no issues, and it’s been a great property for us to this point.
Joe Fairless: What’s a mistake you’ve made on a transaction we haven’t talked about already?
Josh Mitchell: Well, the only mistake I feel we’ve made on the transaction side of things is my wife travels for work a lot throughout the year, and we’ve had to do a couple of power of attorneys, and didn’t get that signed one day before closing… So we had to scramble, because the title company needed the original, and they needed a bunch of different things, so we actually had to push back closing a day or two on one of the properties… But that was pretty much the only hang-up that we’ve had to this point.
Joe Fairless: Best ever way you like to give back to the community?
Josh Mitchell: I’m a huge athletics freak. I played in college, in the suburbs here in Chicago, but I’ve coached at the college level, and I’m actually coaching at the high school football level this coming season… So I’m all about working with that age group. Any friends and family that wanna talk real estate – I’m always pushing them to try to get involved and try to get their feet wet, and I love just discussing the advantages of doing that.
Joe Fairless: How can the Best Ever listeners get in touch with you?
Josh Mitchell: I’m on any social media that you wanna reach out to me. Josh Mitchell is pretty much my Facebook, Instagram, Twitter etc. I’m on Bigger Pockets; everywhere that you can be found in real estate, I’m probably a member in that group. So if you can find me, I’m sure I’m there somewhere.
Joe Fairless: Josh, thanks for being on the show, talking about each of your five properties, talking about some challenges on day one of your first investment property, thought process, how you handled it, how you overcame it, and now you’re much farther along and have bought many more properties after that. The thought process you have when you’re buying a property and the numbers that you look at. So thanks for being on the show, Josh; I hope you have a best ever day. We’ll talk to you again soon.
Josh Mitchell: Absolutely. I appreciate it, Joe. Thanks so much.