S2E48 – House Hacking | How To Buy A Multifamily Property

Are you a first time home buyer wondering how to house hack and buy a multifamily property with a minimal down payment? What mortgage options do you have when buying units while house hacking? What are the pros and cons of house hacking? In this episode, we discuss what you have to consider if you’re trying to house hack to buy a multifamily home with a minimal down payment as we help you become The Educated HomeBuyer.

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Connect with me 👇 Jeb Smith (huntington beach Realtor/orange county real estate) DRE 01407449 Coldwell Banker Realty ➡I N S T A G R A M ➳ https://www.instagram.com/jebsmith ➡Y O U T U B E ➳https://www.youtube.com/c/JebSmith

Connect with me 👇 Josh Lewis (Huntington Beach Certified Mortgage Expert) DRE 01209148 Buywise Mortgage M:714-916-5727 E: josh@buywisemortgage.com ➡I N S T A G R A M ➳ https://www.instagram.com/joshlewiscmc ➡Y O U T U B E ➳https://www.youtube.com/c/buywiseborrowsmart

📩 – info@theeducatedhomebuyer.com

For Show Notes, See Below 👇

[00:00:00] Jeb Smith, Huntington Beach Realtor: At the moment, there’s a lot of talk across various platforms out there about house hacking, the idea of buying multiple units, maybe living in one and essentially being able to pay for your mortgage. So in today’s episode, what we’re going to do is we’re going to dive into the idea of buying owner occupied units, this idea of house hacking, how you do it from a financial perspective.

Also what to look at on the real estate side and really whether or not it makes sense because there’s this idea that makes it seem like a very easy principle out there. And I think Josh and I both agree, if you can do it, it is a really, really good way to go, but it might not be quite as easy as you think.

So Josh, when we’re talking about the idea of house hacking, the idea of owner occupied people putting a little bit money down, I know you get a lot of calls on this. Where do you typically start that conversation? 

[00:01:03] Josh Lewis, Certified Mortgage Consultant: What do you mean by house hacking? So a lot of times it’s people that are calling, “Hey, I’ve got a couple of friends, we’re roommates, my dad’s willing to give me a down payment. I’m thinking I buy, I qualify for the loan and they’ll keep renting from me. Makes the payment affordable.” 

Financially, we talk on the show, all the benefits of homeownership. So this person is going, Hey, I’m going to get those benefits. I’m going to build up some equity. I’m going to fix my housing costs and my friends are going to live with me and help me to offset that payment. So all of those things are true, but what generally gets missed in the concept of house hacking, meaning I’m going to buy a single family residence or a one unit condominium and rent out rooms, is we cannot use that income to qualify you for the mortgage.

So it’s great. You know it’s going to offset the monthly payment and I can afford what is left after I collect the rent from my roommates for having the extra rooms rented, but we don’t get to use it for qualifying. Now people will say, wait, I read online or I saw on a video that you can do that.

Very rare exceptions with Home Ready or Home Possible. You can use border income, but also it is possible if someone has lived with you. Let’s say those two people have lived with you in a rental for the last couple of years, and you’ve collected rent from them and you’ve declared it on your taxes.

And we can show that we can use that income. You’re probably laughing. Cause you say. No one does that. In the real world, no one does it. So the guideline says you can, but it just, it never happens. So for the most part, you’re not going to be able to use those rents to qualify, which kind of leads us back to today’s conversation, which we’ve had some recent guideline changes, but it’s been very attractive to say.

“Well, cool. If I buy two units, three units, four units. Now I don’t have to rent out a room in my house. I have a whole separate unit that I can rent to another person. I don’t have to be willing to live under the same roof with them, but I’m going to get some of those same benefits.”

Now from the mortgage side, getting you qualified, getting you approved, we have additional income to work with that can fight some of those affordability headwinds that we’re facing right now. 

[00:02:59] Jeb Smith, Huntington Beach Realtor: And I think [00:03:00] that’s really the main reason we’re having this conversation, Josh, is it really comes back to affordability, right? The idea of being able to buy something, maybe a little bit more than you’d be able to afford on your own and have tenants, have friends, whatever that looks like, paying rent to help you Qualify for the mortgage if that is what’s necessary and also more or less for them to be able to take on a portion of that payment to make it more affordable from your standpoint.

And that’s one piece of it. I think the other piece of it is a lot of this stuff has gotten traction on the internet, right? That this is how you build wealth over the longterm is that you house hack, that you buy these properties and within a couple of years you buy another one and you continue to do that until you own this large portfolio of properties.

And bird’s eye view looks awesome. I mean it looks like a really good way to grow wealth, a really good way to build that foundation. But as we’re going to talk about, it is doable, but it’s not quite as easy as the gurus, as a lot of the people out there pushing this idea on the internet.

And a lot of it’s going to come back to locality, Josh, like we talk about everything, location is everything when it comes to real estate. And even more so when we’re talking about buying multiple units with smaller down payments.

[00:04:12] Josh Lewis, Certified Mortgage Consultant: You are a hundred percent correct in what you said that probably 80 percent of the people considering this, considering buying a multifamily property as their primary residence, as their first home, are doing it from an affordability perspective.

They look at a entry level home and they go, I can’t afford that. It’s a little bit more expensive for two to four units, but once you factor in those rents, now we’re in the range of affordability. So definitely the driving factor there is affordability, but there is a second point there, Jeb. 

Before I ever bought my home, there’s an area here in Huntington Beach, not the nicest area, but it has a three and four unit buildings in there. And my plan at that time, so late nineties, those properties were less than $300,000. 

And my plan was, let me get one of those. I can use FHA financing. We can use an FHA 203k, rehab one, get it in tip top shape. I live in one for a year or two. Rent the rest of them out, and then we convert that to a rental and I can go buy a house.

And there’s a reason for that. It is much easier to go buy a residence once you own units than to go buy units once you own a residence. Now, what happened is life happened. Met my wife. We got engaged. We found a really cool property that we wanted to live in down by the beach and we bought it. And that never happened.

Long story short, those properties are now closing in on $2 million. Still not a great neighborhood to live in, but a wonderful rental that would bring in $6-8,000 a month in rents, possibly more and it’s gone up six, seven, eight times in value over those years while paying for itself.

So from a standpoint of an investment, so if you’re saying I don’t just want to acquire my home, a residence and leave it at that. I want to acquire a portfolio of rentals. The ultimate hack in that space is buying units first and then transitioning on to buy a residence. So [00:06:00] with that, Jeb, the important part comes. How? How do I finance it? 

[00:06:04] Jeb Smith, Huntington Beach Realtor: Right. Well, I think you said something important there, Josh, in that this isn’t a new idea. You’re talking about late nineties when you were talking about doing that. One of my mentors says principles never change tactics do. So the principles are still the same, how you do things change over time.

And with that we’re talking about the idea of changes within guidelines at the moment, those tactics that allow you to potentially take advantage of two units, three units, even four units with house hacking. So Josh, the most popular program that’s always been around when we talk about this idea is FHA, right?

People know that. There’s a lot of information on the internet. I’ve done a lot of videos on it. But we’ve also had some recent changes with conventional guidelines that have also made it more attractive. So I think maybe start with the old school, the idea of FHA. What is required, kind of some of the problems with it.

And then we can talk about conventional and then maybe give some examples to people. Hey, this is what it actually looks like on paper. And is it really what you thought it would be? Because I think that’s really where it’s going to be eye opening to a lot of people. Isn’t it? 

[00:07:07] Josh Lewis, Certified Mortgage Consultant: Absolutely. Because most of the people that reach out to me that have seen some things on the internet, whether it’s an article, whether it’s a video, they go, I know I can do this. And I say, well, what you’re quoting me is not wrong, but it’s ignoring many things that are also true that complicate it.

Why would we start with FHA? FHA is kind of known as the easy button. It’s more lenient on credit, more lenient on debt to income ratios. But when it comes to units, it’s always been monstrously more lenient for an owner occupant in that two to four units, you’ve always been able to do three and a half percent down per the guidelines. Assuming that you qualify.

So we’re going to get into the details of that, but three and a half percent down versus conventional until November 18th of this year would require you to put 15 percent down on two units, 25 percent down on three to four units. Even if you were going to owner occupy. So for most people, those numbers are absurd. They’re astronomical. 

When you’re looking at buying your first property or buying something owner occupied, most people don’t have that big of a down payment. So FHA has been the one and only game in town. I just told you guys, when I was looking at this back in 96, 97, I was going to go FHA. I could have put a little more down, but I couldn’t have put the whole 15 or 25 percent down.

So in general, Jeb, that loan is exactly like a normal FHA purchase. Three and a half percent down, 47 over 57 percent debt to income ratios. Two units you don’t need any reserves. So it’s just like a single family residence. Once you go to three to four units, they do require you to have three months of reserves.

So still quite lenient, a very simple loan program for acquiring what is a residence, but also with a large portion of an investment component there. The big thing is we can take the rents from the other one unit, two units, three units, and credit you with 75 percent of that income and add it to your income for qualifying.

So [00:09:00] most people hear this and go, Hey, I don’t make enough. I can’t qualify for a house. So I need that additional income. The problem is 2, 3, 4 units are generally more expensive than a single unit. Not always. And it can kind of come back to that quality mix of the neighborhood, the location, but it is important to know it’s a bigger loan that you’re getting so that income is going to offset it, but it’s not going to be complete magic. And I guess, Jeb, we probably should spell out why do I only get 75 percent of the rents? 

[00:09:30] Jeb Smith, Huntington Beach Realtor: Well, I think that’s important. And also something that I think for me is not common sense, but something that I would automatically assume is that when you’re paying more money for a four unit complex or two or three, four unit, the more money you’re paying for that complex typically means a couple of things. Better location, maybe larger units, units bring in more income. That sort of thing, right? 

Whereas if you’re in an area where the units are a lot less expensive, that doesn’t necessarily mean all of these things apply, but I would say typically less desirable location, probably going to bring in less monthly rents, smaller units in a lot of cases, condition, that sort of thing.

So understand when you’re paying more money for units, you’re typically going to be bringing in more income as well. But like Josh said, you get 75 percent of it. So why Josh, don’t you get a hundred percent of the rents? Because if I’m receiving a hundred percent of the rents from the tenants, why is it the lender allowing me to use that 

[00:10:28] Josh Lewis, Certified Mortgage Consultant: When you declare that income on your taxes going forward, it’s going to go on schedule E and you’re going to write down not just the income, but then all of the expenses. Taxes, insurance, maintenance, upkeep, any upgrades, updates that you’ve done. So since we don’t have that history, we can’t do an analysis of a tax return to say what the actual number is, FHA and conventional, Fannie Mae and Freddie Mac, also say we have to use a 25% vacancy maintenance and expense factor. 

So that 25% expense factor accounts for the fact that if you own a four unit building, you have three units that you’re going to rent out. That’s 36 rental months a year. It is unlikely that all 36 of those months are going to be rented out and if they are, that you’re going to receive your rent every month.

So it is just a way of giving some wiggle room there to account for the expenses. Now, if you do this and you buy this property and you come back in three years and you want to refinance, they’re not going to do the 75 percent anymore. They’re going to go back and look at your tax return, do that analysis and it’s probably going to be better than 75%, but some people get real funky and real aggressive with their accounting. And then they’re confused when they go, why don’t I qualify? Well, it says you lose $5000 a month with the extra three units. It doesn’t say you make additional money. So something to be aware of, but it’s important on the way in. 

[00:11:46] Jeb Smith, Huntington Beach Realtor: No, no, I was going to say that is the key right there. People want to save on taxes, but saving on taxes can end up hurting you in some ways like this. Just like being self employed. Like if you’re somebody that writes everything off and then you go to buy a home, the lender is going to [00:12:00] look at the net after all the expenses, after everything is written off and saying, “hey, listen, you’re not showing any income, even though you might make it.”

This is something you have to consider, especially when you’re buying units. 

[00:12:11] Josh Lewis, Certified Mortgage Consultant: And think about that. If you are going to be in the game of owning rental property and needing to finance it, it is important that there’s a balance there.

No one wants to pay any more in taxes than they need to. And you want to take every valid tax deduction that you have on your schedule E for your rental property or otherwise. But it is important to balance that with the need to be able to finance things through traditional means, whether that’s FHA, Fannie, Freddie, whether it means going to your bank for a HELOC and they’re going to look at those things.

So always a balance there. So Jeb, the giant one that no one ever accounts for because no one in their videos that they’re doing online, telling everyone go out and buy three and four units FHA three and a half percent down, except for Jeb, so Jeb, tell them what is the gotcha? 

[00:12:57] Jeb Smith, Huntington Beach Realtor: So everybody knows the guidelines, right? You probably didn’t learn anything in what Josh and I just said. The key here is that there’s something called a self sufficiency test that every property has to pass when you’re talking FHA. So it has to meet this test, if you will. Where they’ll actually allow you to buy three and four units with just three and a half percent down, right?

So one and two units doesn’t matter. Three and four units matters. And what is that self sufficiency test, Josh? What does that actually mean? 

[00:13:27] Josh Lewis, Certified Mortgage Consultant: So pay close attention because this sounds crazy. And the first time I say it, people go, what are you talking about? It doesn’t make sense. We’re going to take the rents from all three or all four units.

Forget that you’re going to occupy one. We have to take all of the rents from all three, all four units, apply that 75 percent factor for vacancy maintenance expenses. And 75 percent of the rents from all of the units have to exceed your total PITI payment. 

So where we get into trouble is here in Southern California. Prices are really high. In the Bay area. Prices really high. Many parts of the country, not just here in Southern California, the prices are very high relative to the rent. So the rents are also high in Southern California, but they’re not nearly as high relative to prices . So what we see is it has been almost impossible for over 10 years.

So we’re here in 2023, go back to about 2013 when we first started seeing some appreciation post 2008, we very quickly hit a point where almost no three to four unit buildings in Southern California passed that self sufficiency test. So now where are we in 2023 Jeb? We’ve seen a hundred percent appreciation over those last 10 years.

So homes are twice as expensive as they were and rates went from about that time around four and a half, 5 percent all the way down to two and a half percent. And now up to seven, seven and a half percent. So when we run that number, it’s not even close. So let me throw an example at you, Jeb, and see if this triggers any questions for you or for the audience.

If you found [00:15:00] a property that sold for $400,000 and it was four units. We’ll assume here for identical units, each one brings in $1000 rent. So that’s $4000. So we apply that 75 percent to it. We get $3000. Well, with FHA today at 7%, you’re going to have a total payment of $3309, $2613 P and I at 7%, $180 mortgage insurance, about $400 in taxes for us here in California. You could be in a higher or lower tax state. And about a hundred dollars for insurance. On units, the insurance can be higher because you’re insuring more things there that go wrong. 

So best case, we’re really looking at $3,300. So we fail by $300. And you may circle back and go, well, Josh, you said $400,000. There’s nothing in Orange or LA County that’s four units for anywhere near $400,000. You are 100% correct. It’s probably more like $1 million, $1.2 million, $1.5 million. 

[00:15:51] Jeb Smith, Huntington Beach Realtor: Here in Huntington Beach, $2.5 million. 

[00:15:55] Josh Lewis, Certified Mortgage Consultant: And what happens, Jeb, the people that reach out, they go, yeah, these prices are 2 million, but here’s the good news each unit is going to rent for $3000. And you go, okay. So we’ve got $12,000 a month rent. Now we have $9000. Well, a $2 million purchase, which you can do in high cost areas with three and a half percent down, cause the FHA limits will allow you to do that. You’re talking a $20,000 payment. It’s not even within the realm of possibility. 

So FHA wise, Jeb, what that leads us to a lot of people who decide to do units end up going towards duplexes. And I almost believe that it artificially increases the value of duplexes in these high cost areas, because all of the people that want units are pushed into to those.

[00:16:39] Jeb Smith, Huntington Beach Realtor: So the option in that scenario, Josh, is that you can still do FHA, but in theory you have to put more money down, right? So the solution in those cases is, Hey, I’ll just put more money down to bring down that monthly expense so that it passes the self sufficiency test. But people don’t understand how much more you have to put down in order to bring that payment down to make it work.

So that’s where that new option with conventional, I think is going to give people a lot more leeway with regards to buying multiple units with smaller down payments outside of duplexes.

[00:17:13] Josh Lewis, Certified Mortgage Consultant: 

I like the transition there. It’s a perfect transition over to this. So now, what do we have? Conventional loans, we can do 5 percent down on two, three, four units. So we still have the things that we’ve always talked about with conventional versus FHA. If you have a credit score below 680, the terms are going to get rough. There’s loan level price adjustments for two, three, four units that are much bigger than on FHA.

We’re more restrictive on guidelines. And we have that black box of their automated underwriting system that’s just a little more iffy in terms of what we’re going to get out. And right now I can’t tell you from experience what that looks like cause we haven’t run any of these through it. 

I don’t know of any of my friends, a lot of friends in the mortgage business. I don’t know anyone that’s tried one yet. You know, a year from now, we’ll all have some experience with the automated underwriting system and see what it [00:18:00] looks like. But the most important thing there, Jeb, is what goes away is that self sufficiency test. It doesn’t matter. If you want to do 5 percent down on that 2 million fourplex here in Huntington beach, and it’s $10,000 upside down for the self sufficiency test. Irrelevant as long as you have enough income to go along with those rents to help you qualify. 

So it’s going to be a really good option, but it is essential in these loans that you have as high a credit score as possible, I would think 720, 740 would be a minimum 780+ would be ideal because you have your interest rate, loan level price adjustments. You have mortgage insurance.

And that’s kind of an important one, Jeb. The biggest things that have been showing up in my inbox is either lenders saying, Hey, these are the mortgage insurance companies that will or won’t do this. Or for mortgage insurance companies saying we will or won’t do this. So many of them are only doing 5 percent down on two units.

There are one or two options for three to four units. Have not priced one mortgage insurance wise, but I can assure you the 5 percent down 4 unit building is going to be a higher mortgage insurance rate, not just a higher amount because of a bigger purchase or a bigger loan amount, but a higher rate, just because that’s going to be more risk to the mortgage insurance company.

And at this point in time, they don’t have five, 10, 15 years of history to say what is the actual real level of risk with a 5 percent down three or four unit purchase. So they’re going to err on the side of caution and it’s going to be more expensive than it probably will be over the long haul. 

[00:19:30] Jeb Smith, Huntington Beach Realtor: Yeah and so when I listened to this, Josh, I said, I I’m thinking in my head, who benefits, who are the people that benefit in this situation? Well, if you’re in Southern California, if you’re in a high cost area, let’s say California in general, for the most part, Southern California, parts of Northern California, you’ve got, you know, New York, parts of Florida.

I mean, you can really have these in almost every state to some extent, but the people that benefit here are the people that are high income earners that don’t have a lot of money to put down. And, or don’t want to put a lot of money down. And the property still makes sense from somewhat of a cashflow standpoint, right?

I think the people that that believe that this is the easy button, the easy solution for everything are going to find it more difficult. Because people don’t understand how much units cost here in Southern California. I mean, I have conversations all the time and people are like, I’m thinking of buying units.

I’m like, okay, well, what are we thinking? Well, I was thinking somewhere. I’m like, what are you approved up to? And it’s somewhat difficult Josh, when going through that pre approval process, because it largely depends on how much rent it’s going to bring in and just various factors in the lender, being able to figure out the actual amount.

So trying to get an idea, what are you thinking? 

[00:20:37] Josh Lewis, Certified Mortgage Consultant: Let’s talk about that because it’s a really important thing here because in general it is very easy. You talk to Jeb. Jeb says talk to Josh, get pre approved and I go cool Give me your income and asset docs. Tell me your target price range. Complete the application and we have a number. 

But we have giant variables because what I’m gonna do Is I’m gonna ask you. Okay, you want to buy four units. What’s the prices? Well, you can [00:21:00] get a low end of $1.5 million, high end of $2.2 million. Okay. That’s a pretty big range. What are the rents for those? Ooh, it really depends if it’s four, one bedroom units versus a three and two owners unit, two, two and twos and a carriage unit over the garage. Those rents are all over the place. 

So then they have to come back to you, Jeb, or their realtor and say, Okay. What can we expect on the rents for the market rents and kind of a dirty little secret in here is no one takes anyone’s word for this. We have to do a market rent survey. The appraiser, when they’re going through the value of the property, they’re going to do a market rent survey and say, these are what the market rents are.

Jeb, what do the rents on a market rent survey look like relative to real world rents that you get for the unit when you manage it as a property manager? 

[00:21:46] Jeb Smith, Huntington Beach Realtor: A lot of times market rents are a little bit less in some cases, right? I think it’s going to depend because sometimes the appraiser will ask questions about rentals, like, “Hey, what does this look like in this market?”

And you can kind of lead them down a path, but honestly, Josh has been so long since I’ve actually done multiple units where we’ve had a market survey to actually go off of that I don’t even know that I can speak to that accurately at the moment. 

[00:22:08] Josh Lewis, Certified Mortgage Consultant: The rents on that market rent survey are usually absurdly low relative to where we’re at. So we’re going back to FHA. We’re trying to meet that self sufficiency test. And you and the buyer are saying, here’s what we know we can get for it in terms of market rents and the market rent survey comes back and it’s much lower than that. 

I did one probably five, six years ago down in San Diego and the agent and the borrower said, no, we’ve been looking at this little area, this little pocket of four unit buildings. We know exactly what this will rent for. Could not convince the appraiser in any way, shape, or form. He had knocked on doors and he told us, nope, you’re never getting that much in rent.. I’m like, dude, go out and try and rent an apartment in that area for what you’re telling me market rents are. They are not available. So again, another complicating factor. 

[00:22:54] Jeb Smith, Huntington Beach Realtor: You know, I’m not downplaying any of this stuff or saying it’s impossible because I am downplaying a little bit of it, but not, it’s not impossible.

You know, A lot of people come out to me kind of going back to what I was saying and saying, Hey, this is the price I want to be purchase price wise. Well, here in Southern California, unless you’re in a market, like I said earlier, that’s not quite as desirable, you know, that sort of thing. If you’re near the beach, these units are going to be a million and a half easily. Upwards of two, two and a half million dollars. 

But even then, when we talk about the lack of supply nationwide, inventory has been a problem for the better part of three years, and even leading into that three years inventory was headed in a downward trajectory and with the pandemic and being people to be able to move and rates being so low in demand being pulled forward, all of these things affected inventory.

Well, it’s also affected multifamily inventory in a lot of ways, because what’s happened during that same period of time is rents have gone up. So even though there were all these protections in place for tenants during that period of time, a lot of these landlords were still getting paid. And not only were they getting paid, [00:24:00] they were able to take rents up higher.

And then you also have to look at that and go, if I’m an owner of a multi unit property and I decide to sell this property And I don’t buy something else, right? And typically 1031, you’ve got to buy something that’s same price and or more expensive. So I’ve got to take this money I’m receiving from Property A and transfer it into Property B otherwise I have to pay capital gains taxes on it. 

And a lot of people that have owned units, I don’t know the actual average tenure is for people owning units, but it’s usually a little bit longer period of time. So now they’ve got some equity in that property. If they sell it, they got to pay capital gains. 

And if they decide to transfer it into another asset, they’ve got to find that asset. And so what I’m getting at here is that there’s just a lack of options out there in general, right? With the number of people that think they want to do this. Yes, there are definitely units available.

Yes, there are some areas that have more than others. And I’m primarily talking about Southern California, but they’re not readily available to the point where you’ve got all of these options and you can just go out and make an offer and you’re going to get some amazing deal. Typically not how it works.

[00:25:06] Josh Lewis, Certified Mortgage Consultant: Let’s transition from there. We’re slightly negatively biased. I started the show by saying I wanted to do this. I think it’s a great strategy, a great idea. It’s more difficult. 

[00:25:14] Jeb Smith, Huntington Beach Realtor: It is awesome. I would love to do it. 

[00:25:16] Josh Lewis, Certified Mortgage Consultant: Yeah. It’s just more difficult in high cost areas. So let’s step back and say, where is it possible? I was on a live show with a VA group that I do a show with every week last night. And one of the ladies on the show just closed for a borrower in Charleston, South Carolina. They bought a four unit building for $400,000. So almost the exact same example that we used. But instead of the thing bringing in $4,000 a month in rent, the three units that he was not going to live in were bringing in $3000 a month and with a VA loan with no mortgage insurance, the rents from the other 3 units exceeded his payment. So he was going to live rent free. 

So is this possible? Absolutely possible. You have to look at what are the prices for units in my area. What rents do they generate? I have another friend who focuses on FHA units. He’s in the Minnesota area. He covers Minnesota and Wisconsin and 60 percent of his business is first time buyers buying three to four units using FHA.

They have zero problem with the self sufficiency test and similar situation where buildings that have a $2200 payment, the rents from the other three units are $2800, $3000 a month. So in those areas, it’s almost like a no brainer. Like, why would I not do this? I’m getting a property for free. 

I had a client last year that had bought a home in Wisconsin that I’m looking at going like, this doesn’t make sense. I’m not even grasping it. But when I looked at his tax return, he had paid $140,000 for a triplex and that triplex brought in almost $3000 a month rent. And he had bought during the pandemic at $140,000 with like a three and a quarter rate on it. He was bringing $1500 taxable income [00:27:00] every month off the property. 

So do these exist? They absolutely do. Just be aware of your surroundings. Know what do homes look like in my area and what are rents like relative to those home prices. And if you can say, Hey, I’m in a really high cost area. It is going to be tough to do a minimum down two to four unit purchase. 

[00:27:18] Jeb Smith, Huntington Beach Realtor: Well, Josh, I’m going to ask you to get a little bit of personal here if you’re up for it. Kind of putting you on the spot and talk about the true idea of house hacking. Let’s talk about the units that you own, how you were able to find them, give an idea of what you put down to buy them and how it works because I think that’s a really good example there of finding something off market. I mean when we’re talking house hacking, that is the definition of house hacking. 

[00:27:40] Josh Lewis, Certified Mortgage Consultant: Super unique story. So the person that we bought it from had inherited the property. His dad owned multiple four unit buildings around the city of Long Beach, and he inherited this one.

He lived in one unit. And his buddies lived in the other three units. Well, he was a friendly guy, not a bad guy at all, but he liked to have his drinks in the afternoon and his buddies all like to smoke weed all day. What they didn’t like to do was pay rent. So he’s sitting around going, well, this sucks. I should be bringing in $3000 a month rent to pay my bills but my buddies have a hard time coughing that up at the beginning of the month. 

So he was fixated on a number for that property. And this is going to sound stupid because we bought it in 2010 property was worth about $500,000 at that time. It’s four 700 square foot, two bedroom, one bath units, and not in the greatest shape when we bought it. 

But it should have sold for $500k. He was obsessed with getting $600k. The most important thing, his hot button was, I need $3000 a month, the $3000 a month that my stoner buddies should be paying me and I think you can collect it or you can evict them and you can collect it. 

So the way we wrote it up is he carried the loan with a hundred thousand dollars down. So we paid him $600,000. We gave him a hundred thousand dollars down, we financed $500,000. The monthly payment on that is $3,000 a month, but there’s no interest. It all goes to principal. 

So that was, like I said, 2010. We actually started making payments right at the beginning of 2011 ’cause we put a buffer period in there in the loan where for six months we didn’t have to pay while we could do the upgrades, get the tenants paying or get them evicted and out. 

So, at this time the thing is a gold mine. And two years from now, July of 2026 it will be paid off with those $3000 monthly payments. Unfortunately, my guy passed away like two years after we bought the property. So although he structured it to get his $3000 a month, he never was able to realize the benefit of that.

But through that it’s been a great investment for us. And those deals are out there. Either people who have inherited properties, what you may realize we did the episode two, three weeks ago, Jeb on the silver tsunami. There’s not a tsunami, but there is a silver wave of real estate investors out there who have nice portfolios of investment properties and they want out.

Friend of mine back in the Midwest just said, Hey, I came across a guy, he’s [00:30:00] got 20 single families. He wants out. And he’s willing to carry, because a lot of times similar to the guy that I bought from, they want the cashflow. So he’ll carry it and say, cool. So I’m out of the business of managing properties, but I still get $24,000 a month. Cool. 

And you as the owner, like, wait, I walk into this portfolio. I don’t have to deal with banks. I can finance 20 properties to one person. 

[00:30:22] Jeb Smith, Huntington Beach Realtor: And he avoids having to pay taxes, at the same time he can delay that consequence too. So yeah, I think that’s the real idea of house hacking there, but for most people listening difficult, right?

We kind of come off pessimistic in the idea because you have to understand how many conversations we have with people looking to put minimum down and finance a $2 million property just because they heard it can be done. And it’s just not realistic out there for most people, but the real opportunities are out there. You just got to do some work and find them. 

It’s all about finding a professional to work with on the agent side. Somebody that can get you the list and conversations being had, contacts that can possibly come across these and also working with a lender, somebody that understands that side of things. Walking it through like Josh did today and just being real with you, right?

People always want the rose colored sunglasses approach, but oftentimes you need that lender who is willing to really tell you like it is so that you’re in the right position and starting from the right part. If you will, Josh, where would you like to end this? 

[00:31:20] Josh Lewis, Certified Mortgage Consultant: You covered it all there. This is possible. All of these things are possible. If you’re in a higher cost area, it’s going to be harder. What I would say, just as Jeb said, I get calls from people who know what the guideline says in isolation, a guideline by itself. Had a listener to the show this week, reach out and said, “Hey, talking to the builder’s lender, the builder’s lender is not being cool. And I know the guidelines. I know with a 580 credit score, I can get an FHA loan.”

 Yeah, technically with a 580 credit score, you can get an FHA loan but it’s not guaranteed. You’re probably not going to get the automated approval. You got to do a manual underwrite and there’s a million little things that have to come together. So if you’re doing your research, educating yourself, you are absolutely doing the right thing, but just realize you can see something and it can be a hundred percent true and factual, but it’s not the entire big picture. Kind of like what we went through here today and that self sufficiency test.

So find a lender, find a realtor that you know knows the guidelines, that you can trust that will walk you through this. And if it doesn’t make sense or you’re not feeling understood, ask more questions. And if you’re not still not feeling understood, find someone who you feel like gets you. 

It is really important when you’re doing this. These are some of the biggest financial decisions you’re ever going to make. Get a team that you work well with because it is that important. 

[00:32:35] Jeb Smith, Huntington Beach Realtor: Awesome. Well, until next time, guys, Buy Right. Borrow Smart. Build Wealth. 


[00:32:40] Josh Lewis, Certified Mortgage Consultant: amigos.


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