The Easiest Way to Invest in Real Estate in 2024 (House Hacking)

For those of you out there listening, maybe you're someone who doesn't yet own a home, you're renting right now, and you want to get into real estate investing. I can imagine that you're looking at home prices, higher interest rates than we've seen in quite a long time, and you're feeling a bit discouraged. I talk to people who are feeling this way all the time, so don't feel like you're alone in trying to figure out what strategies work. But rest assured, there are strategies that work in today's market. And on this episode, we're going to talk about one of the most reliable strategies that honestly most prospective investors can use to get started, which is house hacking. Welcome to the BiggerPockets Real Estate Podcast. I'm your host today, Dave Meyer. Today, I'm going to have a conversation with Terrence Turrell, and he's a lender, and he specializes in working with a special niche of investors. It's investors who are also first-time homebuyers, because whether you're house hacking or buying your first condo, your first primary residence, every real estate purchase is an investment. And this is really Terrence's sweet spot. And today, he's going to give us all a masterclass in everything you need to know if you're considering house hacking, from loan options to common misconceptions that trip up a lot of new investors, to the smart house hackers checklist. I think you guys will love this episode if you're just trying to get started. Let's bring on Terrence. Terrence, welcome to the BiggerPockets Real Estate Podcast. Thanks for being here. Dave, thank you so much for having me. I'm excited to be here. All right, we're going to start with something very basic. Most of our audience has probably heard the term house hacking, but for those who haven't yet, can you give us a brief overview of this strategy? For sure. So house hacking is essentially someone that buys and owns a home and rents out part of it for income, whether it's a single family home and they're renting out rooms, couches, basements, attics, whatever that may be, or they're buying a multi-unit property, two, three, four units and renting out the other units, that's house hacking. And why is this such a popular strategy, particularly for new investors? It's the easiest thing to do, you know, because there are so many benefits to house hacking. I mean, obviously, you're buying the home as an owner-occupant. When we're looking at, you know, from a lender perspective, financing, owner-occupied financing is always going to get you the best terms. So if you can do anything with that to reduce your own financial commitment monthly, there's a benefit there. If it's a multi-unit, I can actually use the qualifying income from the other units that you're renting out to help offset. So people will actually qualify for more home if they're buying a multi-unit than they would if they were buying a single family because you have extra income. I just want to point out to everyone that the reason Terrence has specifically listed duplex, triplex, and quadplex is that that is the limit. Four units is the limit to what is considered, quote-unquote, residential financing. Anything above that. So if you go five units or higher, you're going to need to go to a commercial lender or a private lender, something different. And so that's why when we talk about house hacking, most of the time we talk about four units or fewer. In addition to that one benefit of being able to add rental income to your DTI for the two, three, and four units, Terrence, as an investor, what are the other benefits of residential financing and owner-occupied financing? Because this is sort of the one way that you can buy multiple units, right, and still get owner-occupied residential financing. Yeah, so the big benefit there is like I was talking about a few minutes ago with the benefits of buying as an owner-occupant. So the main benefit, especially for first-time investors, I mean everybody's financial situation is different, but it's the initial cash investment. So buying as an owner-occupant, your down payment commitment is a lot lower than it would be if you were buying non-owner-occupant, a straight investment property. So it depends on the program, right? So if we're looking at FHA financing, you can put three and a half percent down of the purchase price up to four units. If you're doing conventional financing, you can go into again up to four units with five percent down. If you're buying a single unit property and you're a first-time homebuyer, you can go into it with three percent down. There are programs to where you can even put down one percent on a single unit property. So buying as an owner-occupant, especially for your first property, is a huge benefit. Even if you're considering, okay, I want to become an investor. Buying a property is an investment. I don't care if it's a one-bedroom house, a townhouse, a condo. That's an investment because you can then think one, two, three steps ahead. What's my plan for this? So when I'm having a conversation with someone that says I want to be an investor, what do I do? First step, okay, you want to buy a condo. Two steps ahead, you want to buy a multi-unit, a single family, whatever it may be. What's our mortgage payment going to be for the condo? What is the market rental income for these condos in this area? Will it cover your mortgage and some when you move out? Does your building allow rentals? Is there a rental cap? You know, these are the things that you want to ask when there's condos. Single family homes, there's no cap, right? But you still want to make sure that the rental income that you're going to get when you move out of it, because again, that's an investment, is going to at least cover the mortgage because you don't want to be in the red when you move out. That's a bad investment. That makes sense. So advocating for thinking ahead so that I think, I guess there's two strategies, right? One is just making sure that it's a positive, probably a cashflow positive deal if you move out. The other one is if you're using an owner-occupied strategy for that first deal and you move out and you want to maybe do another owner-occupied deal into a duplex, triplex, quadplex, you're going to have to refinance that first deal because you obviously can't get two owner-occupied deals at the same time. Well, not necessarily. You don't have to. There's a seasoning, right? Yeah. You don't have to refinance it. So when you're buying an owner-occupied property, your commitment to that property is one year. Okay. At closing, you sign a document that says, I intend to live in this property for one year. But if you're going conventional financing and you buy one this year, you can buy another one next year, owner-occupied. You don't have to touch the financing for the first one. Got it. Okay. And I just want to get back to something that Terrence said earlier, just so everyone knows is like, there are programs right now where you can put 3% down, 5% down, 10% down and buy four units. That is one of the most powerful ways to start your investing portfolio out there. It's really why so often when investors are asked, what's the best way to get started? Ask a lender, what's the best way to get started? So many people say this because it's really just kind of a little bit of a cheat code because you can put less down, you can get more units. And if you live in a state or a area where cashflow is difficult to come by, one of the cool things about house hacking is you don't actually need to have it be cashflow positive in order for it to be a positive financial decision for you. If you can reduce your housing costs, like imagine you're renting and you're paying $1,500 a month. If through house hacking, you're only paying $200 a month, right? That is $1,300 a month that you're saving. And it's actually after tax money, so it's even better. And so you have to think about what kind of financial situation that would put you in. That's not true of everyone. For some people, it would still be better to rent, but it just gives you a little bit more flexibility. So I do want to just talk to you a little bit about, Terrence, who this is good for? Because we've been talking about how great house hacking is, but is it good for everyone? Or what are the types of clients you think do best with house hacking? Well, I mean, I'm a little bit biased because I've done it for many, many years myself, but I mean, I think it's good for anybody. Yeah, me too. I did it myself. That's how I got started. Exactly. And if, like you said, if the numbers make sense to where it's reducing your housing expense, or even if it's the exact same as it would be if you're renting, your benefit there is you're owning a home, you're building equity. So there's the win there. But like you say, it's not for everybody. Not everybody wants to be a landlord. Not everybody wants to deal with tenants. That's understandable, right? So if someone is wanting to and willing to be a landlord or they're used to having roommates, it's a win-win. I don't see any negatives to it. If it's someone that is capable and willing to be a landlord. I think that makes sense. There are certain personality types, right? Where like, if you don't want to live next to your tenants, I personally don't think it's as bad as people make it out to be. I did it for several years. But I understand that if that's something you really don't like, it might not make sense for you. Let's talk about some common misconceptions that happen with house hacking. Where do people get confused during this process? One of the biggest ones I have when I take phone calls from people is number one, the down payment. It's that misconception that I have to have 20% down to buy a house that it's so expensive. Saving for a down payment is so hard. Like we just talked about, there are other options, especially now that Fannie Mae has changed their guidelines back at the end of last year to allow 5% down on two to four units. That's huge. I mean, you've not needed 20% down to buy a house for quite a while. I mean, you can get into your first home with 3% down. Multi-units is where it gets a little complicated, but the down payment is a huge misconception. The difficulty of being a landlord is a little bit of a misconception. It's not as hard as people make it out to be. Like you said, you've done it before. I've been doing it for years. I have tenants that live above, below, in other units. It's not terrible. If you're willing to put in the work, you have to make sure you vet the tenants. People think that not even just from a house hacking standpoint, from a home buying standpoint, that it's hard, that the financing is hard. It's not if you have a good lender that's going to make sure that everything that you have is in place, and if it's not, tell you what you need to do to get there. Or that I can house hack and I can make money every single month on every purchase, no matter where I am. Like you touched on a little bit ago, there are differences depending on where you are, the market that you're in. I talked to a lot of people, thankfully through BiggerPockets, because I've had a presence on the platform for almost 10 years, 12 years now, that when they're listening to podcasts, when they're reading articles, and they're talking about cash flow positive, I bought a house for $50,000 and I put $10,000 into it, and I'm going to sell it for $400,000. That doesn't work everywhere. So I work with, like I said, I'm in Chicago, I do lend in multiple states around the country, but I'm primarily working in a major metropolitan where those numbers aren't necessarily the fact. So we have to kind of back up a little bit and say, okay, if you're looking to buy a multi-unit, on a two unit, you're probably going to do what you said, Dave, and you're going to reduce your monthly payment just with a two unit. Three unit, you're probably going to break even, four units where you're going to be cash flow positive. Then you think about the numbers when you're going to move out. So those are the biggest misconceptions that I have to deal with. Do you find that most clients that come to you fully understand what they're getting into? Are there any things that perspective or potential house buyers should be thinking about before approaching a lender? Well, to answer your first question, no. A lot of people have no idea what they're getting themselves into. They say, okay, I have X number of dollars to put down on a house. I want to buy a million dollar house. I'm like, okay, hold on. Let's back up a little bit. Let's work backwards into what that needs to look like. Because people know that they need a down payment. What that down payment is, they don't know, but we educate them on what that is. But one thing they're not thinking about is cap X on a house. They're not thinking about closing costs on a house. You have to have those. For closing costs, there are ways to ask for seller credits to help with those. One question I do get a lot of is, oh, I want to roll in my closing costs. I'm like, well, technically that's not a thing. The way that you do it is you get a credit from the seller to then reduce those closing costs. That's how you can get the seller to pay for closing costs. But there are limits. There are limits on how much you can get. With FHA financing, you're capped at 6%, depending on the down payment. Conventional financing, if you're less than 10% down, which most first-time buyers are, you're capped at 3% of the purchase price. But that goes a long way. That can help you almost eliminate your closing costs. Then you can come to the table with just your down payment. But then also, okay, well, what's my cap X on this place? What am I going to have to put into it? What am I going to have to put into it years to come? This is why you have a home inspection. You can have a general idea of what that looks like. One thing people don't think about is reserves. Reserves are key. If you're buying a two to four unit and we're using conventional financing, six months of reserves are your minimum. What that means is six months of your mortgage payment put away. We have to show it. We have to source it. We have to show you have it. It doesn't have to be liquid. It can be 401k. It can be stocks. We just have to show that you have six months of reserves. Yeah, and that just makes sense from a risk mitigation perspective. Everyone needs to be able to weather financial downturns. Everyone knows this. Life happens. You might face a month where a boiler breaks and then something happens in your personal life, totally unrelated to real estate. You have to have some money in the bank, both literally and figuratively, to actually be able to weather those storms. Because as we talk about a lot on the show, real estate works when you hold it over the long run. What stops you from doing that is not properly having reserves to weather these down storms. That's when some people have to sell at an inopportune time and take a loss. Whereas if you just keep the right amount of reserves, you can hold on as long as you need to make the return that you're looking for. Let's talk about qualifying for a house loan. For an owner-occupied mortgage, for let's say a duplex, what are the main things you as a lender are looking at? We're going to look at credit score. We're going to look at assets. We need to make sure you have sufficient funds to close. Your down payment, your closing costs, your reserves. We're going to look at your debt to income ratio. This one is huge. Your total monthly debt, because everything we look at from a lending perspective is monthly. Your total monthly debt as a percentage of your gross monthly income. That is inclusive of your mortgage payment. If we're looking at a duplex, we're going to look at your gross monthly income plus the rental income that we can get from the other unit. We can use 75% of that. The appraisal is going to tell us what the market rental income is. We use 75% of that. We look at your debts. Your minimum monthly payments on your credit cards, your car payments, your student loans, any other monthly debt that you have plus the housing expense. Those are your monthly debts. We look at that percentage. With conventional financing, most of the time you're capped at somewhere between 47% and 49% of your gross monthly income. We're going to want to see a credit score of at least 640. When we're looking at scores below 700, we may also be looking at FHA financing because FHA financing will probably give you better terms of financing. What I say by that is your interest rate and your mortgage insurance because when you put down less than 20%, this is lending 101. When you put down less than 20%, you're going to pay private mortgage insurance. That factor, that mortgage insurance is probably going to be lower with FHA financing. The rate is probably going to be lower with FHA financing if credit score is a little bit lower. It's still a way to get into the property, but it's a different way we can finance it to keep it as favorable for you as possible. Those are the big things we look at. When I'm qualifying someone and something is off, one of those things don't fit, we figure out a plan so that they can get there because there are ways to get there. Yeah, that totally makes sense. So much of it is trade-offs like you're talking about, ways to get there. If you want to put 20% down, great. You're going to probably cashflow better because you're not going to be paying that PMI, that private mortgage insurance. If you put down less, if you have less money saved up, that's also perfectly fine, but you have to understand that that's going to reduce your cashflow a little bit. For first-time investors, for people who are just getting started, you sometimes just need to make trade-offs and you're not going to get the perfect loan because just to be perfectly honest, you're not the perfect borrower to the bank unless you have 20% down. So you have to just think about that and that's totally fine. Your first deal doesn't need to be a home run. A lot of times house hacking can turn into a home run, but even if it's just a single, a double, a triple kind of deal, it can really work out for you. That's why you want to just work with your lender to consider the trade-offs, what your priorities are, what your goals are, and construct the right loan for you, given those parameters. Absolutely. People just have to understand and, okay, well, here's where I am right now. Like you said, I may not be able to buy this right now, but right now I can buy this and still be comfortable and be happy. And then later on, I can upgrade to this when I have more money, more equity, more salary, whatever the situation is. So that sort of brings me to my last question here, which is, you've already given us some advice on how to start thinking one step ahead, two steps ahead, but do you have any thoughts on how house hackers who are looking for their first deal or maybe their second house hack can think strategically right now and set themselves up for lendability, which might be a word I just made up, but lendability in the future. So it's honestly the exact same things that we go through when qualifying them the first time. So I want to say, okay, what is the plan? What do you want to do? When you already own something, like if someone that's looking to buy something in the future that they already own, you want to think about your tax returns because this is, I mean, this can be a whole new conversation, but I'll kind of shorten it. We're going to look at your tax returns to tell us what your income is on your current property. So depending on the expenses that you have for the property, depending on what the rental is, depending on how many months of vacancy you have, you may not show very well on your tax returns, which is always the fun part. Another fun part when I'm having conversations with people because they say, oh, I have a really good accountant and I'm writing off all this stuff. And I'm like, great, you're in the red on this property, technically. So that may hurt you for qualifying for your second property. This is only for a multi-unit. Again, I can go on about this all day, but on a single unit property, we can use departing rental income when you're buying another one, which is awesome. So we just have to show that your current home is rented. We have to show that you have received two months rent or first month's rent and security deposit. And then we can use, again, a percentage of that to offset your current mortgage. So when you're looking to buy your second property, it's almost like you're starting over again. We don't have to hit you with any additional debt. Terrence, do you have any final thoughts or final advice for those who want to house hack and how they can just be as prepared as possible for their conversations with their lenders and to be a successful house hacker? Absolutely. Well, number one is talk to your lender. It's so true. It's funny because it just seems like people are always like, well, I don't know if I'll qualify. And I'm like, well, did you talk to a lender? And they say, no. No, exactly. Like it's free. Just go talk to a lender. They're going to tell you exactly what you need to know. And you'll save so much time knowing what exactly what you qualify for, exactly what your position is. And you could start honing in on the properties that actually work for you. Absolutely. I mean, I would say, make sure that they're talking to a lender that understands investors. There are plenty of great lenders that understand investors on bigger pockets on the platform. Same thing with the real estate agent. You want to make sure that you're working with one that knows investing, in your market, because that's key, because that's going to help you set yourself up for success. It's not just someone that says, okay, yeah, here's what you qualify for. Here's how you close the deal. It's someone that's thinking about it with an investment mindset. So that's thing number one. And when you're going into that conversation, have the essentials with, you know what your income is, know what your assets are, know what you're willing to spend on the home monthly, know what you're willing to put down. And then they can help you work into the purchase price. So you know what you're doing. There are plenty of people to talk to just people that have done it. Plenty of investors that aren't lenders and realtors that are on the platform that are on the forums, have conversations with them. Those that are in your market, you know, go to some of the meetups. Those are key. I go to a bunch of them. It's fun. You know, it's great to just talk to people because I started investing before I even started lending. So yeah, it's just one of those things where there's so much knowledge out there, you want to make sure that it is specific to you as possible. But step one, talk to a lender because you don't know what you don't know. All right. Well, that's just very candid, good advice. I appreciate that. I do what I can. And obviously for anyone listening, if you want to meet a lender, we'll put Terrence's information in the show notes, of course, below. We also have a lender finder on BiggerPockets. If you go to biggerpockets.com slash lenders, put in some information there, you can find a lender to talk to. Terrence, thank you so much for joining us. This was a really great, fun conversation. We appreciate it. Dave, thank you so much for having me. This was a blast. And thank you all for listening. For BiggerPockets, I'm Dave Meyer, and we'll see you soon.