House Hacking 2.0: Buy a Home, Pay Almost Nothing?

Welcome back to the podcast. Here's the reality of the situation. Interest rates are still at 7%. People can't afford a $300,000 home, but the median home price is $440,000. So what do you do? Well, people have found a new strategy called House Hacking 2.0, so that they can start affording homes, and it's actually a hack to potentially have a mortgage-free situation. Now, House Hacking is still in play. I actually tested House Hacking 2.0 about 20 years ago. I just didn't really know what I was doing, and I didn't really know it was a concept. So we're gonna cover House Hacking, we're gonna cover House Hacking 2.0, we're gonna provide some numbers so that if you were in your 20s and you wanna get into real estate, this may be the best option to get in early. So first, we're gonna do overvalued, undervalued. Few things coming at you real quick. Number one, renting to friends instead of strangers. I'm gonna put that as overvalued. Airbnb versus long-term rentals. Long-term all day. I would skip the Airbnb. Using PadSplit, this is a software to help you rent out your rooms, undervalued. We're gonna go in depth on what this means and how you can do this correctly. Ignoring zoning laws, do not do that. That's not an undervalued, overvalued, that's a don't do. Privacy concerns with house hacking. Undervalued, I would deal with it. Furnishing rooms so that your tenant doesn't have to bring in furniture. I'm gonna put this as undervalued. We tested it, I had a good experience. Starting with house hacking before you buy your primary home, undervalued. I wish I would have done that when I was younger. Claiming deductions, yeah, undervalued. Do that all day long. Renting your primary first, that's kind of the same as starting with a house hack, do that. Creating a smart home with tech, so undervalued. You should all be doing this. This is a great way to drive rents up and it's a very cheap way to do so. Okay, number one, what is house hacking? So, house hacking, and this is something I wish I would have done before I bought my first primary, it's typically when you buy a duplex, a triplex, or a quad, you get a first time home buying program, which means a little down payment down. You live in one of the units and you rent the rest out to tenants. The reason why this is so beneficial, one, when you're looking at apartments, if you buy something below five units, so four and down, it's still considered residential. So you get better options on your financing, you get to tap into a 30 year loan, you get the little down payment. The second you cross over and you go into my world, which is five and up, you're dealing with commercial loans. They are, they're harder to get. It's a higher barrier to entry, so house hacking needs to be done four and below. The thing that I've always shared with everybody, when I was young, I, number one, believed in the American dream, and number two, all of my friends told me when I was a pro skateboarder, buy a home. That'll be the best investment that you ever make. So what I did, I saved as much money as I possibly could. I mainly did that by living with my parents longer than was ideal, and I had my expenses really low. I was crushing it on controlling lifestyle. Saved up money, I got a loan in 2005. Now for context, they were giving loans out to anyone. I'm not sure I would have got the loan I did if it was in 2009, but either way, I got into the house. Now my mortgage for the month was, I believe, $4,100 a month. My house I bought for $575,000. That was a lot of money for me back then. So I actually brought my friends in to help with some of the rooms, to help with my mortgage. I'm gonna go into my experience, what I would have changed. We'll do that at the bottom end. The first thing we're gonna focus on is what house hacking 2.0 is. So house hacking 2.0, they're skipping the duplex, triplex, and quad. They're buying a house. So they're doing basically what I did. They're tapping into software that is helping them with the management of who they're renting to, where the money's going, and kind of helping position them as an actual landlord, as opposed to just renting out to the bros like I did. The software that a lot of people are using is a company called PadSplit. And what PadSplit does is it helps with room rentals, and it's gonna help you vet your tenant, because this is very important. It's gonna help you collect rents. It's gonna help you with the background check, the income verification, and the housing rules. That's one that I struggled with. I don't even know if I had any rules. It was, let's go live life, have fun, and just please pay me. This is gonna help you do this better. The big thing that you kind of need to decide is is it better to rent to your friends, or is it better to rent to strangers? Here's some of the pros. If you're renting to friends, you already know them. You already know that you enjoy them. Communication may be easier. Not necessarily, but it could be. And then it's less awkward on small talk. I don't know for you guys, probably gonna be based on your personality. If you get in an Uber, do you talk to the Uber driver? Do you feel obligated to talk to them? Or maybe the better question is, if you are an Uber driver, is it hard for you to talk to the customer in the back? Do you feel obligated to? These are probably some questions that you're gonna need to know about yourself. I would say, if you're renting out your house, and you should be probably mindful of the tenant experience, you're probably gonna have to learn how to communicate to them. Some of the cons for renting to friends. It's harder to enforce rules, personal conflict if they pay late, and eviction, this is a tough one. If your friends stop paying rent, is it gonna be hard for you to evict them? For renting to strangers, the pros, you have clear expectations from the start. You can be a little bit more business kind of focused with them. It's easier to enforce the boundaries, and it's easier to go through the legal process if you need to. Some of the cons, less trust upfront. You don't know the people yet that you're renting to. You have to screen very carefully, and screening takes time. It takes time to vet. Now, for me personally, this was my experience when I did this. I invited my friends. I would say the first few months, it was awesome. You know, we were having house parties. It felt like I was living life with my friends. It was great. Some of the challenges that I had. One, it was hard for me to check my friends when they didn't clean up after themselves. I got in a situation where my house was kind of a disaster. It was a full skate house, and it was hard for me at that age, because I was only 22, 23 years old, to set the boundaries upfront, and then when people, my friends, weren't doing them, it was hard for me to correct them. So I had a scenario where the house kind of got nasty, and that was due to me not being able to step up and clearly tell them, we gotta change it up. The other thing that was really hard for me was I had some friends that went through kind of some life changes, right? We're all young, we have random jobs. Sometimes you lose your job. And I had one friend in particular that I'm thinking of, lost his job, came up to me and said, dude, I'm trying to find another job. I might be late on my payment, is that okay? And as his friend, I was like, for sure, all good. Just let me know when you have your job in place, and we'll figure it out on the back end. Well, three, four months went by, still didn't have a new job, and the thing that really was hard for me, they started buying things. Bought a new guitar, bought all these things, and I felt like they were not paying me, which the money should have came to me first. They were buying other things for them, and it was hard for me to say, dude, this isn't fair, you need to leave. That's the eviction process that can be hard for your friends. So I would say, knowing what I know now, if I were to go back and do it the way I did, which was with my house, I probably would have done a hybrid. I think I would have had one of my friends with me, and then probably rented two other rooms out to strangers, and had a little bit of a blend for me to get used to it. But if you were asking me today, which is totally different, well, yeah, if I were to do this right now at 40 years old, it would be only to tenants that I don't know. I would have not done it with friends. So I would say, if I'm recommending or giving advice to you, do it with strangers. I think that's actually gonna be beneficial. Now let's break down what the math looks like. In a real life scenario, we're gonna use the Phoenix market, so that my numbers are actually tied to something. Something that's important to know for anybody watching or listening, real estate is fragmented. So the numbers that work in Phoenix are gonna be radically different for maybe those that live in Idaho, or wherever you're at. If you're living in California, it's gonna be way more expensive than this. But the percentages are the same. So even though the actual dollar amount I'm gonna give you is different, it should work if you're getting the right deal. So in Phoenix, the median home price is $457,000. On a first time home buying program, we're gonna consider putting down 5%, which is gonna be $22,850, making our mortgage $2,400 a month. In this scenario, it's gonna be a four bedroom house. You're gonna live in one of the units. If we use PadSplit and we rent out the other three units in that market, we're gonna be able to get $165 per week. We're gonna multiply that by three because we have three units open, which is gonna give us a total of $1,980 per month, which is gonna mean that you as the owner are gonna have to pay $420 per month. So that's pretty awesome. You get to buy a house worth $457,000 a month and coming out of your pocket is only $420 per month. Okay, now we're gonna spend a little bit of time talking about the first time home buying program. And what I wanna tell you is this could be at play for the house hacking 2.0 model. This can also be at play for the duplex, triplex or quad. So what a lot of people do is they go at a FHA loan and an FHA loan will actually allow you to put as little as 3.5% down and they're usually gonna want your credit to be higher than 580. Now, the cool thing is that's not a crazy high credit score. So when you're young, that's actually achievable. One thing I wanna focus on before we go on the qualifications of an FHA loan, the challenge that I had when I was 22, yes, I was young for buying a house, but I was making money, I saved up for a down payment. My challenge was I had no credit. So when I started trying to get a loan, a lot of the pushback I got was your credit is zero. Like I didn't have bad credit, I didn't have good credit. So I had to go through the process of trying to build credit when I was in a position of needing, not in a position of needing, I was in a position of buying a home, couldn't do it because of that. So what I would recommend, if you are younger than 18, one of the best ways that you can build credit when you're young is ask your parents to put you as an authorized user on their credit card. You don't have to use it, you don't have to spend money, but doing that, they will actually help you build your credit for you. That is a very, very powerful tool that a lot of young people aren't aware of. And so they don't ask their parents to do it, do that. The other thing, if you're like me and you weren't able to do it, you might have to start with an unsecured credit card, which basically means it kind of acts like a debit card. You gotta put money in, then you use it, but that will help you build credit until you're at the point of getting an unsecured card. And then when you do, here's the important thing to know about credit. Do not use it as a layaway program. Do not use it to buy things that you want that you can't afford, but maybe you could if you're looking at it as monthly payments. I would say only buy things that you can pay for in cash and pay that bill every single month, no matter what. Once you get to the point of building credit, then an FHA loan will come into play. Here's the things you need to know. W-2 income, or if you're self-employed, you're gonna need an income history of two years. So that's a big one. You need the credit score over 580. You're gonna need to put as low as 3.5% down, and you must live in the property for at least a year. Here's the example for a $400,000 home using this FHA program, 3.5% down. That's gonna be a $14,000 down payment. You have to live in one of the units for one year, but after that year, this loan can stay in place. You can replace your unit or your room with a tenant, and if done right, you can now have your first cash-flowing asset with as little as $14,000 down. So that's pretty exciting. Some of the pros and cons to doing this, and I think this is really important for everyone to know. The pros are obvious. You're gonna offset 60 to 80% of your mortgage. That's huge. So you get to live pretty cheap while owning real estate. You get to learn how to be a landlord, hands-on experience, and you're gonna get tax deductions and equity growth. So these are all the reasons why I recommend for you to become a real estate investor. There's a lot more value than you get beyond just building your wealth. Some of the cons to this one, privacy loss. It's not just about you anymore. You now have to share your house with others, so you need to consider that. Being a landlord comes with legal responsibilities, so you need to make sure that you're doing everything in play with the law so that you don't run the risk of having a lawsuit. You have the potential for roommate friction. I had a little bit of this when I was younger, but be mindful of that. You might get a tenant in there that you just don't vibe with, and if it makes you uncomfortable to even go home, that's not a scenario you wanna be in, so that's gonna be important. And then last, you need to make sure that you are aware of the local laws and the zoning. I see a lot of real estate investors make this mistake. They don't know what the local laws are. They buy a property, and then they can't do what they intended to do, and then they're kinda screwed. And so you wanna avoid that completely. Some of the red flags for you to know personally, if you are somebody that hates confrontation, this is not for you. This is something that is probably really important for you to understand. If this is done right, you are gonna have to be good at conflict resolution. When things happen that are not good, you need to stop it quickly. That's something that I did not have when I was younger. I lost a lot of money because of that. So I would say, if you hate confrontation, don't do this. If you're somebody who won't enforce rules, that's gonna be a challenge as well. And then last, if you're not willing to do upfront research, I would wait on this one. You need to make sure that you are somebody who has the discipline in play to set everything up correctly, know what the potential risks are, mitigate against them, and then move forward. For the tech platforms that are gonna help you succeed at this, PadSplit, I think, is something that I would absolutely look into. They're gonna help you with a lot of things. They'll help you vet the tenants. They're gonna help you collect rents. They're gonna make sure that in the vetting process, they even have the income to qualify. They'll help you with the eviction process. And then most importantly, they will actually help you keep it occupied. So they will act as a means to find tenants for you. That's a pretty powerful tool. The other thing, creating a tech, a smart home, this makes life a lot easier. Something as simple as the Nest thermostat, do that. It's cheap, it's easy. Install Ring Cams, that's a no-brainer. Do the smart locks, stay away from physical keys. And then for the rent rooms, the fact that they allow rent collection through their platform, I would absolutely do this. That's a no-brainer. So here's something that I wanna spend a little bit of time on. It's gonna be a little bit more on the mindset. I don't really like talking about mindset because it comes off a little bit cheesy, but I'm going to here because it's important. In this scenario that we're in right now with real estate, it's very easy to see the price tag, see how much you need to make, and go, I'm never buying a house. The way we're wired, right? This is the cool thing about humans. Our brain is wired to solve problems. And so you wanna make sure that you're even giving yourself the opportunity to put your brain to work to solve the problem. If you start your real estate journey by saying, the median home price is $440,000. Can't afford that. I'm never gonna own a home. You have just lost the opportunity to put your brain to work. It's insane what we're really able to do. This is a beautiful example of how we're problem solvers, right? This is a way that you can go, okay, I can't have the house I would love to have by myself, but I can have other people help me afford it. It's gonna be a year of maybe not ideal scenario. But after that year, now I'm in play. Now I've got almost a half a million dollar asset that I only had to put little money down. It cash flows, which means you got money coming in every month. You get depreciation loss, which is tax help. That is a special thing. And that goes beyond real estate. Like when I got into my first business, I remember going through the idea phase. And the idea phase was exciting, right? We're gonna build a craft brewery. We're gonna change the game. We're gonna make a lot of money. And as we're building out our business plan, we had the realization that we didn't have enough money to do it. Now, if I would have taken the stance of, okay, we need $2 million to start this business. It's gonna take me 20 years to save that much. Let's give up. The first thing we did was say, how do we get to a half million dollars? And just that question alone had us generating all these ideas of how it could be done. What we ended up doing, we went out and pitched our investment to investors. We got money. We were then able to start our business. We had a shot. We succeeded. We sold the business. We paid our investors back. And then we made a lot of money. That was a game changer for me. So the thing I wanna leave everyone with, always ask yourself how. How can this be done? It's insane, the ideas that you will come up with. The other thing I'll finish with. I remember listening to a podcast a long time ago. And the podcast host had somebody on the podcast and he asked him, how hard would it be for you to make $2 million this year? And the person that he was interviewing said, impossible. I can't make $2 million a year. I make 100,000 per year and I don't know how to make more. And the host says, what if your mom had a year to live? And if you were able to go out there and find $2 million, she'd be able to live another 20. But if you're not able to, she's only got a year. And you know what his response was? It was, I can go get $2 million a year, no matter what, I'll get it done. And so remember, we are actually more capable of doing things the second you give yourself the most do or die scenario, your confidence changes and you go out to the world going, I'm gonna get this done no matter what. If you have to play that game to get your brain to switch over, do it. The results will be insane. So thank you guys for spending the time with me. Don't sleep on this option. House Hacking 2.0 is in play. House Hacking is in play. If you like this information and you find value in it, don't just leave a like, I'd ask that you subscribe. It tricks the algorithm to getting these videos out there far and wide. We want more and more people to succeed, to own real estate, it is incredibly valuable. Thank you guys, have a phenomenal week. I'll see you guys next week.