If not house hacking, then what?

Question

Hello BP community,

I'm looking for ideas other than house hacking for a first purchase to break into the rental community. I live in Austin, TX and am having a hard time finding a "great" deal on a duplex or triplex that would actually cash flow to house hack. It would be my first home purchase, I currently pay way to much renting. I am most interested getting us out and into something of our own that will cash flow both now and later.

So any ideas would be appreciated. Thanks all!

Logan Allec · Answer

If you're in your 20s and are currently renting, house hacking is a no-brainer.  If you were older and weren't throwing money away toward rent every month, there'd be more factors to consider, but as it is, I wouldn't be too concerned about finding a "great" house hack deal that cash flows $200 per door every month.

When I was looking at house hack deals in the inflated Los Angeles market, I was a little worried about "cash flow" as well, but given the facts that (1) I could get into a Los Angeles fourplex for a measly 3.5% down, which would free up cash to invest in other places if I so chose, (2) I was already throwing away rent every month such that I could still be cash flow negative of $650/month (what I was paying in rent) and still be better off because a portion of my monthly payment would be building my equity and the rest would be tax deductible (this is to @Cal C.'s point), and (3) I’m in my 20s and have the time to take a long-term view of appreciation potential, it was a no-brainer to go the FHA fourplex route in Los Angeles, despite the fact that it is one of the most expensive markets in the country.

One thing to keep in mind when looking for an FHA owner-occupied triplex or fourplex is that 85% of the market rents on all four units need to cover your monthly payment (principal, interest, taxes, insurance, and mortgage insurance). This is known as the self-sufficiency rule. It only applies to 3- and 4-unit properties (not SFRs or duplex) bought using FHA financing. I put together a spreadsheet here to help potential house hackers quickly analyze whether or not a property qualifies. There are other FHA requirements concerning which you should contact your local lender, but determining whether or not a triplex or fourplex meets the self-sufficiency rule is a good place to start as this rule will immediately eliminate many properties from your search, especially in expensive markets like mine.

Best of luck to both of you and happy New Year, @James Lindsey and @David Healey

Jeff Rappaport · Answer

@James Lindsey, @David Healey

Hey guys, let me tell you a little about another strategy that works very well.  It is called owner financing!  Stop looking on the MLS for deals.  You can find deals on the MLS but you are competing with many other investors.  Find off market deals for the properties you are looking for.  Pull a list of absentee owners on Listsource that own duplexes-4 plexes in the zip codes you would like to live in.

Once you have the list send them a postcard, letter, or find their phone number and call them directly.  Tell them you are looking for a property in their area and was wondering if they would consider selling.  If they are open to the idea prescreen them.  Find out about the property, their situation, what the property is worth, what they owe, what their payment is etc.

Based on this information you could make them several offers:  all cash, owner financing, lease to own etc.  Structure deals that will make sense to the seller and in this case, also to you as the buyer.  You may be able to show the landlord how they can net pretty close to what they get now without having to deal with tenants and maintenance.  Being the bank is good!  Maybe offer them more for their property but make the terms better for you - lower monthly payment, lower interest rate, lower down payment.

In my opinion, being a successful real estate investor means you are a great marketer, listener and problem solver.  If you become good at those three things you will make money in this business.  Any time you can identify motivation or a hot button for a seller and you can create a plan that will alleviate that issue you have an excellent chance of buying a property.

Whatever you do, keep learning and don't give up!  If this was going to be simple everyone would be doing it!  Good luck and have a happy new year!

Dev Horn · Answer

The Rule of 7 is really meant as a general guideline for developing leads from a mailing list.

The point is, new investors will often mail to a list once or twice and then bail out on direct mail.  That is NOT leveraging what direct mail can do and how it works.

Can you mail to a list 1 time and get a great deal?  Sure, that can happen.  But most people (97%) are not going to contact you on the first touch.  Direct mail tends to be a crappy investment if you only do an occasional mailing to a different list every time.

Michael Quarles · Answer

@Brian Gibbons

Im not a big believer of having to touch 7 times.  I certainly see the value however.

I think more importantly is if an investor doesn't understand communication then no matter how many calls they get they won't be able t harvest.

And in his example he spent over 25000 in marketing.

Glenn Mayo · Answer

Cal, I was having similar issues, and I wasn't including my rent equivalent, so I couldn't make the numbers work. Are you supposed to include your rent equivalent? If so, I wish I'd known that! Is there a book out there on house hacking or something that tells you HOW to do it right?

James Lindsey · Answer

So far there have been no phone calls (not one) from yellow card marketing to multiplex owners and I still work full time. So most of the REI groups are out of the picture because they only meet Monday through Friday during business hours. I have found 1 group that I can barely make it on time assuming I get off on time, so I'm trying it out next month when they meet.

I'm in my 30's and married with hopes of children soon. So I can no longer jump from place to place. Although I am considering buying a foreclosed sfr and living in it and renovating it for a year and then renting it out when I find my next sfr. It's a much slower strategy though.

Due to a very hard year and not good news. The medical bills have taken their toll and I no longer have a down payment and instead have trade it for a bit of debt which I am heavily working on. I have been told that isn't an issue so long as you know the right people though. Which I am still hunting for a good CPA for real estate and a good lawyer if anyone "knows a guy" locally :-)

Logan Allec · Answer

Some people have brought up marketing to fourplex owners to find a killer off-market deal.  Let me offer a word of caution from my own experience.  I really wanted to find a “great deal" on my house hack, so I ended up spending about $2,000 marketing to fourplex owners in my local market, and not one callback was one of those sellers you dream about, e.g., the guy who just about lost his shirt and needs to liquidate his assets for $0.70 (or even $0.85 for crying out loud) on the dollar–and these kinds of people typically would need a cash, not an FHA, buyer anyway–or that older widow who’s sick of dealing with tenants but still wants the monthly cash flow and would be open to seller financing.  They all just wanted to know how much they could get for their property.

I’m sure distressed multi-family owners are out there when the market’s hot, but obviously they will be much farther and fewer between than distressed SFR owners, both because there are so many more SFR owners and because multi-family owners, in general, are more sophisticated real estate-wise than SFR owners, most of whom aren’t investors at all.

Maybe I didn’t spend enough on marketing or didn’t know what I was doing or how to negotiate, but that was just my experience.  And at the end of the day, I bought something off the MLS, and the numbers still penciled out. Would I have done it if I already had a primary residence and I had to put 25% down?  No way.  But since I was kicking money out the door every month for rent and because I could get in the property for a measly $15k down + $10k repairs, it was as no-brainer.  Purchase price was $435,000, and the seller gave me a credit for $15,000 to cover various repair costs, particularly roofwork.  I think it was off many people’s radar because it’s definitely out there, geographically speaking. That being said, the location is between two rapidly-growing cities, and if I stay with the property for the long-term, I shouldn’t have any problem with appreciation and growth over the long haul. In any case, it cash flows with only $15k down payment + $10k repairs out of pocket.

Of course take what I say with a grain of salt, as there are many factors here, not the least of which are 1) the fact that this is Los Angeles and everybody thinks their property is worth a fortune and 2) the fact that this was my very first marketing campaign/experience negotiating with sellers.

Jeff S. · Answer

One variation on house hacking is to buy a SFH and rent out a room or two.  For younger people sharing a house with roommates isn't that uncommon.

With this approach you would be able to afford a slightly larger/better property (don't overdo it!) and have more appreciation than a small SFH or typical MFH.  You would have a little more cash to set aside each month. And you would be learning many crucial landlording skills.

Curt Smith · Answer

Join the local REIAs all of them.  Tell everyone what you want to do.

Join the local RE groups for Austin in linkedin.  Tell them what you want to do.

Use one of the automated search tools for craigslist.  Search CL every week for a 3-4 plex.  Sellers will advertise their deal and you are more likely to negotiate with the seller without an agent in the way.  Know the market!

James Messa · Answer

The first thing I was told as a newbie, if you want to find a great deal, (chances are your not going to find one from the MLS), is to start marketing to motivated sellers and networking.

Typically a good deal is a property that needs a lot work or somebody has experienced a life changing event that needs to sell their house quickly.

Marketing finds good deals, good deals find people with money.

Networking finds people with deals and people with money.

If you have money, you need to find people with deals.

Are you pre-approved for hard money?

Do you know how to evaluate a deal if one is presented to you?

Do you know how to negotiate a deal directly with a motivated seller from your marketing?

Do you know that there is about 12 different strategies to negotiate a deal with a seller who is motivated?

So where would you like start? Marketing or Networking?

If not house hacking, then what?

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