20 yr old debating house hacking or buying property out of state?

[Alex Clark]

What's up y'all, as a young 20 year old I have a question. I'm currently going to school, working full time, and have a business going. I've saved up a decent amount of money and i'm starting to catch interest in real estate. A lot of kids my age want to move out of their parents houses and I'm wondering if house hacking is the move and having buddy's pay rent and move in. The problem is in California it seems very difficult to find a good deal where I could eventually cashflow. I'm young and ready to take the risk If that means It will take years to cash flow I'm in for the long haul. I've also came across buying property out of state and am wondering is that a good option? What advice would you guys have on this? Is there something you wish you did as a young man in terms of real estate?

[Leo R.]

@Alex Clark I have experience with both, and I'd 100% recommend a house hack over OOS investing for a beginner, no question.  I've written about this on the forums plenty of times, so here's one of those posts:

I've house hacked, BRRRR'd, rehabbed, and been involved in just about every other REI strategy out there, and in my opinion, house hacking (a single fam or small multifam) is the single best way to get started in real estate investing.

Why? Because, house hacking can produce great returns, it’s highly flexible, it teaches you essential RE investing skills, but (compared to more advanced strategies like BRRR'ing, flipping, wholesaling, or out of state investing), it is comparatively lower risk, simpler and more beginner-friendly—and therefore has a higher likelihood of success.

Here are the top reasons house hacking is the best way to get started in REI:

1. A HH can produce great financial returns. Specifically, a HH can substantially lower your living expenses, while increasing your income. Lowering your expenses while increasing income is the fundamental recipe for building wealth—and a HH can accomplish both in a single step! A HH lowers living expenses (which is usually a person’s biggest expense)—living in the smallest room in your own house might only cost you $500 per month, whereas renting an apartment might cost $1,000-2,000+ per month (not to mention the $500/mo you spend to live in your own house is partially paying off your mortgage, whereas the money you spend on rent is gone forever). A HH also produces income and adds to your net worth—you can get cashflow from rent, property appreciation, mortgage pay down, and tax benefits. Since it’s your primary residence, you also get access to one of the greatest wealth-building tools ever created: a 30 year, fixed low interest, low downpayment mortgage. When executed correctly and repeatedly, house hacking can be very lucrative, and there are multi-millionaires who built their fortunes on repetitive house hacking!

2. House hacking is highly adaptable, and can be combined with other strategies. As you gain experience, you can combine a HH with other strategies to maximize returns—I've done HH's that turned into various types of value-add plays, BRRRR's, STRs, flips, etc. Often, this is done to adapt to market changes. For instance, I have a property that started as a HH; when rates increased, re-fi'ing wasn't an option, but the property had a layout and zoning that was conducive to adding an ADU—which I did, greatly improving the property's cashflow. Nobody can predict the market, but good investors know how to adapt to whatever the market throws at them, and HH’ing is a strategy that is highly adaptable.

3. A house hack will teach you the essential skills you'll need to succeed in RE investing. With a HH, you learn how to analyze properties & markets, how to find an investor-friendly agent, how to spot value-add opportunities at properties, how to engage in a strong due diligence process, how to screen tenants, how to create a strong lease, how to manage the property, how to build a network of contractors, plumbers, electricians and other pros, how to manage the book keeping of the property, etc., etc., etc. If you want to succeed in RE investing, getting this experience will be critical! There are some lessons that can only be learned through experience, and A HH will provide incredibly valuable lessons that no mentor, real estate course, book or podcast could ever teach (though, I'd still recommend reading up on relevant RE resources, listening to podcasts, etc.).

Moreover, a HH allows you to learn these lessons in a context that is often lower-risk than more advanced strategies (like out of state investing, flipping, etc.). Make a mistake with a house hack and you might experience some inconveniences and lose a few thousand bucks, but you can usually survive. Make a mistake with a flip or out of state investment, and you can easily go bankrupt (especially when you’re first starting).

Plus, if you decide to do one of the other strategies in the future (such as BRRR'ing or out-of-state investing, etc.), you'll be much more prepared to do it if you have a few HH's under your belt--a ton of the lessons you'll learn from a HH can be used to succeed in other areas of real estate ...in fact, I'd say that a HH should be a necessary prerequisite to the more advanced strategies (like out of state investing, BRRRR'ing, flipping, etc.)!

4. Compared to other strategies (like out of state investing, flipping, wholesaling, etc.), a HH is ** relatively ** simple and ** relatively ** lower-risk, and therefore has a higher chance of success. I always use this analogy: would you tell a beginner skier to ski the most advanced terrain on the mountain? (obviously, no; a beginner could get themselves killed on double black diamond terrain!). Beginners should start off on beginner terrain, where they actually have a chance to learn and succeed. A house hack is like that beginner run—you'll fall down a few times, and learn in the process (but you hopefully won't get yourself killed!) …on the other hand, flipping, BRRR'ing, wholesaling, and out-of-state investing are more like double black diamonds—they require a lot of experience, and a single mistake could have dire consequences.

The fact of the matter is: real estate is a high-stakes endeavor, and the more advanced strategies (like BRRR'ing, wholesaling, flipping, out of state investing, etc.) can easily bankrupt a beginner when they're executed poorly.

Although HH’ing is a strategy that's good for beginners, it’s not just for beginners—there are plenty of very experienced RE investors worth many millions who continue to HH, because it's such a powerful strategy.

Now, having said all that, house hacking is not necessarily easy, and it’s definitely not risk-free (if it were, everyone would do it!)...it's just easier and comparatively less risky than the more advanced strategies...House hacking still takes significant due diligence, skill in analyzing the market and the property, time and effort to learn about tenant screening and property management, the ability to anticipate appreciation/depreciation trends, etc., etc., etc....and even with lots of skill and preparation, things will still go wrong (vacancy, plumbing leaks, bad tenants, unanticipated capex, furnaces that kick the bucket at the absolute worst time, etc.)--but that's the nature of the game. As James Brown sang: you gotta pay the cost to be the boss.

Good luck out there!