Unlock the Power of House Hacking: The Ultimate Solution to Free Living
How would you like to live in a house and not make any payments or make as low a payment as possible? I’m going to talk about a house hack where you live for free or pay as low as possible. In fact, I have five house hacks for you and I have a special guest, so let’s get right into that.
Many of the buyers I talk to hesitate to buy a house because they feel they cannot buy a house or they don’t have enough down payment. But did you know that you can buy a house or a property with as low as three and a half percent down with a government loan with better than easy qualifying, or you can always go with a 5% conventional down, or if you’re a VA, you can put 0% down. But talking about the house hack, let’s get to that. I want to give you an example of how you as a buyer or a potential buyer, can buy a fourplex and how you use the rental income to pay as less as possible. And I’m going to give you an actual example of a property in the city of Atlanta that is in escrow right now. So I’m going to briefly go through the numbers and then I’m going to bring my guest, Sumir, who’s a lender and also an owner of a fourplex. He actually did that when he first bought this house, maybe 5 to 15 years ago. So let me give an example of this property. A fourplex in escrow in the city of Atlanta, which is in the desert, for those of you who are not familiar.
So let’s talk about house hacking and staying in one of the units. If you buy a fourplex, here’s an example that is in escrow in the city of Atlanta. As I mentioned to you, the asking price is $565,000. And I’m going to give you a brief example of how this works so you get a basic understanding. Of course, you can buy something for $300,000 in other cities. In Orange County, this unit would be over a million dollars. So for example purposes, and these are actual numbers or potentially actual numbers, the listing price is $565,000. The rent you can get currently is $1,680 per month because these are all two bedrooms, one bath. So let’s go back at the listing price of $565,000. And if you get this loan, let’s say you can potentially get it at an FHA loan for three and a half percent, or even if you get it at a conventional loan of 5% down, or if you convince the seller to pay you some down payment or closing cost, you can reduce your down payment and closing cost. But for calculation’s sake, the principal and interest and tax and insurance and the PMI, if it’s an FHA loan, comes out to $4,800 a month on a 30-year mortgage, and I calculated this at 6%. So your mortgage payment comes out at $4,800 a month, and this is a fourplex. So let’s say you have your friends or relatives or even tenants staying in the three of the other units and they are paying you $1,680 a month which comes out at $5,040 per month income. So if your mortgage is $4,800 a month and three of your tenants or relatives, technically tenants pay $5,000 a month you are staying in the fourth unit, and guess what?
At this point, you are not paying any mortgage at all. So this is a great hack you staying in. One of them not paying any mortgage and the other tenants make up for your mortgage. But let’s say because interest rates is higher, I just quoted 6%, or I might have quoted you 5% of five and a half variable. But for calculations, let’s say you get a more mortgage payment. You paid 7% and your payment is $5,500. You may have to pay $1,000 or $1,500 a month. But even then, where can you stay in a property in today’s market in April 2023 at $1,000 or $1,500, or even a $2,000 mortgage? You can’t in a decent house by the way, once you buy the property you also get tax refunds or tax benefits so there’s a lot of benefits by doing this. So this is one way I wanted to show you how you can house hack. I’ve known people who did that. And at this point, before I talk about the other four hacks and give you one more example in Orange County, I wanted to bring to you Sumir Desai. He is working with US Bank. I’ve known him for a long time. In fact, he does most of my loans and mortgages for my buyers who are single, family, and including investors. So I want Sumir to give you an example of how he did this when he bought his Fourplex.
Mike Patel: “Hey Sumir, welcome to my channel. I know this is the first time we’re doing this hope we have a lot of information for our viewers there and I wanted to talk to you about this journey that you took. I remember one time you told me when we were having lunch the first house that you bought was actually a fourplex you had reason to buy it, you were nervous to buy it, and you had borrowed money to buy it. So take us through that journey. What we call today, what I’m trying to say is, it is actually a house hack and you did not even know it was a house hack. So take us through that journey, please.”
Sumir Desai: “Yeah.I didn’t realize that it’s considered a hack today. So many years ago, my wife and I, our first investment property that we bought was actually a four-unit. And the traditional thing was to go buy a single-family. And we looked at all the numbers and we realized, ‘Hey, wait a minute, we can buy a four-unit complex in Orange County. And three units would help pay for the majority of the mortgage payment at that time.’ And that included the taxes, the insurance, the principal, and the interest. It was a great, great idea at the time. And our future goal was to have a single-family residence. So fast forward, we have a single-family residence, we have a four-unit. The four units today pay for the entire mortgage payment and an overspill to our current home mortgage payment. Who would have thought then to what we have today?”
Mike Patel: “But congratulations. So you still have the fourplex?”
Sumir Desai: “Yes.”
Mike Patel: “And you bought a new house and some of the mortgage payment is coming from the fourplex.”
Sumir Desai: “That’s right.”
Mike Patel: “Could you explain why you bought the fourplex? And just to clarify, was that you bought it as an investment or you bought it as a single-family residence?”
Sumir Desai: “Great question. Because I’m in the lending industry, I was qualified as an owner occupancy financing for the four units. So what that means is the intention was to live in one unit and rent out the other three. And at that time the lender was able to give me positive rents on the three other units to qualify for the entire mortgage.”
Mike Patel: “Okay, so what you’re saying is because you had income coming in and on top of your income, you and your wife working, that as income. On top of that, the three months mortgage or rents coming in, that also qualified, what, is about 70%?
Sumir Desai: “75%”
Mike Patel: “75% of that. So it helped you get a bigger property.”
Sumir Desai: “That’s right. So the thought process that I sit with consumers today is, well, how am I going to qualify for this mortgage? That’s the first thing that comes to their mind. And so after asking more questions, you’re able to realize, ‘Hey, wait a minute, the three units that you’re looking at, or the Duplex, or even a four-unit that you’re looking at, there’s rents coming in. So let’s look at what the rents are and the Performa. And the banks generally will take 75% of the gross rent, 25% vacancy factor, add those up and see what the future mortgage payment is going to be all in with.’ Taxes, insurance, mortgage insurance. If you’re taking a government loan and just working up the numbers from there, it’s not rocket science by any means.”
Mike Patel: “Cool. And then how about the down payment? Because you are a first-time, I know you’re in a different situation now versus in 2006. How did you come up with a down payment? And maybe you had 20%. I’m not sure. But if somebody was to buy with a low down payment, how would you recommend somebody do that?”
Sumir Desai: “Sure! When I bought my property, fortunately, I was able to put a full 20% down. So that’s a different story. But in today’s market, you don’t have to put 20% down to buy a four-unit complex. You can put a 3% down, 5% down, or 10% down. It all comes down to the client’s income, and qualification, and depending on their living history that’ll then depend if the banks can use the performer rents to help offset to help qualify.
Mike Patel: “Okay, great. And then do you feel that the taxes help you? Because I know that if you have a $3,000 mortgage payment, if you’re paying rent versus you have a $3,000 mortgage payment, you have property tax deductions, you have interest deductions, you have depreciation and all that. Do you think that helped you as well? Because you are pretty tight on qualifying on your first home.”
Sumir Desai: “I’m not a CPA.I’m not a financial advisor.”
Mike Patel: “Me neither. So please consult your CPA or your lender. This is just a conversation we’re having. But if you get into specific numbers, please talk to your lender or your CPA or your attorney.”
Sumir Desai: “Yeah, I just have to plug that in there. But I will say that it’s definitely a huge help because when you have an investment property, you have a new form to use on your tax returns called Schedule E for rental properties. So to what you’re saying, Mike, you not only have property taxes that are tax deductible, home insurance, that’s tax-deductible depreciation and other expenses which actually fall under expenses. So maintenance, going to the hardware store, consulting with a financial advisor. These are all expenses that you can sit with your accountant and itemize on your income taxes.”
Mike Patel: “Exactly, right. And also I found out that if one of the units gets vacant–”
Sumir Desai: “Yes”
Mike Patel: “–that’s also called shrinkage and that’s also deductible.”
Sumir Desai: “That’s right.”
Mike Patel: “So all these to your advantage. So this is a great way of buying a house. Hopefully, you can do that. And thanks Sumir, for coming and we’ll talk more, we talk about hacks one, but let’s go to hack number two.”
By the way, we talked about the fourplex, but you could do this with even a duplex or a triplex, which is two units and three units. But we talked about four units because Sumir Desai had a four-units that he bought. So I went there first. So let’s talk about the remaining four hacks that you can use to buy a property. So the first hack, the traditional hack we talk about was buy units, duplex, triplex, or fourplex.
The second hack is if you have a two-story building, let’s say you have a bedroom downstairs and your living room or family upstairs, you could rent that out. Or if the living room is downstairs, by the way, it’s called a living room. There’s a reason for it. So if you want to rent it out, if you’re desperate and want to rent it out, partition your living room. Or just do an extension or partition, put a door and you can rent it out to friends or family or somebody you know and you can have extra income. I’m in Orange County, and of course, as you may know, prices are very high in Orange County today. I know a lot of friends and family and their friends and family are renting out rooms and they go for $800 a month. That’s a lot of money for renting out a room. I have a four-bedroom house myself and it’s just me and my wife. I could rent out the three other rooms and make $2,400 to $3,000 a month and still stay here. Obviously, I don’t want that lifestyle right now, but in the future, it’s a consideration. So the second hack is if you have a house and if you have any room in there living room, family room, bonus room, or upstairs is empty, convert it to a room, livable room, and rent it out. Rent it out to somebody you trust and feel secure staying with. So that’s hack number two.
Hack number three is actually buying a single-family home or a condo. I’m showing actually a two-bedroom townhouse right now in the Costa Mesa Santana area in Orange County because she works near the South Coast Plaza and she does not like to drive too much. She’s looking for a two-bedroom, two-bath townhouse with an attached garage or an enclosed garage and her objective is because she’s very tight on cash. She has a lot of debts, and she makes good money, but she made previous mistakes and she has some extra debt and her credit is not that great. So by qualifying her for up to $3,000 a month mortgage, she will be stretched. But my lender, Sumir, has given me the okay that she can go up to $3,000 a month on mortgage plus the association fee. So her objective is to buy the two-bedroom condo. She already has a relative who’s going to stay with her and pay her anywhere from $700 to $800 a month, which will help her on the payment. So that’s hack number three. You can buy a single-family home or a condo and rent out the other portions, and other bedrooms. If you have a three-bedroom house, you can rent out the other two. So that’s a great way to do it.
Hack number four. This is if you are really, really desperate for money, or if you really want to buy a house and you want to make the payments. Or you may already have a house and you want additional payments, you need help. And I know an agent whose client did that. And if you have a house, it doesn’t work. If you have a townhouse because you need a yard, go buy a trailer, a used trailer, not a very expensive trailer, a livable trailer, and put it on your yard. Either you stay in the trailer and rent out your house so you get more mortgage or rent out the trailer and you stay in the house and you get some money from your trailer. But again, that’s only if you’re very desperate to do so. But people have done it. People do different things in different situations. And if life permits or situations come around, you do stuff like that. I remember after I got my bachelor’s degree, working part-time in a hotel as a desk clerk, waiting to find a job, waiting to find a business. I also worked at 711 because I had money in my bank. But by working part-time, two jobs, I was not using the savings because I wanted to use that to buy a business. I was desperate to save my savings. So I worked at a 7/11, worked as a desk clerk, even with a bachelor’s degree. And I also had a baby, a brand new baby. So any money I made at that time, I was getting paid $10 an hour. Even if I made $400-$500 a month, that’s the money I saved. So you build a house brick-by-brick. You make money by saving money brick-by-brick.
The fifth hack you can use is what we call is building an ADU, which is the Accessory Dwelling Unit. Of course, you have to check with the city and your county if they allow that. Or buying a tiny home, put it in your yard, or if you’re a handyman or a contractor, or you have some friends and family who can do it at a reasonable price, build a one bedroom, one bath, a house, if it’s reasonable and stay in that house and rent out your big house. Or you can still stay in your big house and rent out the ADU. But about financing, because that costs money. I’m going to bring Sumir in.
Mike Patel: “Could you give us an idea? Like if I decide to buy a tiny home and put it in my yard, or have a contractor build a small house, one bedroom, one bath with a bathroom and a window, and air conditioning, how would I do that? Because that costs money. And my money that I own this house for a long time, I have equity. How can a buyer like myself or somebody else use that to build an ADU or buy a tiny home?”
Sumir Desai: “Sure! So you have many different options. The obvious is if you have money in your bank account, you can use that money tomorrow and pay your contractor and build that ADU or tiny home. Or many clients right now are taking advantage of the equity, like you said, in their homes. And generally speaking, banks will go up to 80% of the equity of your home with a drive-by appraisal and they’ll just subtract what you owe on the property, one or two loans, and whatever you already have. And that difference is what you’re applying for as a HELOC or a Home Equity Line of Credit.”
Mike Patel: “Okay? So you can pull the money out and buy it back in cash. I don’t know how much it costs, but tiny homes may cost $1,500 to $5,000 depending on how big your house is, how fancy you want to get.”
Sumir Desai: “That’s right.”
Mike Patel: “You want to build a big one, a small one, et cetera.”
Sumir Desai: “That’s right. So you have many options as far as financing goes and dollar amounts go. All the numbers just have to make sense.”
Hey, I want to thank Sumir for coming and giving us information. One more thing I thought about as far as your hack is that I know some people doing that one of the other things you can use your house as is converted to an Airbnb or VRBO seasonally. I know a friend of mine who lives in Palm Springs in La Quinta and when the golf season comes and the tennis season comes, they move out and rent out their house as an Airbnb or VRBO vacation rental by the owner. So those are ideas you can have. And there are a lot more ideas of house hacking, but these are the ones that I want to talk about. Thanks for watching the video. Please subscribe and make some comments. We would appreciate it. And thanks, Sumir. Thank you very much.