In this episode, Cynthia Meyer and Veronica Woods talk about the six advantages of living in your multifamily property. Learn how house hacking as a strategy is one of the most powerful ways to get started and build wealth in real estate.
In this episode of the Rental Property Café™ Video Podcast they cover:
1: Becoming a homeowner and investment property owner at the same timE [00:01:22]
2: Reducing or eliminating housing expenses [00:1:31]
3. Tax advantages of house hacking. [00:04:15]
4. Lower downpayment and mortgage rates [00:07:03]
5. Managing your house hack [00:10:19]
6. Building a rental portfolio more quickly [00:15:57]
“ If your tenants' rents are subsidizing or completely covering all of the costs of the property, that frees you up to save more money for the down payment on the next real estate investment. ” - Cynthia Meyer
“ If you have the dream of becoming a real estate investor down the line and you need a place to live and you don't need a lot of room yourself, this is the opportunity to start your investing career while you're really just looking for a place to live.” - Veronica Woods
About the Rental Property Café™:
The Rental Property Café™ podcast offers a real estate tool kit for busy professionals who are building a real estate portfolio. In each episode, co-hosts Cynthia Meyer & Veronica Woods explore ways to grow a successful real estate business while growing your career.
☕ See more financial planning guidance for real estate investors from Cynthia Meyer on the Real Life Planning blog: https://reallifeplanning.com/blog
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Connect with Veronica Woods of Daniel Woods Real Estate:
Transcript for Episode 17
[00:00:08] Cynthia Meyer: What is the most powerful real estate strategy that people just don't talk enough about? Hi, I'm Cynthia Meyer with Real Life Planning.
[00:00:16] Veronica Woods: And I'm Veronica Woods from Daniel Woods Real Estate.
[00:00:19] Cynthia Meyer: Today in episode 17, we're talking about the six advantages to living in your multi-family property. House hacking as a strategy, which is one of the most powerful ways to get started and build wealth in real estate. As real estate financial advisors, we don't think enough people are thinking about this.
If I could go back and give myself one piece of advice to my 20 something self, it would be to house hack. To purchase a multi-family property and live in one unit and rent out the other units. It is a powerful wealth building strategy both as a homeowner and a real estate investor.
[00:00:56] Veronica Woods: Yeah, and it's important to note, you can do it in your thirties. I am a successful house hacker. I did it a little later, but I think the key is if you have the dream of becoming a real estate investor down the line and you need a place to live and you don't need a lot of room yourself, this is the opportunity to start your investing career while you're really just looking for a place to live.
[00:01:21] Cynthia Meyer: Ah so, being a homeowner in an investment property at the same time is a really powerful way to get started at both things. And the second powerful aspect of this is that the rents from the other units can subsidize, in some cases, completely subsidize your other housing costs. So, Veronica mentioned that you don't have to be a 20 something to get started.
My sister, for example, who's just a couple years younger than me is a house hacker and she lives on one floor of her duplex and rents out the flat up top and that rent completely pays for her housing costs.
[00:01:58] Veronica Woods: I think the real thing is thinking about how much space do you really need? Because maybe you've perceived buying a house as a traditional three bedroom two car garage. If you really don't need that space and you want to invest, buying one unit and renting out the others is a great strategy to use.
[00:02:20] Cynthia Meyer: There is also the idea that you and I have talked about before, Veronica, I think, that there is an owner's equivalent rent, right? So you have to live somewhere, right? If you can figure into the financial analysis of the property- what would I pay to live in a similar sized unit if I had to just go and do that on the open market?
[00:02:44] Veronica Woods: Or where are you living now? Like, all right, so cost of living, let's say for use numbers is $1,200 a month, and then you have the opportunity to buy a duplex where the tenant is covering most of your expenses and you're only paying out of pocket $500 a month. That's $700 savings. You just do that. That's really easy math to do.
But I think people get caught up in the do you need the home run and have the tenant completely cover the cost, but you really should be comparing what you're paying now or where you aspire to live- how much that will cost a month.
[00:03:24] Cynthia Meyer: Yeah. And so, oftentimes, when I'm talking to clients, if they're thinking about () a house hacking strategy, as long as their costs as a house hacker don't exceed what they're currently paying it's a win-win, generally.
[00:03:38] Veronica Woods: Yeah. I think there is some neighborhoods that maybe the multi-family unit is more an outlier, so it's not an area predominantly multi-family. Sometimes, you can get hurt on the exit, on the sale, because there is not a lot of comps to judge it by. So there definitely are some neighborhoods that probably will hold value better as a house hack afterwards; after you leave the house than others.
So that is something to think about then when you're choosing neighborhoods. It's kind of bringing another dynamic into it.
[00:04:13] Cynthia Meyer: Yeah, good point. And the third powerful reason to consider living in your multifamily are the tax advantages. No, obviously we're not tax advisors and we would encourage you to talk to your own tax professional about your own situation, but if you are renting out part of your property, you can also deduct part of the expenses of that property; proportion to the amount of space that you're renting, right? So that can be really helpful. You get the tax advantages of being a homeowner and the tax advantages of being a landlord at the same time.
[00:04:45] Veronica Woods: Yeah. And it brings up once any sort of getting into investments, you probably should talk to your tax advisor about what that would look like.
What are some of the questions that you prompt your clients to think about when they have their first house hack?
[00:05:01] Cynthia Meyer: Yeah. These are common questions. I think one is, can I still maintain the capital gains tax exclusion on the sale of a primary residence And the quick answer is yes, right? But you have to make sure that you're reporting everything properly on your tax return throughout the years, and you've categorized which part of the property is your home and which part of the property is the rental.
Okay. So another good reason to get professional tax advice- the other question that people often have is how do I figure this out? Of course, you're going to want to keep good records. Generally what an accountant would do is they're going to divide the property proportionally according to the square footage, right?
So, let's say if you live in a quarter of the square footage, then three quarters of the remaining expenses might be deductible. But again, now,
[00:05:53] Veronica Woods: Obviously it..
[00:05:54] Cynthia Meyer: Use a CPA!
[00:05:55] Veronica Woods: A specific divided unit is a little easier and I advise my clients- and I do this myself, my receipts in terms of the utilities, they're right for the first floor. They track differently than the utilities that I pay for the unit I live in- or the repairs for the unit I live in versus not. So really itemizing your repairs- and you are in the rental property business at that time even though you're living in the house, too. And really just tracking everything that has to do with the property by the unit.
[00:06:30] Cynthia Meyer: That's a really good point, Veronica, because as we often tell people, real estate is a business, right? So, even if that business happens to occur in your home, you should still separate the components of the business, right? So it might be a good idea to keep a separate account, separate debit or credit card, separate set of books for the property business itself. It's not necessarily legally required that you do that when you own the property directly, but it's going to make tax time a lot easier.
So the fourth rationale is lower down payment cost and financing rates. How do your clients typically do this, Veronica?
[00:07:11] Veronica Woods: The whole reason the house hack is to take advantage of the lower financing costs because the bank's view- if you're living in the property, the likelihood that you won't skip town and not pay your mortgage is lower. Their risk is lower, and then that means your cost is lower.
So that's, really was one of the primary reasons why I was thinking about it as someone who wants to start- wanted to start investing and with the minimum cash outlay, that was the best way to do it.
Generally, it might be like a point difference in rates.
[00:07:47] Cynthia Meyer: That's a lot.
[00:07:48] Veronica Woods: And you know, talking about the percent down payment and FHA investor loan in the duplex, you could put three and a half percent down and buy an investment property.
[00:07:59] Cynthia Meyer: That's right. If you are doing an FHA loan, a low down payment loan, or even if you're just doing an owner-occupied loan, that's what's called conforming, right? Meaning it's bought by Fannie Mae or Freddie Beck after the loan is issued and securitized. Afterwards, you can generally put a lower down payment on the property even if you're not going- you're not doing an ultra low down payment loan. That means that instead of putting 25% down on an investment property, for example, you might put 15% down.
[00:08:27] Veronica Woods: Or 10%. I put 10% down on my investment property.
[00:08:31] Cynthia Meyer: Oh, that's excellent.
[00:08:31] Veronica Woods: The loans rate differs by the size of the property. So generally, duplexes will be the lowest amount you could put down, but a triplex- usually there is a schedule. So that's something to talk to a lender about. It's not like I just want to buy a multi-family, or I just want a house hack. I want to buy a four unit versus duplex. It may be slightly different. So it's important to ask those questions up front.
[00:08:54] Cynthia Meyer: That's right. And one thing to know, if you're doing this for the first time with a very low down payment mortgage situation, you are generally going to pay mortgage insurance.
And that is going to be something that you would continue to pay until you reached 20% equity in the property or you were able to refinance that loan. So just something to think about when you're budgeting for your house.
[00:09:18] Veronica Woods: If you're looking at the cash needed to close and you're running your numbers, for most people, it's really worth it because a lot of people would not have been able to get in their first investment property without it. In my mind, that's just money well spent to, get in the property.
[00:09:36] Cynthia Meyer: If you're buying a property that has a tenant in it, right? So you're taking over that tenant's lease, so to speak, you can actually use the income from the rent that they pay towards qualification for your mortgage.
[00:09:51] Veronica Woods: Yeah, that's definitely true. It helps if they're paying close to market rent, though. Sometimes, you're inheriting tenants that are paying below market rate and you might think, oh, I didn't buy this property to make that little money. So you may think about a plan, maybe six months to a year after you move, to turn over the lease so that you can benefit from saying that you'll have the tenant for your financing calculation.
[00:10:19] Cynthia Meyer: So the fifth reason to consider living in your multi-family property is that it's easier to self-manage when you're right there, right? When you live on site. It makes being a property manager or a landlord easier. It just makes it easier to talk to tenants. It makes it easier to see when there is problems.
As somebody who has done the strategy now and before what do you see? How is it easier for you?
[00:10:46] Veronica Woods: If you can do it like a business, have a professional relationship with your tenant as opposed to your friend. I always joke that people go back to Three's Company and they think they want to be Mr. Roper and come on and sneak in on your tenants. They do have the right to enjoy their privacy.
You can't pop in their house. They're part of the house, even though it's your house. But it is different managing from a distance versus just going downstairs.
You can hear things. You can smell things. You just have more eyes on the on the property of what's going on.
If you can't stand living next to your tenant, or dealing with a tenant that close to where you can actually see a lot on your own, you'd probably be a little leery about doing it from a distance because it's just harder, I would say.
[00:11:33] Cynthia Meyer: Yeah. Yeah. One thing I've heard from many clients is that the tenant doesn't necessarily need to know that you're the owner of the property. You could always be the manager, right? The property manager, the tenant that collects the rent from the other one or something like that. So, you could technically house hack and have a property manager manage the other unit if you were willing to pay for it. For people who are very privacy sensitive, that could be an answer.
[00:12:01] Veronica Woods: One thing to think about though, just backing the timeline up, when you're looking at the property, you may see a tenant, so they're going to know who you are.
[00:12:10] Cynthia Meyer: Yeah.
[00:12:11] Veronica Woods: So you when you're looking at properties and you plan to live in it, you may have to be the the brother of the owner. Like you would have to play a role when you're visiting because they're mindful when you're going through properties. Okay. Is. this going to be my landlord? And so there is a little dynamic to that. So you would have to manage it early on because you can't get there and oh, it's not me. No, I saw you. I remember.
[00:12:36] Cynthia Meyer: That's good. I don't know if you agree with this, Veronica, or not, but I would say if somebody were really didn't want to deal with people directly, then you know, they might consider looking at a real estate strategy where they could always use a property manager; where they didn't have to landlord one-to-one because they might not enjoy it.
[00:12:55] Veronica Woods: And that is true. Generally, a smaller unit versus a whole house and property management, the kind of the contract is pretty much the same. So there is nothing different. You may even want them to coordinate the repairs in your property where you live in it. So yeah, I have seen that work. Ultimately, if they're writing your name on the check, they'll probably have an idea that it's you. But if they're writing their rent to someone else, I think that's part of the distance; so you're not the one responsible for the money. You're not the one to call for the repairs. You just maybe know the owner. So, I have seen people be able to be anonymous in that way. Yeah.
[00:13:37] Cynthia Meyer: So I have a lot of clients in California and California has legislation that allows people to build ADU or accessory dwelling units on their property. So a lot of folks are doing it; makes a lot of sense. Helps with the housing situation in California and helps generate extra income for them. But these are often people who own single family homes that never thought of being a landlord before. And the ADU was often like a little studio or a casita or something in the backyard, or a converted garage or an English basement or something like that.
Any guidance for those types of people who have always lived in their own single family home, when all of a sudden they're like fresh landlords?
[00:14:15] Veronica Woods: I do think generally, and what I know about the ADUs is there is definitely some separation; just even physically.
[00:14:23] Cynthia Meyer: Typically.
[00:14:24] Veronica Woods: Yeah. Generally, when we're talking about buying a multi-family, you're sharing a wall or a ceiling so you can hear; hear the folks. But I think the biggest thing is just respecting that the people do have an interest in the property; in their own enjoyment and privacy.
So you're just providing a service, just think about it. You're providing a service of housing in exchange for that, they're paying money for that. They do have some rights. I do think the biggest thing is newer landlords think that they have the right to kind of barge in or invade that privacy. Usually, I'm talking just back to just a regular first time landlords. You can't just go in their property now. You can't just leave your stuff in their property. They're rent out all the spaces to use and just creating that distance, it's something that people maybe generally aren't comfortable with or unsure how to set that appropriate distance.
[00:15:24] Cynthia Meyer: Those are really good points. For those people who are listening, who are considering doing something like that, or even just becoming a house hacker or the landlord of a multifamily that they're living in for the first time, there is a great series of articles and books by NOLO Press which is a legal publisher. Really good guides for first time landlords. Lots of available educational content on their blog but also some good books that you can buy directly for them or at your regular book sellers about being a first time landlord that I think are really helpful.
The sixth reason to consider living in your multi-family is that it can help you build a rental property portfolio more quickly. Typically, people are homeowners then rental property owners. But this gets it done in one transaction, right?
You can often with a low down payment mortgage, for example, you have to live in the home for a year and you could actually move on to the next home, the next house hack, if you will. A few weeks ago on a different podcast, I talked to another Realtor® who's a serial house hacker.
She and her partner move into multi-families, fix them up, rent them out, and then move on to the next one. So that can be a very effective strategy to move on to larger real estate projects.
[00:16:42] Veronica Woods: Yeah. I think if you're invested minded in the beginning, and like I said earlier, really don't need a large square footage for the the family that you have right now, it is really a good option to build wealth. So you think about buying that next property and going to next, and you're building a assets on your balancesheet as you go.
[00:17:06] Cynthia Meyer: Oh, and because going back to that example that Veronica gave at the beginning of our discussion, right? If your tenants rents are subsidizing or completely covering all of the costs of the property, that frees you up to save more money for the down payment on the next real estate investment.
[00:17:25] Veronica Woods: As the financial planner, that's where you have to remind people that not just put that money in your pocket or spend it.
But that's really the goal- all their cash flow investments, technically, you should be reinvesting the assets to buy more assets.
[00:17:41] Cynthia Meyer: Yeah. I really agree with that. And, it is true that people are more likely to reinvest their securities profits than they are to reinvest their rental profits.
But when you're in the building and scaling stage, ideally should be reinvested in other real estate assets. Any other guidance that you want to share with us before we summarize?
[00:18:05] Veronica Woods: One thing didn't really come up. There is a trickiness in finding the ideal multi-family that one you think will be a good investment long term, and two, that you want to live in. You actually do have to want to live in that neighborhood.
[00:18:20] Cynthia Meyer: Oh, yeah. Good point.
[00:18:21] Veronica Woods: You may hear about the person who bought a property needed a lot of work, and maybe it was in, we'll call it questionable neighborhood, for where they thought they'd want to live.
You really do need to balance how far to the edge of growth and gentrification you feel comfortable with; it's really a personal decision. So there is no judgment of that. But I do remember one of my earlier house hacking attempts. I drove by the neighborhood during the day and I drove by the neighborhood during the night. The numbers are really a stretch and do I want to live here for a year? And the answer was no. So I'd let the deal go. I could have financed it or made something happen, but it didn't check all- my lifestyle costs was something to consider because you really do have to live there for a year.
I think I have heard of some loans, maybe six months, but generally, it's about a year and you don't want to commit fraud and not really live there. So you really do need to feel comfortable living there for a year.
[00:19:26] Cynthia Meyer: Yeah. Yeah. The financial benefits come from living in your investment, basically. That's where you're most supercharged, if you will, in terms of the growth effects. I think that's really important point, right? Because if you're going to put down that much money in any one investment, you should like- like you want to fall in love with your investments. You want to fall in love with the home that you're buying. Don't have to necessarily commit to it forever but...
[00:19:51] Veronica Woods: Right. A lot of newer home buyers think, oh, I got to live in 30 years and the average person lives in a home for what seven years. Now, it's even less; probably closer to five now. All I'm saying is one year.
[00:20:04] Cynthia Meyer: That's good. Just to sum up here. Our six advantages to living in your multi-family rental are one, you can be a homeowner and a rental property owner at the same time.
Two, rents from the other units subsidize the housing costs.
Three, tax advantages. You can deduct the expenses proportionate to the amount of the home that is a rental.
Four, lower down payment and possible lower interest rate on the loan.
Five, it's easier to manage it yourself when you're on site.
And six, it's a strategy that can really supercharge building a rental property portfolio more quickly.
So thank you so much for joining us in the Rental Property Cafe™ this morning. And if you found this interesting, please subscribe so you get notifications of next episodes including our next episode 18, where we're going to make 2023 predictions for the rental market.
Veronica, as always, you're one of my favorite people to talk to. Looking forward to seeing you in the next conversation.
[00:21:05] Veronica Woods: All right, have a good day. Thanks.
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