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You heard about it here. Again, that's longangle.com. Hello, and welcome to another episode of All The Hacks, a show about upgrading your life, money, and travel all while spending less and saving more. I'm Chris Hutchins, and I'm excited to have you on my journey to find all the hacks to optimize my life.

With housing being one of our largest expenses, I thought it would be amazing to do an episode about reducing your cost of living through house hacking, something I did for almost a decade that helped me save over $100,000. And who better to have on than Andrew Kerr, a seasoned real estate investor and the founder of Financial Independence by Real Estate Investing, or FiByRia.com.

He's also worked for years in residential and small commercial banking, but most relevant to our conversation is that he's the host of the House Hacking Podcast. In our conversation, we'll talk about the six different types of house hacks you can use to start saving money, roommate. We'll also talk about some of his tips for buying and selling properties, including in a hot market, and how to start thinking about real estate as a way to build your wealth.

It's going to be a great episode. So let's jump in. After I remind you. Chris Hutchins works at Wealthfront. All opinions expressed by Chris and his guests are solely their own opinions and do not reflect the opinion of Wealthfront. This podcast is for informational purposes only and should not be relied upon for investment decisions.

Andrew, thanks for being here. Awesome, man. Chris, I'm so excited. We finally got the time to connect. Thanks for having me on. Yeah, I am excited. And I just want to dive in really quick. I don't know if everyone listening to this knows what house hacking is. So I just want to start off by hearing you explain in your words, what house hacking is.

Awesome. Yeah, I like the fact that you said my words, because it's sort of changed over the world and the way media has talked about house hacking, it's sometimes only talked about one way. To me, house hacking is doing anything creative with your housing options to help reduce your housing costs.

You know, the average person spends 30% of their income on housing. So if you can take a housing choice, pick how you're going to live to reduce any of that or all of that cost, to me, that is house hacking. And whenever anyone says, you know, the goal is to cut all these costs, I feel like it often comes with a connotation of, you know, living in a crappy, rundown apartment, this isn't that though, right?

So that is one option. And that's where, you know, a lot of the articles that are online are doing roommates or room rental style house hacking, where it's the young person in their twenties that's getting and living in a big house and having four or five roommates. And, you know, to me, that is definitely a big sacrifice.

I could never convince my wife to do that, but house hacking can be pretty luxurious, dependent on the style that you pick and where you're living. So like me and my wife, we're in the Bywater here in New Orleans. It's a historic district. We're in a historic home that runs about $600,000 once we're finishing out our renovations, and we've got a tenant on the other side and we live in our side and they cover almost all of our housing costs.

So, you know, we're living in a amazing neighborhood. We can walk to everything. We rarely drive our car and it's just a beautiful building and it costs us almost nothing to live here. So there's a lot of different ways to do house hacking, but most people prefer not that like dingy, dirty, a million roommate style of house hacking.

Yep. And these are, you said on the other side, are they in your sharing living space or is this completely separate? No. So this is what I'm doing is what we sort of call a small multifamily house hack. So it's where you buy a duplex, a triplex or a fourplex.

So, you know, in New Orleans, it was traditional where a family would buy a piece of land, build a building and make it into a two unit or a duplex. So they've got their own entrance, own exit. We even fenced off the backyard. You know, we share a common wall all the way down the middle.

But outside of that, you know, we only see them if they're hanging out on the front porch and we're hanging out on the front porch. Wow. And so that's one kind of house hacking. The roommate style, you mentioned it, anyone could buy a place and get a bunch of roommates and charge rent.

Are there some other categories or is there a way you break it down? Yeah. So I sort of look at the six styles. There's that room rental, the roommate style. There's the small multifamily where you're buying the two unit, three unit or four unit. Then you've got the income suite.

So maybe you've got that walk up attic or that unfinished walk out basement and you convert that into an income suite. So, you know, for folks that are maybe more in their 30s, they might remember a show. I think it was like HDTV. It was called Income Suite. And that's all they did was take people's basement and convert it into an income suite.

And that way there's no shared space. The other way is called the ADU house hack. So an ADU is a term for an accessory dwelling unit. It's essentially an outbuilding on your land. It's a sort of zoning or building code definition. But that's where a lot of folks will, especially in California, where they've got that pool house, guest house or garage and convert it into an apartment.

And now you've got sort of your main building and a small building on the same lot. Then the next is a work provided house hacking where you specifically choose a career path or if you want to change careers, pick a career path where housing is provided. So that could be, you know, teaching abroad, careers in the military.

There's a lot of sort of upper level white collar jobs where they're going to post you somewhere for three months, six months, a year, and they'll provide corporate housing. And then the last option is a live in flip and a slow flip. So most folks are familiar with flipping a house.

You know, you go and you fix it up as quick as you can. You sell it. But the idea with the slow flip is you live in it for at least a year, ideally two years. That way, as you fix it up, it drastically appreciates in value. And then when you go to sell it because you lived it in for two years, you don't have to pay taxes on any gain up to two hundred fifty thousand dollars if you're single or half a million if you're married.

So whereas a normal flipper, they'll flip a house and they could be paying 30, 40 percent in taxes on that money they made on the flip. So those are the sort of six main styles. You can combine them and there's a lot of other things you can do. But those are the sort of six ways.

And do they all require buying a property or is there any type of rental based house acting? Yeah. So that's actually a question I get a lot. Folks will say, look, hey, I don't know what I can do yet. My credit's not quite right. I need to save money for a down payment.

Well, go rent a big house, get a big flat lease and put the lease in your name only. And then you rent out the rooms to all your friends. Or maybe you can find that house that does have that walkout basement and you can close it off and then separate it and put it on Airbnb or rent it out to travel nurses or put in a long term tenant.

Just the one thing you want to be careful of if you're renting a space is just look through the lease and make sure it's OK to sublease parts of the property or to do things like Airbnb in the portions of the property you're not using. Have you found that if leases don't allow that, are landlords ever willing to negotiate here or if it's not allowed, kind of move on?

It depends on the landlord. Now, here's the thing, being a landlord myself, and I know you've been one. If someone comes to me and says, hey, I'm going to pack more people into the property, my mind automatically goes to, OK, that's more maintenance costs. That's more wear and tear on the property.

But now if they say, hey, we've got this unfinished basement or this finished basement and I'm going to rent it out long term or I'm going to put travel nurses in there for three months at a time, would that be OK? And by the way, I'll throw you an extra 100 bucks a month or 200 bucks a month.

I'm going to say, hey, great, I'll take that extra increased rent. And I think if you have the conversation that way with the landlord of, hey, they're all being screened, they're going through a process, they're paying their own security deposit, I'm still going to be responsible for everything. I think a landlord, if you have a decent conversation with them and they see the benefit to them of, hey, there's more money coming into that property, so there's a better chance all continually getting paid.

And if there's a little more upside for me, that's great. I mean, I have a good sort of we'll call him an Internet friend. He was in San Diego. His housing allowance from the military was three thousand dollars a month. So he rented a nice big house that had a basement and he put that basement on Airbnb.

So not only was his rent about three thousand dollars, which took up his whole housing allowance, he was bringing in another fifteen hundred to three grand a month from that Airbnb place. So not only was he living for free, but then he was bringing in twenty five, thirty grand a year and he worked it out with his landlord and his landlord didn't care.

Wow, that's amazing. OK, so you could do it if you're renting. But I know a lot of these opportunities are much better when you own the home. If someone listening hasn't ever purchased a home, are there specific kind of requirements or prereqs that come to buying properties for these purposes that might change for, you know, just a traditional look for your first home?

Or are they similar? Very similar. And that's the great thing about house hacking is because you're buying the property to live in it, you now qualify for a owner occupied loan. So just if I were to go out and buy a house to just normally live in, I can get those same loan programs if I were going to house hack a property.

Now, in some cases, there's a little extra qualification where they might ask to, you know, have you put down five percent instead of three and a half percent. But most loan programs out there. So if you're a veteran, there's the VA loan program. You can buy a small multifamily property, a property with a walkout basement, exactly the same you would if you just bought a traditional single family home.

Same thing for an FHA loan. You can buy a house three and a half percent down. You know, so for a $300,000 home, you're looking at $11,000 and buy a two unit or buy that house with that unfinished basement and then use some of your savings to finish that basement.

So that's the great thing with house hacking is you get to use those same owner occupied loans that the average homeowner's using versus if I were to go buy it as a true investment property, I got to put down 20 percent. So, you know, in that $300,000 home, I got to come up with 60 grand to buy that, say, duplex, where if you're house hacking it, you know, you're at $10,500, $11,000.

Wow. And so VA loans, obviously for people who've served in the military, who's an FHA loan for? Pretty much anyone. They want you to be a first time home buyer or have not owned a home or not had an FHA loan in the past. So it's a great option where if you're just going to go out and buy a property, use an FHA loan, low credit score requirement, low down payment requirement.

You don't have to have perfect credit. And then what you get approved for is just based on your income. Wow. And you, and you said you only have to put down three and a half percent. Yep. Three and a half percent. And then one of the really cool things when you go to buy a home and you can do this, if you're just buying it yourself, is you can negotiate with the seller to give you credits for closing costs.

So a lot of the times with those FHA loan programs, you can get credits, you can get a down payment assistant grant to help reduce that even lower. Is there a limit on FHA loans? Yes, there is. Yeah. Great question. So the FHA loan limit is going to be based off of where you live and based off of how many units in the property.

So one thing to touch on, you know, I say small multifamily, that's up to four units, soon as a property has five units or more in it, it's considered commercial. So that's why you want to stick at those four units. An FHA loan program will have a max loan limit for one unit, it increases for two unit and goes up for three and goes up for four.

So I think when I was looking a couple months back, buying a four unit there in Los Angeles, it was almost like a little over a million dollars was the FHA loan limit. Now, obviously that's a higher priced part of the country versus say here in Louisiana where I'm at in New Orleans, the FHA loan limit is not going to be as high.

Or if you're in, you know, a very rural part of Iowa, the loan limit is going to be a bit lower. Yeah. Now, even if you're not eligible for FHA loan, you can still buy these as kind of traditional conventional mortgages and get a lot of the benefits of owning it by living in it, like property tax deduction and mortgage interest deduction and those things.

Yeah. So there's always like what I'd say the four pillars of building wealth and real estate, right? So there's going to be appreciation. So over the long term, you know, if you look at the Case-Shiller Index, which looks at real estate prices over the past, I think almost a hundred years, it's appreciated on average 3% a year.

There'll be dips, pullbacks, recessions, but you'll, you'll have that consistent appreciation over the longterm. You've got your debt pay down. So you've got a loan and you'll be generating income from some part of the property. You get your tax benefits as well from your deduction. And then, you know, you start to build some experience as a landlord as well.

And with that comes some potential cashflow where if you're getting monthly cashflow as well, on top of all the sort of maintenance and debt required to pay for the property. So clearly you've put a lot of frameworks around this. I mentioned earlier that, you know, you have a whole podcast about this.

How did you get started in house hacking and make this kind of your brand and passion? Yeah. So it was really by accident. So I'm 20 years old at this time, back in 2002. So starting to age myself just a little bit, but I was actually in the mortgage industry.

I was doing really well. I started at 19, started doing sales. I think that year I was making a little over a hundred grand. I was getting ready to go rent a place with my buddy. And we were looking at places and it's like two bedrooms, decent places, you know, a thousand bucks a month.

And then I was like, wait, a thousand dollars a month, I'm helping people go through loan applications and they're buying places and their payments were, you know, with taxes and insurance, eight, 900 bucks a month. I was like, this doesn't make sense. Like I'm going to go buy a place and then my buddy can rent a room from me.

And that's how it sort of all started where I started with house hacking and then started growing a real estate portfolio and then got away from house hacking. But then when me and my wife got really serious and started building our life together, we went back to house hacking.

You know, she had never owned a property. We had just moved to New Orleans. And I said, you know, we really love to travel. We're paying at that time, I think we're paying like $1,500 a month of rent. And I was like, you know, that's 20 grand a year.

Why don't we do a house hack? We each put in some money and find a really cool property that lets us live for free. And then that 20 grand that we're saving, we can use for travel. And that just sold her on it. We ended up having this really cool property in New Orleans.

We converted it from this whole corner store to three high-end apartments with a ADU out back. We lived in this two bedroom, one bathroom. And folks, let me tell you this. My wife wasn't going to live in a dump by any means. I mean, we had like this 60 gallon soaker tub with the jacuzzi jets.

She had that clay fire house, farm sink thing that she really wanted. You know, 11 foot ceilings, hardwood floors. And it was perfect for us at two bedrooms and one bathroom and saving 20 grand a year. And that property also gave us an extra eight to 10 grand a year in profit on top of paying all the expenses for the property because we had so many units in it.

So it worked out phenomenal for us. And that convinced her to do my fourth house hack, which we went from that two bedroom, one bathroom to now, you know, we're going to be in a three bedroom, three bathroom on our side. So, you know, that, that was sort of how I started, went on a little bit of a tangent.

We got away from a different point of life and then we started to get back to it just to say like, "Hey, you know, she had her finances. I had mine. Let's start building our financial life together." And house hacking is a great way to do it. And again, you know, we didn't need a fancy car.

We'd rather just go travel and put our money towards that. Yeah, it's funny. So I didn't know house hacking was a thing until I similarly found out that, "Oh, I guess I was doing it." So our story is a little similar. We were looking for a place in San Francisco.

And one of the reasons I often tell people not to buy a home is that, you know, the cost of buying and selling a home, there's real estate commissions and closing costs and everything. And so the kind of general rule of thumb is if you're not going to be somewhere for five years, you probably won't recoup all those costs.

And when you're young, you know, you think, "Well, I need a place that I'll be able to live in for five years." So you're kind of incentivized to buy the place that you think you would need five years from now, which might not be a one-bedroom. It might be a two-bedroom or a three-bedroom.

And I've always said, you know, you don't want to prepay for all that space. So if in four years you need a three-bedroom place, but right now you don't, if you buy, you're going to end up paying for three bedrooms for a few years that you don't need it.

And so when you compare it to renting, it should be fair to compare it to, "Well, for two years, I'll rent a one-bedroom. And then two years, I'll rent a two-bedroom. And then I'll switch." And so I often think until you're at a place where the kind of house you're renting is the same kind of size and style of what you'd need five years from now, that's a challenge.

And, but we're still looking, we're still, you know, taking, touring some open houses. And this was probably around 2010, 2011. And we saw this house and it was three bedrooms, but on the ground floor, it was kind of a San Francisco style, walk up, enter on the second floor.

But the ground floor had its own entrance. And we thought, "Oh my gosh. Well, one day we might want three bedrooms, but we can't afford a home that has three bedrooms now. But if we bought one and then immediately started renting it out, we could use that rental income to offset the cost of buying a house that was bigger than we needed.

And then at some point in the future, if we want a third bedroom, instead of selling a two-bedroom house and buying a three-bedroom house, we just stop renting out our, as you call it, income suite. And I think something that maybe people don't realize, and this is maybe much more true in, you know, urban areas with lots of places to eat nearby, but you don't need a full kitchen suite to have an income suite.

We turned a bedroom with its own en suite bathroom into a rental and rented it for almost seven, eight years. And there wasn't a kitchen in there. And people knew that. Some people worked at Google and got their meals paid for. Some people just went out to a coffee shop and some people use a microwave, a hot plate and a mini fridge, but we were able to just turn a regular bedroom with its own entrance into a rental unit.

And that effectively covered our mortgage payment for almost seven years. That's awesome. It seems like with every business, you get to a certain size and the cracks start to emerge. Things that you used to do in a day are taking a week and you have too many manual processes and there's no one source of truth.

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So check them out today at allthehacks.com/peak, P-I-Q-U-E. You know, I think you mentioned a good point. Like people don't always need a lot of stuff or need that full kitchen. You know, the way I always looked at it is there's three types of tenants. You've got your short-term tenant, you know, folks that are going to stay less than 30 days.

When people hear short-term tenants or short-term rentals, they think of like Airbnb, VRBO. So a lot of times if you've got that income space that could become an income suite and it doesn't have a full kitchen or really any kitchen, I mean, you can throw in a microwave and like a kettle for some coffee or French press or a Keurig or something like that.

Those folks, most of the time they're in a city, they want to go out and eat. And then, you know, the next step up is a midterm tenant. You know, those are folks that usually stay 30 days to six months. These are, you know, traveling corporate executives, they need a furnished place.

They don't want to be in a hotel for three months or your traveling nurse. You know, we've rented to a lot of traveling nurses. And while the place we had for those midterm tenants had a small little kitchenette, they were eating in the hospital cafeteria every time they were working.

And since they were only there for three months when they weren't working, they were out at the coffee shop, they were out, you know, enjoying dinner at a local hotspot. And then that third tenant base is that long-term tenant that's there for 12 months. But even then, a lot of times the longer-term tenants, they don't need a lot of space.

You know, the grad student or the person like at like a Google that has all those benefits there at work. So there's a lot of options. And if you think through like, "Hey, what's the best type of house hack that fits my need?" And then pair that with, "What's the best type of tenant base that also fits the space and what I like as well?" Yeah, I think it's interesting.

I've always been a bit turned off by rental properties as a thing to own because I wasn't really that excited about being a full-time landlord. But I think I found when I was running this, I guess, income suite, when it's nearby and it's a house you know and understand because it's yours, it's much less work than if you had a property 40 minutes away or even 15 minutes where you've got to drive over and figure out what happens.

And so I actually found it to be a little less work than I thought. But earlier, you said something about net profit. And I think something that maybe I naively didn't think about was anytime you're buying something that you wouldn't otherwise need for the purpose of generating income, you still have to look at it like a business.

And you could think that, "Oh, if I could get this much for rent, it would break even." But you might not realize it's hard to keep a place occupied 100% of the time. And there are maintenance things. Could you walk through all the things that you would be thinking about if you were considering getting a space to rent it out, the different costs, and how to make sure it really will be a good income producer?

Yeah, so I'll start with maybe just an overview of what you'd want to think if it was a true investment property. And then we can sort of tie in how that relates to house hacking. Because I think you should have that same mentality of, "Am I going to buy this property, just a house hack, and then sell it when I'm done?

Or do I want to turn it into a long-term rental?" So the place my wife and I bought in Uptown, New Orleans, our goal was to turn that into a full rental property. So that's still cash flowing and it's great. So first thing I look at is, what could be the gross rent?

You can use a tool like Rent-A-Meter. And there's a lot of other things that will say, "Hey, here's what a one-bedroom should rent for in your city," or a three-bedroom and two-bathroom. And then you want to look at vacancy. So you just Google your city and average vacancy rate, it's going to come up.

But what you want to think about is, even if a tenant moves out on day one, you're going to have to clean it, you're going to have to do some stuff, and you start marketing it, there's very few tenants that want to move in the next day. So you got to figure it's going to be empty for at least a week, if not a month.

So figure out vacancy, plan to have it empty two to four weeks out of a year if a tenant's turning over every year. You want to look at what's called maintenance. So this is little things like, "Hey, the thermostat's not working. I got to call the HVAC guy," or, "The fridge went out," little things like that.

Then you want to look at CapEx, so CapEx is a big capital expenditure. It's like the roof. When's the roof going to go out? So you can say, "Hey, my roof's going to cost 20 grand to replace, and it's due in 10 years. I should be setting aside two grand a year over the next 10 years so I can afford it." And so you can figure out some of the bigger things on your house and then back those out over a period of a year to figure out how much you'd be setting aside.

The rule of thumb for maintenance is to set aside five to 10% of your gross rent. So if you're renting a duplex and you're getting $1,500 for each side, $3,000 a month, you're going to want to set aside about $150 to $250 a month. Some months, you'll never have maintenance.

And then other months, all of a sudden, the fridge goes out, can't be fixed. You got to buy a brand new fridge, a thousand bucks. And then you're just going to want to look at any, what I call miscellaneous stuff, utilities, do I got to do trash, lawn care, shoveling snow, things like that.

A lot of that you can do yourself or you can hire it out if you don't want to. And then the last thing to think about is property management. So do I actually want to manage the tenants? If they're on the other side of the property or they're in my finished basement, maybe I don't mind doing it.

Or, Hey, I want a house that can not deal with anyone. Let me hire a property manager. Property manager is going to take eight to 10% of those gross rents. So if you've got a place that's renting for $1,500, figure a property manager is going to take on average about $150 of that, so you sort of look at those expenses of a rental and then you should do that for a house act, but say, great.

Well, if, if I'm living in one part, what, what should this part rent for? Okay. So I should be thinking about that for setting aside for maintenance. I should be thinking about what the big things are for CapEx, setting those aside. Obviously there's not going to be vacancy on my side.

There will be on the tenants portion. And then you can sort of look at that and say, great. You know, how is that working out compared to what the mortgage is? And then the other thing I think about is housing savings. So, you know, when me and my wife moved to new Orleans, the place we were renting was like $1,500 a month.

So we realized, Hey, we could go into this house hack and we could bring in enough income to cover all the mortgage. And if we rented out the ADU, we'd have an upside, but we looked at it of great. So we're breaking even we're covering the mortgage taxes and insurance, but now all of a sudden, you know, that that's breaking us even, but we're saving $1,500 a month from what we were previously paying.

So there's that savings there. So we said, great. If we are saving 1,500 a month, let's put aside 500 for maintenance and CapEx. And then if our, our outbuilding or ADU guest house, anything we get above that is the gravy money. So, you know, for in that situation, we went from renting paying 20 grand a year to living in the house act, saving 20 grand a year from not paying rent, plus having an extra eight to 10 grand a month on top of that, on top of paying all of that mortgage taxes and insurance.

So that's sort of like a, a long, long way to think about how to look at a house hack and then how to think about analyzing a rental property of all the fees you need to think about that could be in there. Is there any kind of ratio of average rent to average purchase price to get a sense of like, is this a good place to, you know, whether it's a rental property or a house hack to do it?

Yeah. So the, there used to be this old rule of thumb called the 1% rule. And I look at this as just it's back to the napkin rule of thumb. So if you're buying a place for a hundred thousand, it should rent for 1%, a thousand a month in very high cost of living areas that just doesn't work very well.

And again, that's just a rule of thumb. I, I use that as, Hey, a realtor sent me a deal. They think it'll be a good rental property. I can really quickly look and say, you know, does it meet the 1% rule? Is it close to it? If so, then I'll go spend the time of walking through the property.

It's just tough to see if it will actually work in a place like a San Francisco or a New York city. Most of the other parts of the country, it's a nice little rule of thumb to use. But again, it's just that it's just a rule of thumb. Yeah.

That makes sense. And, you know, as much as I enjoyed being a landlord from the income producing side, the, you mentioned a property manager and that was something that I, I never considered, but does that include all the maintenance issues is hiring a property manager going to mean that at midnight, if the sink stops up, I'm not getting the phone call.

Yeah. So a property manager is really going to do three areas, right? It's, we're going to take, take over the property in the sense of here's the rental unit. They're going to market it. They're going to find tenants. They're going to screen tenants, make sure, you know, credit background check, they're going to price the unit.

And then there, when they find a good applicant, they're going to go through signing a lease and they're going to put the tenant in it. So I sort of that first piece of property management does is market and fill the unit. The second piece they do is manage the property ongoing.

So if that tenant calls at two in the morning, says the toilets broke in and backed up or the sink won't stop running, they're going to be calling the property management company, not you. And then the property management company is going to send out a maintenance person. Now their fee won't cover the maintenance costs, that service costs.

So if the plumber sends them a bill for 250, they're going to pass that bill on to you to pay. But they're managing that process, which is pretty nice because a lot of times when stuff seems to go wrong with the property, it goes wrong when you're traveling or you're at work in a meeting and can't get your phone.

So it's, it's great to have the property management take care of that. So they sort of do that ongoing management. And then the third piece that the property management will take care of is what I call the lease renewal or turnover. So, you know, the tenant signed a one-year lease, you know, the lease is getting ready to expire in 45 days.

The property management company is going to reach out to them, ask them to re-sign a lease. They'll go through that re-signing process, update the lease, re-verify any information. Or if they're going to move out, they'll go through the whole move-out process, getting the property cleaned back up and ready to go back into that first phase of remarketing and filling it.

I always say for new folks, you should manage your property for at least the first year, just so you understand the process and then turn it over to a property manager. It'll make you more effective at working with a property manager because you'll understand what, what they're doing. But again, if you're that person that says, look, I'd love the house act.

I just don't ever want to deal with the tenants. There's a lot of folks that will tell the tenants that they're just a renter also, and the property manager takes care of it and they don't know who the owner is. So there's a lot of different ways you can approach it.

But property management is a great, great way to go. If you want to be hands-off as possible. That's amazing. I love the idea of not, not telling the other person that you're the owner. So you can kind of be, "Oh, that terrible owner. You know, this thing's always clogging up." I want to jump back to a couple of the types of house hacking.

And one in particular is ADUs. And if I run through them again, it's kind of obvious, you know, room rental, renting, having roommates makes sense, buying a duplex, turning something in the house, whether it's a basement, an attic, or an extra bedroom that has an entrance into an income suite.

But ADUs are interesting because I don't know a lot about them. Is this something where it's easy to just build one on your property? Do you need permits? So the thing I love about an ADU is right now the multifamily market is so hot. Like if you try to find a duplex or a triplex, they go really quick because so many people want to be in real estate.

But if you look at properties that have that detached building, you're just going to be competing with the average home buyer. And then a lot of folks nowadays, when you've got homes, they like the garage actually attached to the building. So it's a really easy way to find a property to house hack.

You specifically look for those detached buildings. And then what you can do is if the building's existing, it's pretty easy to get it converted. You do need to get some permits if you got to run new electrical and plumbing to it. You know, luckily with like the ADU, we had plumbing and electrical lines were already ran out there and we were able to keep a one-car garage and then convert it into this two-story loft.

So it just sort of depends on that side. If it's an existing building, it's a lot easier. Now, if you have the space to build a building, that's going to be a little bit more challenging. So one of the things down in LA that they did is there's obviously a housing problem.

So one of the ways to solve a housing problem is you allow more density in housing. So they actually passed laws to let people start to build ADUs because they said, "Hey, this is an easy way to add more rental units. Let someone build an accessory dwelling unit." So you can actually go through the process of having plans drawn up, building a brand new building and making that guest house, outside building rental.

And it's a pretty cool process because you can customize it. I'll send you for your show notes. We actually interviewed a designer and builder that builds ADUs. That's all he specializes in. And he has some really, really cool knowledge about how to build a smaller space, make it really more effective.

And he works specifically in California, but it was a phenomenal episode. And he talks about going through the zoning and building permitting process. But it's one of those phenomenal things that you can do where you can build an ADU. And while maybe you live in the ADU and you rent the big house when you're young and you're single, or maybe you're just a young couple, and then once you start a family, move into the bigger building and now rent the ADU, you can rent the ADU on Airbnb, you can rent it to travel nurses, you can do a long-term tenant.

And then as your life changes and you've got that teenager and you don't want them in the house because they're moody and they hate mom and dad, put them out in that ADU, right? And now the ADU can just be this really cool way of how you can live in that property.

And over a 10 or 15 year period, that property can transition with you through life by starting the smaller unit and renting the bigger unit and then switching. And then it's just a cool way to have it work with you through life. It sounds like a great idea if you have the space.

How much ballpark does it cost to build an ADU on your land? I think $40,000 to $75,000, just depending where you're at in the country, any permitting fees that are out there and how big you want to make it. Obviously, if you're trying to make a three-bedroom ADU completely from scratch, they got to pour a foundation.

Our ADU, because it was this old existing barn building, the frame was there, it had a roof on it. We had to replace the roof, the windows were good, we had to do new siding. But we probably spent $25,000 on our ADU. And right now we have travel nurses in it at $1,000 a month.

So if you're looking at just a basic ROI, even if we spent $40,000 on it, that's bringing in $12,000 a year, simple ROI, you're making a really good return there. And I assume when you turn around, if you ever sell that property, the value of that property goes up as well.

It's not just extra income, but the whole value goes up. Yep. Now, an ADU isn't valued the exact same way as the main building, but because it's a heated and cooled condition space, it does drastically increase the value of the property. Can the cost that you need to build an ADU, can you add that to your mortgage?

Is there a way to build it if you don't have the $40,000, $70,000 in cash? Yeah. So a lot of people, they'll get a first mortgage and then they'll say, "Hey, great, we're buying this property. There's like a garage building on there. We know we want to convert it or there's space and our city and county will let us build it." So they'll either use savings or if they've got, say they've been living in the property, like, "Hey, we can actually do this." A lot of folks will use an equity line.

So they'll get that second mortgage equity line on their property and they'll get that equity line for $50,000 and use that to pay for that building. And then once the building's done, the value of the property is increased. They refinance and pay off that equity line or second mortgage.

And now they've just got the one flat rate, low payment mortgage. And then you've got that higher appraise value to do that. Yeah. One thing we didn't talk about much, when you said the straight cost, right? You just get $1,000 a month, that's $12,000 a year. How do taxes play into house hacking?

And I know neither of us are CPAs, but we'd love your... Good disclaimer. Yeah. So you're definitely going to want to work with an accountant. A good accountant is going to save you more money than they cost. So one of the things, when you look at a property to house hack, when you're living in it, let's just say, I'll use that, our property we had in Uptown, three units in the main building, and then we had an ADU.

We were living in roughly 25% of the building. So what our accountant did is say, great, the other 75% of the property is rental, is considered rental property. That was generating X amount in gross rent. We could back out 75% of our mortgage, 75% of our taxes, 75% of the utility bills for the property.

We paid all the exterior lights, any maintenance costs were deducted from those gross rents that we are collected. And then what was left, we had depreciation. And this is one of the big wealth builders for depreciation is, I'll try to oversimplify this, depreciation, the IRS says, let's take the value of the property, divide it by 27 and a half years.

And that gives you a depreciated value where the value of the property should be less each year. So with our Uptown property, we had about 16 to 18 thousand dollars in depreciation a year. And that was essentially wiping out all of our gain. And I'm doing air quotes for folks that are only listening.

So we ended up paying zero taxes on all that extra income we had after paying all of the expenses. And that's why so many millionaires and multi-millionaires own real estate is because it's such an incredibly wealth building tool. You've got that tax benefit, you've got the appreciation, the tenants are paying down the mortgage, which is essentially like a forced savings account for you.

And then you're getting the cash flow as well. So it's a beautiful, beautiful way to build wealth. Yeah. I mean, the one thing you just said, the forced savings vehicle, I think, is a really important point to hit on, because when we were in San Francisco, we had an apartment and the rent was covering the mortgage payment.

And I often had people say, well, what about the property tax? I said, OK, well, it didn't cover all of that, but the mortgage payment was paying down the house. And so, you know, I was thinking, OK, well, I'm actually able when we sell the house to recoup a lot of the equity value I've put in.

So, you know, if you're looking at these costs, in some ways you could say, as long as the amount I'm making covers all of my expenses, the property tax, the maintenance, and it doesn't actually have to cover your whole mortgage, even if it just covers the interest portion of the mortgage.

That's all of your outlay, because the way I like to think about it is every dollar you put towards the principle of your home, that's a dollar you get back later in life. Obviously, it's possible that home value doesn't go up. But in general, like you said, in the long run, all your principle payments are coming back to you when you sell the house.

So you don't have to cover the whole mortgage for this to still be a good deal. Well, just since we've been talking about our property in uptown, the tenants are paying down the mortgage, which is putting about $10,000 to $11,000 here in 2021, paying down on the principle. You know, that's $11,000 that our net worth is increasing on top of the cash flow, on top of the appreciation.

And, you know, I love real estate for so many reasons, but let's say the property never appreciates. Let's just say it always stays flat. You're still going to have equity growth because of that principle pay down. So if the property stays flat, you win. If the property value goes up, you win.

If the property value goes down and only stays down, you lose. But most likely what's going to happen if you're looking at a longer hold period, it'll go down and then it'll go back up. So there's just so many ways to benefit from real estate investing. And, you know, house hacking is this great tool to get your foot in the door to do broader real estate investing.

But if you never want to be a real estate investor, just use house hacking as an amazing life hack, right? Use it for three, four or five years to get ahead financially, to pay down your student loans, to pay down the credit cards that you ran up. Maybe you're just having your first child and say, hey, you know, we can live in a small two bedroom for, you know, four or five years.

Use that savings to max out a bunch of money into a 529 plan for your child and then stop putting money in. And, you know, when they're ready for college, there'll be plenty of money in there for them. It's a really amazing hack that you can use. As long as you want, or as short as you want.

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Over the years, it sounds like you've bought and sold quite a few properties. Yeah. You know, I know not everyone here is thinking about house hacking, but, you know, many people are thinking about buying homes or selling homes. Are there hacks or tips or tricks you'd give people, whether it's for a house hack, a rental property, or a primary residence when you're looking for a house or selling a house to keep in mind that not everyone knows about?

Yeah, so on the buying side, I would say look for the problems. Look for the ugly houses. If you can find the ugliest house in the best neighborhood, you can go in and spend time to fix it up. You know, if you put in a little bit of TLC, a little bit of love, you can end up with a great deal and then you can really customize the house.

I love when I see pictures online of houses and they've got the pink tubs and the pink tiles that are from the 70s because to me that says, "Hey, this is awesome. I can customize that bathroom and bring it up to date." And that's really going to increase the value where the average homeowner might walk through and be like, "Oh my goodness, this is a horrible bathroom.

I would never live here." And they go out. I love smelly houses as well because the average person doesn't want to deal with the smelly house. Me, I think a smelly house, I'm like, "This is awesome." You know, I get a smile on my face when the realtor is like, "It's gross." Because you rip out all the carpet, you wash everything down with this cleaner called TSP, you run a no-zone machine and that kills the smell.

And then you do a kill paint sealer on everything and then you put it back together. So I look for the things that the average homeowner doesn't want to deal with. I also like when I go look on like realtor.com or Redfin, I do the reverse search. So usually I say, "Hey, this property just came on two hours ago." Everyone's looking at that one.

I say, "Show me the property that's been on the longest," because that person is probably willing to negotiate and willing to cut their price. And then the other thing when you're buying a property, it's sometimes hard to do in a really hot market, but ask the seller to pay a portion of the closing cost.

They can give you a seller credit or a seller concession, and that can just reduce your cash to closing. So even if you've got 20, 30, 50 grand saved up, closing costs can easily run you depending on where you're at in the country, eight to 10 grand. So if you can get the seller to pay part of that, look at that as a lever.

So maybe they, for whatever reason, they have to have a five, they've got to sell their house for 500,000. So say, "Great, I'll give you that 500,000, but can you give me $7,000 in closing costs credit?" And a lot of times folks will say yes to that, but they won't say yes to a $493,000 sales price.

So look at the different levers that you can pull and a good realtor can help you with those. Yeah. For the house we just purchased last year, there were a handful of things that were just part of the staging. And we were like, "We just really like this TV.

It's already mounted to the wall. It's exactly where we'd want it." We really liked these lime trees that were all around the yard that weren't part of the yard because they were staged plants. And we're like, "We'll do this deal, but can you just throw in a long list of things?" And especially these things that have prices that are kind of unknown, but relative to the cost of the house, everyone knows they're pretty small.

The sellers were willing to flex, but they were not willing to flex on the price. So I love this idea of just finding all the ways that you can kind of get something out of the deal that aren't the price. Yep. Because yeah, so many people, they mentally get stuck on this idea of like, "I need this certain price because they'll feel good about it." And maybe the lime trees were only $200 a lime tree or maybe they were $1,000 a lime tree, but to them it's like, "Oh, it's a little lime tree in a pot.

Great. Like I'm getting my number." So yeah, flex on that. So those are a couple of things on the buy side. If you're getting ready to sell a property, deep clean your property and then bring someone in to help stage it or declutter it. I'm really big on, I know what I'm good at and it's worth spending money on experts.

You know, one of my early real estate mentors, he goes, "Andrew, if you ever get in financial trouble with tenants over leases or potential lawsuits or negotiation issues, figure out the best lawyer you think you can hire and then go hire someone better. It'll pay off." And I'm that same way.

If I'm going to sell a property, I'm not going to try to skimp. You know, I don't want the realtor that's going to cut a quarter percent off or a half percent off and then miss out on the realtor that's the rockstar that has the giant team, has the giant network.

I feel like I'm okay with design. My wife is even better. But even with that, you know, this is stuff that we're emotionally attached to. I want someone else to come in and say like, "Hey, you need to declutter this stuff. You need to remove that. It's to your taste.

It's not common enough or generic enough that it's going to appeal to everyone." So I always say like, bring cleaners in to do a deep clean and then bring someone in to help declutter. And even if you're keeping your stuff in there while it's being sold, have someone help stage it and rearrange it.

You know, maybe you've got the living room laid out where it's perfect for you all for sitting at the TV and it's comfortable and you've got all the extra pillows on it and, you know, throw rugs and all sorts of weird stuff. But for the person coming in, the layout might seem a little funkier or might not flow with stuff or might not make the house present as well.

So to me, that curb appeal and that presentation on the inside really do go a long way. Yeah, we paid a premium for good staging when we sold our San Francisco apartment and I regretted it for like the first week and then the house sold in a week and I did not regret it.

And I think it's tough because, like you said, your style isn't always the style that sells. And when you hire someone that's been doing this a lot, they know the style that sells. And they designed the house in a way that I was like, "I wouldn't want to live here." But, you know, it's what everyone wanted.

So I really like that advice. The only thing I'll add, my brother-in-law gave me this advice, is when you're buying, whether it's through the real estate agent or if you can somehow get in touch with the sellers, if you can find out what the priority is, some people want to sell fast, some people want the highest number.

There's always one lever. And if you identify that someone wants to get the highest offer, well, then you don't necessarily need to worry as much about how quickly you can close and maybe you could put in some contingencies, maybe not in today's market. But if you find out that someone just cares about closing as fast as possible, then you can put in a time to close.

And the advice that he gave me, which I will caveat this with, it's certainly a risky move, was you can always... It's easier to extend an offer that's been accepted than it is to ask for longer time up front. So he said, "We guarantee a 15-day close." And I asked him, "How long did the bank say they could close?" And he's like, "Oh, they said 21." But I figured that once we're 15 days in, if I need seven more days, they'd rather give it to me than start the whole process over again and look for another person.

It's like, "Well, we're already almost all the way through with them, so let's give them a little bit more." So you mentioned hiring the best lawyer you can and then upgrading that if you have financial trouble with tenants. I'll just ask, you've had a lot of tenants. Have you had any fun stories or terrible things or interesting tales?

So my original investing career was very focused on affordable housing and what I would call like student housing, college housing by universities back in North Carolina. The affordable housing, I did a lot of aid work overseas, worked in places like Indonesia, Philippines, Kenya, Haiti. So this idea of community development in very challenging places, coming back to where I lived, I was like, "Oh, this is nothing." So I did a lot of affordable housing and I wouldn't recommend affordable housing for anyone that's new, but it was a great way to get started.

I mean, I had a property where I was under contract on it and the SWAT team raided the apartment. So I think that would probably freak out most people. What happened to me was I'm getting a better discount. You know, so I mean, literally they came in, they knocked the doors off one of the rental units.

This was a fourplex that I was buying and folks in the top unit were selling some drugs. I knew it was a bad area. I was planning on clearing out the unit. But to me, that was automatically like, "This is a problem and a challenge. There's upside for me." So I went back to the owner and I said, "Look, hey, this building," you know, I pretended to be nervous and scared and, "Oh my goodness, this is so horrible.

I didn't know this was going on." And we negotiated the price down lower. But from my standpoint, it was like, "Well, I was going to put new doors on all the units. I wanted to get rid of that tenant anyways." So that just sort of solved that problem. And I could use that as a negotiating tool.

And then also in that affordable housing, I unfortunately had to do a lot of evictions. I think I probably did 20, 25 evictions. I did them all myself except for one where the tenant appealed and then we had to go to a higher level court. And at that level, I brought in a lawyer.

But the reason I won all of them was because I used leases. So even if you're going to house hack and you're bringing in a friend to live in a room, get a lease and make sure to follow everything in that lease. So I had great leases. And if a tenant was late, I would deliver the notice.

And if they still hadn't paid, then we'd file in court and they'd come to court and they'd complain and say, "Oh, you know, this and that," or "He's a bad guy." And the judge will say, "Well, he brought you to court for not paying." And he delivered the notice.

And here's proof that I delivered the notice. "Okay, why didn't you pay? Okay, great. Well, he wins." So if you have good leases, if something does come up in a worst case scenario, having all that stuff in writing is super valuable to have. It's easy when you're house hacking and it feels a little less professional than running a rental property to kind of let things get a little casual.

I remember we had a friend of a friend looking for a place and we didn't take a security deposit because we were like, "Oh, it's just a friend." And then one day before they were supposed to move in, they backed out and we couldn't find a tenant on a day's notice.

So we had about a month's worth of rent that ended up getting lost. And it was just a learning moment for me. So my takeaway now is find a place that's smelly, that has a pink bathtub, and ideally that the SWAT team has recently raided. Yes, yes, yes. If you find those three, that's the trifecta.

You're going to get a great deal on the property. That's amazing. So right now, it's definitely a hot real estate market across the country. Does that make house hacking more appealing, less appealing? Any tips to take advantage of it? Yeah. So I'd say it can be both. Rents have gone up across the country.

Obviously, there was in some areas last year due to COVID, where rental prices went down in major cities. But if you look at it, it's rebounding all across the country. If you're paying 30% or 40% of your income towards rent and you're not getting ahead financially, if you're making $20,000 a month and you're spending $8,000 on your housing and you've got $5,000 left over to put towards investments, cool, you're probably in a good spot.

But for most folks, housing's taking up so much, it's not letting them pay down debt or put money away for investment. So to me, I'd say yes, you should really look at house hacking. And then in any market, there's going to be assets that are overvalued and there's going to be assets that are undervalued.

And that's the same thing in real estate. You just got to go out and look at that property, that asset that's being undervalued for whatever reason, and then use that as a good property to house hack. So you get a lot of upside while reducing your housing costs. So even if there is a housing correction in the next two years and housing drops 10 or 15%, or say even 20%, but if you bought that property that was undervalued by 10 or 15%, and then you're able to go in and buy it and do some work to then increase it 10 or 15%.

So even if there is that drop in two years, you're still going to be coming out pretty even if you can hold it for another year or two. And one other tip maybe I'll throw in here is in a hot market, if you think a property is good, and there's multiple offers, you can do something called an escalation clause, where basically says, here's my offer.

If someone else comes in higher, you actually have to show me that offer. But my offer will automatically beat that offer by $1,000 or $2,000 or 5,000. And basically your offer will automatically escalate up into a cap. So maybe you want to buy this property for 300 grand. You'll say, great, here's what my offer is.

I know the property still works up to $310,000. So I'm going to add in an escalation clause for $2,500 will automatically go up in a $2,500 increment above any other offer at that cap. So that's a great way to get a property. You just got to be careful because some people will get emotional about a property and then overpay.

But if you can find that undervalued asset, it's a great way to get into real estate, whether you're going to house hack or not. But I definitely think house hacking works in any market. And right now with housing so expensive and rent so expensive, it's a good tool to get ahead financially.

Absolutely. I think most people aren't out there looking to house hack. So I know when we looked at places, having an ADU, having an income suite, especially when they're not labeled as such. When we were in San Francisco, it was a third bedroom with a second entrance. It wasn't marketed as an income suite.

So being able to spot that, it wasn't charging a premium over other three bedrooms. So keep in mind as you're walking through a place, could we convert this to a rental? Could we make this an in-law unit? Could we build an ADU here? And you might be able to get yourself a really good deal.

Well, I mean, the way most places with basements are marketed, it's like, "Oh, basement for kids or for the man cave." And someone's paying extra for that space when they might not need it. Where for us, we don't mind paying a little extra for that space because it can become a rental unit.

So yeah, you just got to be open and creative and look for those hidden gems for properties. Awesome. This has been so fantastic. There will be a lot of links in the show notes that you guys have a guide about house hacking, your podcast, a couple of the episodes you mentioned.

Where can people find you and all this information online? Yeah, my website is Fibirei.com. F-I-B-I-R-E-I.com. And the podcast is really easy. The House Hacking Podcast. Easy to find. Like you said, we'll share some of those stuff for you to put in the links. And then for all your listeners, if they're wondering like, "Hey, maybe I should get into real estate or not," we actually have a guide.

We'll give away for free to all your listeners. I'll make a pretty link, short link. Fibirei.com/allthehacks. It goes through the nine biggest mistakes that real estate investors make. That's fantastic. Thank you for sharing that. And thank you for coming on the show. Yeah. Thanks again for having me on.

That was amazing. Thank you so much for listening. My wife and I have saved thousands of dollars through house hacking. So I hope this inspires some of you to do the same. You can find links to everything we talked about, including the guide Andrew referenced in the show notes.

I also recorded an episode with Andrew on his House Hacking Podcast. So if you want to hear more about my experience with house hacking, you can check that out too. Finally, as always, I love hearing from you all and trying to help you optimize your lives. So if you have questions or want help, please email me at chris@allthehacks.com or I'm @hutchins on Twitter.

See you next week. I want to tell you about another podcast I love that goes deep on all things money. That means everything from money hacks to wealth building to early retirement. It's called the Personal Finance Podcast and it's much more about building generational wealth and spending your money on the things you value than it is about clipping coupons to save a dollar.

It's hosted by my good friend, Andrew, who truly believes that everyone in this world can build wealth and his passion and excitement are what make this show so entertaining. I know because I was a guest on the show in December 2022, but recently I listened to an episode where Andrew shared 16 money stats that will blow your mind.

And it was so crazy to learn things like 35% of millennials are not participating in their employer's retirement plan. And that's just one of the many fascinating stats he shared. The Personal Finance Podcast has something for everyone. It's filled with so many tips and tactics and hacks to help you get better with your money and grow your wealth.

So I highly recommend you check it out. Just search for the Personal Finance Podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts and enjoy.