BEFORE YOU HOUSE HACK: A Warning From An Experienced Multifamily Investor

Hello YouTube, it's Christian. I am back with Brandon for Multifamily 101. This week is gonna be fun because Brandon is wrong. I'm kidding, but there's a few different ways to get into real estate, and there's a debate on house hacking. Is it a good strategy? Is it a bad strategy? Or should you just start buying bigger buildings? This is actually something we think a little differently on. I have done the house hack thing. A lot of Brandon's clients have done it. Brandon, have you actually ever house hacked yourself?

I was house hacking before house hacking was a term Christian.

Dude, that's awesome.

My buddy Casey and I, who will appreciate the shout out, we bought a townhome in the Valley part of Los Angeles with the intent— we specifically knew exactly the layout we wanted, 2-bedroom, 2-bath, because it's going to make a good rental, townhome style. And we bought it, we lived there, and he paid half the rent and I paid half the rent. So we both felt like we had a roommate subsidizing our mortgage, and the intent was we would move out and then rent that thing. Life events happened. I got married. He stayed there, you know, but it was a house hack before things were popular like that.

Oh, that's awesome. I actually started with a condo, actually just down the street from where we're recording. 2-bed, 2-bath. Had a roommate. This is when I was engaged, so I had a roommate for about 9 months, and then we got married and we decided to keep the roommate for a while, and then he got really mopey and wasn't fun anymore. It was so fun for a while. We'd actually do like, we had certain Netflix series that we just loved, so we'd come in and watch Walking Dead together. It was awesome. But then he decided the fun came out of it. And then I got a dog, and with a dog it's easier to buy a yard. So I had to buy a whole house for my Frenchie.

So there are pros and cons.

There are pros and cons. It actually was very financially helpful. I get about— it was about 3/4 of the mortgage was covered by having a roommate. So it was almost free living in a single-unit building. It's not like we did a duplex or fourplex, which is something we should talk about. If you're getting into house hacking, you're looking for the best way to do this, Brandon. Granted, I'm gonna give my opinions on house hacking in just a minute here, but if you're going to do this, what buildings are we looking for? What works, what doesn't? What are your thoughts on how to do this?

Yeah, so speaking for my clients who are weighing versus buying a huge house for their first investment and living there with no tenants to help subsidize the rent, or trying to get a duplex, triplex, fourplex opportunity, I get on my soapbox, I try and say, hey, these are things to consider. The more doors you have, the better for vacancy. Being a landlord from day one versus buying a house that, you know, is— if you've ever read Rich Dad Poor Dad— is a liability, right? It's not putting cash in your pocket or help you building equity too much with like a duplex where you have tenants subsidizing that mortgage. Uh, the downside is, can be, if you buy a house and you house hack, then buy room or whatever, right? Getting rid of those roommates can be difficult, or having roommates that have pets, like you say, are causing problems or whatever. But I think it's still a very good first step for people to become a landlord in terms of, you know, versus trying to scale big from day one like you would encourage.

Yeah, well, even if you're, even if you're trying to subsidize your, your housing, I actually like the model that I came up with better. And this is just, this is what I did when I was starting. This is still buying small multifamily. I bought my house, and then very shortly after I bought a duplex, low down. And the plan was to house hack that. That was actually the original plan. What I ended up doing was I almost immediately after close, I completely switched jobs to a new area. I let the bank know, hey, we just closed this. My whole situation's changed. They were fine with me just keeping that loan in place as they tend to be. I am not an advocate for just saying you're going to do something and not doing it. I got permission to keep the loan, but I bought my first property, investment property, 5% down. The next thing that I did is I bought another duplex in another market across the street from Cody, and it was 101% financed, hard money. So I spent 5% down for one building, bought about $750,000 $100,000 of duplexes, and it was like $30,000 out of pocket. Those 2 duplexes paid for my house. I don't share any walls with anyone. I have a yard for my Frenchie. I have my space, get to watch Walking Dead by myself or with my wife. But I didn't have to do the house hacking thing. I spent about the same amount of money that most people would spend on a house hack, maybe a little bit more because I had 5% down on my house and 5% on a duplex. But I mean, you're talking relatively small numbers to the same goal of my real estate bought my real estate. Yeah, just the thought.

Thank goodness we all don't want the same thing, right? It's already competitive enough in every space.

True.

And there are different ways that people can skin the cat, so, so to speak. But I think looking back on myself, you know, I tried to get my wife to do a house hack after that first townhome. She wouldn't have anything to do with it. I wanted to buy a fourplex. Yeah. And she did not want to be next door to neighbors. And that was a challenge I had, you know. And the other thing is, looking back, is I probably should have just gone bigger going home, like you say, you know, go straight into trying to buy as many units, whether it's commercial or residential. Again, weighing pros and cons though, commercial, looking these days, people are, you know, used a lot of bridge debt the last 3 years, they're going to get stuck. Stuck maybe with their pants down as they try to refi here. Rates are now double what they were just earlier this year, um, versus residential is a little more security. If you, if you only buy a 4-plex versus that 5-plex, you're locked in for 30 years. You know what that debt is going to be for 30 years. True, right?

So I do love the debt products for residential. Uh, that being said, you can negotiate whatever you want. I'm going to use, uh, Cody's first deal as a perfect example. Cody went out and bought a 12-plex, and he did it Hard money with seller financing. The seller financing is 30 years, just like a bank debt. 30 years fully amortized debt. You can do that $0 down. That deal cash flowed over $1,000 a month. Cody's rent was $1,000 a month. He effectively house hacked, but he has a 12-unit asset that's appreciating at a much faster rate, and he didn't have to share any walls. Now granted, he had roommates where he lived, but that's his own choice. He could have rented a space where he was at that point in time 3 years ago. He could have found a place to rent for $1,000, had completely free cost of living just from the one building.

And I will touch on just one more downside to what— on the residential side, yeah, both sides again. Yeah, the downside is you are stuck with comps, right? So if the market does go down on a, on the duplex, you are, you are a victim of the comps in that neighborhood of what they're selling for now these days, even though you may have been improve the property, increase the rents on your commercial properties, right? You can force that appreciation up.

Whoop whoop.

And get that—

because that's a short—

because you are more in control of that valuation. Yeah, right. Now, so cap rates kind of dictate what the pulse of the market is, but that doesn't necessarily dictate— because a 10-unit down the street sold for that price doesn't mean your 10-unit is going to be valued at that. If you're— if your NOI is 50% higher than that one.

Exactly.

So there's, there's the benefit too.

And that's where I really like buying bigger beyond just buying duplexes. You have more control over your values on commercial assets. Is the debt window a little bit shorter typically? Yes, you're probably, probably looking at a 10-year balloon if you do these. That seems to be the standard for, for a lot of our stuff. But if you have 10 years Guarantee you're gonna have up and downs in the market cycle there, and throughout that cycle you have direct impact on the value of your building beyond whatever your neighbors are doing. You can actually control, hey, my building just brings in more money more consistently. Your ability to get a loan is far more negotiable on commercial debt. You can get a lot more creative working with the bank than you can trying to fit into the Fannie Freddie box, which is a very, very specific checkbox of what you can and cannot do. The one other thing that I really don't like, and this is the main thing for me that I don't like about house hacking, is people get married to that strategy like they do to the BRRRR strategy. And what ends up happening is I meet investors who've been playing the game for 5, 10 years and they have 3 or 4 duplexes. While that's awesome, what I mean, what Cody and I did, I mean, we built over a 100-unit portfolio in a year. Financially, if we just pay that off, we're done forever. In fact, there's enough cash flow there where I could be done forever. I'm just still having too much fun. But the model of going bigger— and this is something Grant Cardone really pushes, and whether you like him or not, I really do agree— the 38-plex is enough to retire me and Cody a couple times over, and it's one deal. And it was our first deal we did together. Like, you can do that as a rookie. Find that one deal, knock it all the way out of the park. And you're done. You can't do that with a duplex. I've never seen someone buy a duplex and be like, dude, I'm out of the rat race, I've left. You can't do that with a condo.

It's tough, very tough.

Yeah, agreed. You will accelerate your goals if you do a bigger deal. You need to have the confidence to do it. You need to do the right math because a big deal can bury you. But if you're going to go broke, do it on a 50-unit building, not a duplex, because both of them can kill you financially just the same way if you do a bad deal. You lose a duplex, you can go bankrupt.

And I would also encourage people not to get high on unit count as a goal, as a metric for your goals, right? Because I don't care if I get to $30,000 a month in passive income, I don't really care if that's from 30 units or 300 units, right? It doesn't really matter to me. So focus on your passive income goals more than unit count, and I think you'll be surprised how much quicker you can get there.

No, that is the main goal. You're completely correct. I'll give one contrarian view to that. When your goal is market control, unit count actually really does help. In a market like Moses, where Cody and I have 100 units, it's actually a little less than a 6-cap market right now, but when I was buying there, it was a 6-cap market. Well, you raise rent $100 on 100 units, your net worth just increases $2 million. We raise rent by $200, just $4 million of new money just And that's what you're able to pull out of. When we're doing our refinances, like, I took some 4% debt to a little over 6%. Cost of debt went up 50-plus percent. That's ridiculous. However, we pulled out hundreds of thousands of dollars from our one year of work on one deal. We did a lot of deals. If you really want to play the game at the highest level, that is something to consider for your unit count, is how much unit count do I need in an area to actually have an influence on rents? However, if you're just getting started, because this is Multifamily 101, just buy the biggest deal that you can wrap your head around. If you are way too scared to buy a 50-unit deal, it's probably not the deal for you right now. But if you find that a 12-plex is something that pushes you a little out of your comfort zone, I would do that over trying to house hack a duplex. That's my opinion.

Especially if you're younger. You have time to recover from mistakes versus someone that's maybe in their late 50s, right? Somebody that's in their mid-20s, You've got a lot of time to recover from really a bad decision in real estate, but— and that's okay. I mean, you're gonna learn a ton anyway just by taking the action. But, um, yeah, so some good tips. We can still disagree and still be— still be buddies.

Darn it, the algorithm will now hate us. We agreed too much. But seriously, there, there are multiple ways to invest. The most important piece, no matter what your strategy is, whether it's BRRRR, house hacking, buying big I mean, even if your target is unit count, which I agree is the wrong metric, go out and buy real estate. If you do that, you're going to be farther than you are today. Absolutely promise you. Buy it, hold it, never lose it. Like, subscribe. We will see you guys next week for Multifamily 101.