What’s up folks, we’re gonna be talking a little bit about house hacking. Now house hacking might be for the younger guys, in my opinion. Great way to get started when you’re low on capital. Most of you guys out there have spouses. That’ll probably kill you if you even consider having somebody else live in the house with you guys.
Maybe not the best idea for people who want to stay married or above the age of 30. But, maybe if you guys have kids, this might be a great option to reach out to them. Or, maybe if you’ve got kids in college, maybe your kids can house hack it. And this is a great way to collect rent and see how money really is made as opposed to trading time at your W2 day job.
But before we get going, somebody asks a question there, people send me emails all the time and they say, “ Hey, I found this investment making 13%, 15% a year. And I just glanced at it and not all investments are made the same. And the first question that most sophisticated investors ask, including myself is like, what’s this investment backed off of, of course. Beyond performers can mean anything, but this is more like, all right, say an investment performer is. It’s not just some kind of crazy Bitcoin mining machine based on the price of Bitcoin. Where if Bitcoin tanks, so does your investment because it’s based on that, but let’s just say it’s like a legit investment that, there’s a sound P and L and supposedly you’re gonna get 14, 15% off.
The next thing is what do you collateralize? By what are you backed by as what we talk about? When sophisticated investors talk and, sometimes, you’ll see these investments and, there’s kind of one making that reigns through the internet.
Is that you’re investing in these businesses or providing startup capital, but, again, answering that. Butterfly money collateralized by there’s not by much. And which is why it’s a risky investment. And which is why it’s a higher rate of return, or it commands that because it’s more risky.
And this is, I think, where a lot of newer investors chase the higher returns. Ooh, 15%, Ooh, 18%. And they just gravitate towards that, but they just don’t stop to think and ask this question and they realize if things go bad, if shit hits the fan what are they gonna go and collect?
On the right. The nice thing about real estate is the real estate is there and it typically doesn’t go up and down in value. And if it does go down in value, just hold and wait till the better time for the sale, an operational business, like the one I’m referring to here that has like this higher rate of return.
In bad times or, if you ever needed to recollect on the asset’s not worth very much some of these businesses, there’s no real physical inventory. And even if you, there was some inventory in some warehouse somewhere, good luck. Even collecting pennies on the dollar on that.
That’s just another view to look at these types of investments and at least spotting out the bad ones. Another thing that I see going around a lot, especially in the house flipper world, is that there are pretty a lot of good house flippers. Once they do it for several years, they realize house flipping really doesn’t make that much money and it’s super risky.
So what do they like to do? They like to become a marketer, use their social media influence, and that’s why you see all these silly house flippers on social media, all the. Creating this brand. And what they’re essentially doing is they’re taking the unsuspecting passive investors and putting them in a newer house slippers deal and making money on the spread.
So what this kind of more experienced house slipper is doing is they’re pawning off. Somebody else’s deal as they’re up. Some newer flipper who’s really inexperienced, a huge risk. They, their fair market rent for private money might be in the 20% range. Sounds crazy, but it’s also very crazy to be investing in a newer flipper.
It’s, very bad paper. If you wanna use that industry. So what this kind of this middle man will do is they’ll pay, they’ll charge 20% to that newer flipper. And then they’ll give the passive investor 12 to 15% and obviously pocket the spread in the middle. And yeah, I think this is there’s some bid of a cloaking of this a lot of times, and a lot of times just the past investor really doesn’t have the experience to ask the question who the heck is the operator?
And this obviously happens in the syndication world, too, right? Where you have these kind of Daisy chain deals put together. And there’s everybody in their mother raising capital, which, in my opinion, is illegal. because, you need to be a licensed broker dealer to be able to do that.
You need to be an operator and not just a capital razor for that deal, but, I think that’s where there’s all sorts of things out there going on and, potentially nefarious activity and it’s hard for passive investors. And that’s why we always tell you guys, build a network, get going building your inner circle.
And that’s what we provide in the family office. Oana mastermind. There’s well over 90 members in that group right now. We asked you guys to test drive our organization, see if it’s the right fit for you. I really don’t think that there’s anything else better out there with this much sophisticated, accredited passive investors, right?
We’re not some real estate groupy group trying to teach you how to fake it to you, make it and make it rich. Cuz quite honestly, a lot of those groups. The failure rate is like 95, 90 7%. It’s and that’s why I never wanted to create a group like that. I wanted to create a group for folks like myself who are still working their jobs, still running busy entrepreneur businesses.
And how do you be the best pass investor on the side? And my whole formula was for that is relationships and really banding together with a bunch of other purely passive investors and trading the best trade secrets, where to invest who to stay away from, and then ultimately building those relationships with the people. If you guys are interested in that, check out simplepassivecashflow.com/journey for more details and enjoy the show.
Hey, simple passive casual listeners. Today. We are gonna talk about house hacking and how you can implement that or do that alongside of your normal investing or do that as a primary form of investing our guest today is Andrew Kerr from fi by rei.com. So Let’s get into your story, cuz you’re pretty accomplished real estate investor been doing it a while. How maybe give us a little rundown of how you got to this point. I had actually was working in the mortgage banking industry. I skipped college, started right away at 19 working and by 20 I was doing well enough where I could buy my own home.
So at 20 I bought my own place and I did this sort of house hacking style room rental, where I bought a place running out the other rooms. So my roommates, my friends were essentially covering my cost of my mortgage and along the way I had built up. Decent size real estate portfolio. I ended 2016 with about 40 doors, 40 rental units spread out across a couple different states, but most of my investments were there in North Carolina where I grew up.
And then I had this progression in life where I wanted to change my lifestyle. And started selling off all my properties that I actively own and actively managed and started investing in passive income. So I started investing in larger syndications where all I had to do was manage the sponsor or the individual or the team that was running the, this syndication.
And that’s let me free up a lot of time to focus on passion projects, like working for nonprofits and travel. And I think a lot of people listen and they hear about your story and how you’re investing in bigger syndications. And obviously my story is sort very similar. I started in 2009 and our paths it looks like a mirror a little bit.
Yeah. And they’re like I’m gonna invest in syndications, it took a long time. For me, it took since 2009 and then 2015, getting up to 11 rentals. And when did you start again? Just to give some people, how long it. It’s it grows at a snail space, right?
Yeah. I really started going heavy in real estate there in 2010, 2011. I had, while I had bought my first house at 20 and I had owned that property for quite a while. I didn’t go heavy there until 2010. And that was partly because I went from. The mortgage industry, where I had a six figure income to working in the nonprofit industry, where I started as a volunteer with an $800 a month stipend to then $2,000 a month.
So I did it built up a real estate portfolio on a very minimum budget, very minimum salary. And. It takes you about six to 10 years to really change your life around with real estate, which in the grand scheme of things, when you look at it, if you’re gonna be 70, 80, 90, a hundred years old, focusing really hard for six to eight years, isn’t that long of a period of a time.
I know a bunch of investors they’ll do the short term rentals or the house hacking very similar variety, but at some point you had a turning point where you’re like, screw this is too much work. Was there any kind of particular thing you can remember back to, or was it a sort of a gradual thing of slowly transitioning into syndications?
Yeah, it was a bit of a gradual thing, I’m 37 now. So when I started going really into it, it. Late twenties. And at that time I had more time on my hands. I did not nonprofit work. I did hanging cabinets. I did floors. I did painting. I didn’t have capital. So I did a lot of the work myself and the two niches I focused on were.
College housing and affordable housing. And then as life progressed, you start to get into your thirties. You start to get serious relationships, you get engaged, you get married. And I just wanted to be more hands off. My college housing portfolio was always managed by someone else, my affordable housing I did until I just ended up selling it, but just life as transitioned, you wanna spend time on different things.
It is just this progression where I didn’t want to be involved on the day to day anymore. And that’s where I started as I sold off my portfolio, reinvesting it passively into syndications. If you could define house hacking for us and we’ll get into your little twist on house sacking, cuz I, I think when people hear it, it’s it can mean a lot of things, Yeah. So I really look at house hacking as just making a slightly different choice for your housing. All the way back to a lot of folks have read that rich dad, poor dad book that basically says your house is a liability, not an asset. So the idea is just to do the slight change on how you pick your housing, especially if you’re in a high cost of living area.
So you can reduce. That 30 to 40% of your budget. That’s on housing and cut that in half or completely reduce it. And then the idea with house hacking is I define it as these six styles of house hacking. There’s the room rental style house hacking where you buy a big house, you rent out the rooms.
That’s great when you’re just getting outta college and then. There’s the sort of live and flip where you’ll live in the house for a year or two while you’re renovated, and then you sell it. That’s a lot of work. It’s not great for a family. Then those couple other styles are this sort of income suite where you convert a basement or you have a mother-in-law suite.
You have an accessory dwelling unit, like a pool house that you can rent out or a garage apartment, you have this sort of small multifamily and then you have a work provided housing. And then the idea is with all those different styles, you can run out to long term tenants. You can run out to short term tenants like Airbnb, V R B O, or you can do midterm.
Sort of rentals where you rent to corporate housing or traveling nurses. And the idea is you pick the model that’s best for you and pick the type of tenant base that you want. And it lets you reduce your housing costs. My first two house hacks were that room rental style. My third and fourth house hack were this sort of more luxury house hack where we bought this small multi-family property and really created these high end apartments for it.
And I’m happy to dig in more to that style of house hacking if you want. Yeah. When you went, when you did that style the more higher end one was that a short term or long term, the way you did. Yeah, we did a little bit of both. So when we moved to new Orleans, about four years ago, we run in an apartment right away because we wanted to start for looking for real estate and to do a house hack.
And what we found was this old 1920s corner store property that was in really bad shape, had broken sewer lines, it needed new roof. It had knob and tube wiring. And what we did is we gutted it to the studs and we converted it to three high end apartments. And then out back was this barn building that we turned into a one car garage and a sort of carriage house guest house.
And what we do with that carriage house is we rent it out on Airbnb, V R B O. So like during Mardi Graw we get 200 bucks a night for this $500 square foot place. Then the main building. We live in the upstairs, which is a two bedroom, one bathroom apartment. And a lot of folks when they think of house hacking is you really gotta sacrifice on CRE creature comforts.
You can really do it really nice where, we’ve got the farmhouse sink, the stone countertop, the higher end kitchen cabinets with the crown molding. We have a jacuzzi tub in the bathroom, $20 square foot, marble floor in the bathroom, hardwood floors. And then downstairs, we have long term tenants, we got a one bedroom and then a two bedroom.
And the really basic idea of it is those downtown stairs tenants cover our mortgage and a little bit of the taxes and the insurance for the property. And then that short term rental Outback covers all our additional costs. And we usually make, five to 10 grand on the property as well. So not only do we have a really comfortable, nice, higher end place to live, but we also have zero housing costs and then usually are able to pocket some money off of it.
And that gives us a lot of freedom to do a lot of other things that we want in. And you’re taking advantage of it’s your primary home. So in terms of financing and were you doing like a FHA, like 3% down or, yeah, for this one, we actually used hard money because it needed so much work. We bought it for two 70 and it needed to be gut to the studs and we put in about 250,000 into renovating it.
So we used hard money. We got all the renovations done after about 11 months we moved in and then we refinanced out with the conventional loan and then we’re able to pull back out most of the cash we put into it with our equity line that we added on the property. We’re actually working on a new property, which is just a due duplex, which is gonna be a higher end house hack as well.
But like with that, we ended up doing a FHA loan cause we’re sitting on a bunch of cash, but we wanted to. Have that cash on hand to do the renovations and do the value, add expansion on this next property that we’re looking at. So there’s a lot of opportunities out there, but most people, if they’re short on cash will use that FHA loan to do a house hack, cuz you only have to put that three and a half percent down.
And the, you get a little bit better interest rate when you’re the when you actually live in that property, as opposed to a non-owner occupied property, I would say probably what a quarter point or a half a point better. Yeah. Usually about a half a point dependent on the bank. So it ends up being work, working out pretty well.
I know a lot of listeners they live in like California, where a lot of these higher price markets are, they’re priced out. They don’t hit the 1% rent value ratio. And for those people I’ll say, Hey, go outta state rent. Get above that 1% rent value ratio, but some people.
They have limitations and it is what it is. I say something is better than nothing. At least you get outta the stock market and all of those type of investments and house hacking is another option. Or maybe you can go over some strategies for folks who have been investing, but it more, it’s more of a lifestyle change too.
And part of it is with the house hack house. Doesn’t have to meet the conventional 1% role. If you wanna buy the property and have it be a long term rental, you should definitely have it meet those traditional real estate investing roles. But, we’ve worked with some folks that have done house hacks where, maybe you’re in that high cost of living area like California or Seattle or New York and your housing costs are.
Three grand a month. If you can do a house hack and just reduce your cost to 1500 a month, that can be life changing for a lot of folks. Maybe the property will never become a long term rental, but if you need a place to live for that next 5, 7, 10 years, and if you were cut and cut those housing costs in half, most people for $1,500 a month, that gets ’em a new car, that lets ’em travel.
If they want to travel that lets ’em pay down debt, for $1,500 a month in savings. You can max out a 401k at work. So even if you never want to be a big real estate investor, or you’re just trying to, or you wanna save money to invest in real estate, do a house hack in, in that higher cost of living area and reduce your housing costs that will frees up the cash that you can then put in other places.
So now maybe you’ll feel more comfortable investing that estate. Any other nuances about house hacking that after being doing it for a few years, You know the listener out there might, clean some insight over just anything random. Yeah. The biggest thing is that most people had this default of, if I’m doing a house hack I gotta become a giant real estate investor and that’s not true.
And then the other is most folks feel like, oh, house hacking is something you can only do in your twenties. And it’s where you’re gonna have all these giant roommates. And you can really. Quite the opposite of that, where while my wife and I have tenants living below us, we didn’t have to sacrifice on any creature comforts.
Where we live in new Orleans, we have the street car two and a half blocks from us. We have bars, restaurants, grocery store Walgreens, within four or five blocks walking distance, we’ve got original hardwood floors in the place, 11 and a half 12 foot ceilings. That’s this misconception a lot of folks have with house hacking is it has to be giving up and making a lot of sacrifices on location or space.
If you plan for it, you can really get everything you want. And that’s the obvious cons, right? You’re living near your tenants. Me personally, I’m an introvert and I that’s a big one for me. , that’s why I don’t do it. I actually house hacked my primary residence in Seattle for I put it on Airbnb and that was just tiring to have people come in and out.
I just rented like the bottom floor. So I’ve done it, but I know a lot of people there, they might be a little bit more outgoing and they might like to chat up people who are out of town. If that’s you this could be something that you wanna create your life around and.
I guess a captive audience for all your stories, if whatever you will, but maybe give people like insight in your life today. Like how are you using house hacking cuz you’re you’re definitely more on the fi side of things and just given an idea or another viewpoint of things you don’t hear talked about in the workplace cubic.
So back in 2016, I had from building up with those portfolios and selling off money and reinvesting, I got to where in that sort of P community folks call lean fire. So I achieved that towards the end of 2016, and now I’m working towards fad fire, but what house hacking lets us do is, You essentially have five big expenses.
You’ve got taxes, you’ve got healthcare, you’ve got your housing. You’ve got automobile and food and real estate through the depreciation and doing things like cost segmentation. I’ve essentially offset almost all of my income. I have a very minimal taxes. And then by eliminating my housing costs through house hacking, I freed up 50% of my income.
Just by reducing my taxes, my tax liability, and by eliminating my housing costs and that lets me work for a nonprofit. Traditionally, in nonprofit world, you don’t get paid a lot of money. You also don’t have lucrative benefits, stock options, retirement accounts, those type of things, where I know my retirement set from a real estate portfolio and through house hacking, we also, my wife and I have a huge passion for traveling.
I’ve been to 34 35 countries and she’s been to 40, every year we seem to take off for several weeks and travel. By knowing that we have zero housing costs, it’s really easy to say, let’s go to the middle east for three weeks and we don’t have to worry about covering a cost of rent or mortgage back home.
So it just gives you a lot of flexibility in life. So you’ve left the 40 hour a week type of job in an office. Both of you guys are no longer doing. That you can travel. O oddly enough, I ended up sometimes with the nonprofit work. I ended up spending 50, 60 hours a week, partly just because I love it.
But yeah, I work from home managing my real estate portfolio and then doing some nonprofit work. And then travel. So in 2019 we visited guitar, Egypt, Jordan. We went to Jamaica, we went to Mexico and then we visited family and friends throughout the us. So it’s just given us a lot of flexibility, but yeah, we definitely don’t travel full time.
That’s a little too much for us, now in our thirties, we like to have a home base that we can come back to in a regular bed we can sleep in. And we like to just go out and travel, for a long weekend, a week or several weeks at a time. Yeah. I hear you. We’re about the same age and it’s nice to have a garage so you can put stuff in it, right?
Yeah. A bunch of bigger toys. Maybe if you could go over like the high level of your portfolio, right now people are thinking you’re not the Airbnb guy, but the house hacking guy, but how does it look and what’s the percentages of, is it like half syndications, half active, more active income like this?
We’re currently living on our third house hack, which is essentially four units. And we’re currently renovating our fourth house hack, which is a duplex. That’s all we actively manage. When we move out of our third house hack, I’ll actually turn it over to a property manager.
and then I will, when we’re living in the duplex, I just use cozy to collect rent, manage maintenance request from that person living on the other side. That’s all that we own now. And then probably about 80% of my net worth is in syndications. And then the other 20% is in, IRA, 401k, Vanguard, brokerage account, where I take that, jail call and simple path to wealth.
Idea of investing where you’re in a index fund and passively invest that way. Outside of those, I guess it’s six units that I actively manage. Everything else is in syndications. And I think at this point, I’m, I don’t know, maybe in 10 syndications now, I think. And you made me chuckle a little bit.
You actually said you were gonna go visit one of these deals before you go invest in it. I always put it out to my investors. I’m gonna be in Huntsville later on this week. If anybody wants to come join along with me and out of the thousand or people, or so, only a handful of people come cuz everybody’s busy.
Like it’s a little hard except a guy like Andrew shows up cuz he’s got, nothing better to do no offense. That’s the kind of life you want. Exactly. Another thing, I think some folks get too lazy with passive investments where they’re like, oh, it’s passive.
I don’t have to manage it. And my approach has always been, yes, you’re investing in a syndication, but you should still check up on your syndicate or. And then also check up on the property. So I’ve used a service called we go look where if I’m not traveling to the area, you can hire, we go look and they’ll send out a Looker who will then take pictures of the property and you spend a hundred, hundred 50 bucks, I’ll do that where.
The syndicator will send back a report for us. I’ll actually send out. They like, oh, the report says they just renovated the roof. They did all new siding, did all new windows and did landscaping. He sent pictures, but let me spend 150 bucks to send someone out to verify that works actually done. And it wasn’t just something they pulled off the internet.
So I’m always big on while it’s passive. You still need to mind your investments and check up on them from time to. . Yeah. And when I have people come out, we check out units. But if you’re going out by yourself, you’re typically not gonna be able to do that, nor do we encourage ops to even talk with the property management.
A lot of these deals, there’s 50, a hundred guys that’s impractical and not very good LP etiquette, but. What I do recommend LPs do is go ahead and check out the property and walk it and get the feel for it. Is this really a, B, or is it more of a B class neighborhood?
Absolutely. Any insights there that things you key in on, like I know personally, I look for bars on the windows, in the, is it in a primary residence kind of areas and renters area? What kind of cars people are driving? Anything that you can. Kind of things you’ve picked out or things you look at when you do this.
It’s a brief and how long is the trip? Oh a lot of times it’s really short and I love the fact that you mentioned that sort of etiquette is. So when I go in, I don’t go bother the property management. I don’t disturb the tenants. It’s very much, I’m gonna go drive through the apartment community or walk through the apartment community.
Or I might go in not announcing that I’m an owner where if they’ve got, Open house, or if they’ve got the onsite office where I’ll go in and just ask about what apartments are renting for and get the materials. You definitely want to have some etiquette and don’t go in trying to act like you own the place.
Definitely have good etiquette. But yeah, what I like is I love to see where the closest Starbucks is. What’s the closest grocery store and then any other single family neighborhoods that are around, do they have window units? Do they have the AC units in the windows? Do they, like you said, the bars on the window, are there check cashing places close by?
Usually if there’s a check cashing close by you’re definitely a C or. Area unit, if there’s a Starbucks close by, you’re pretty much a B or an a, a class unit. So I try to look at those things. And then I also look at the schools and then what are the ratings of the schools that are close by?
And that can tell you a lot about an area as well. But yeah, most of the time I’ll try to visit friends in the area or go to do some nonprofit work. And then I might spend an hour or two where I’ll drive through the community and drive through their surrounding neighborhood. Just to get a sense.
What are the window? What are you looking for? The window units there? So a as an example, if you’re looking at a single family neighborhood and it looks like it’s an older neighborhood and there’s the window air conditioning units that tells me it’s no central air, no central heat. So it’s an older unit and.
Renovations haven’t gotten into that area yet. So if you drive down a street and you see half the houses have window AC units, it’s definitely more affordable housing, affordable rent area where you can go buy a window AC unit for a hundred bucks at lowes or home Depot, where to put in a central air AC and heat, you could spend eight, 10 grand or more.
It’s something that I always look for to tell what the neighborhood’s and that gives me indication if it is a, B or a C class area. Yeah. I look for the, if it is sort of sensor air which a lot of properties like in Alabama are, for example, If there’s a cage on it. When I had my single family, I always put cages on it.
If it was B minus or worse, I, oh yeah. I probably had two or three of those things grow legs and run away. Yep. I’ve been there. But it’s weird in some, in other markets like Texas, your class C stuff, they don’t have, it’s not normal to have cages on ’em so it’s all a regional thing. Texas, everyone carries guns in Texas yeah.
Yeah. And that was, you. Come up with these stories of reasoning. That was my reasoning too. It’s so hot there. It’s man, you just don’t do that. So Andrew runs fi by REI a A website, a lot about a lot of articles about house hacking.
You’ve got the podcast, you just check that out. But yeah, appreciate you coming on and yeah, you getting to know you a little better here. Thanks lane. And we’ll have to get you on our show to talk about your early house hacking experience and where you’ve been going with your real estate investing.
All right. Everybody out there. Thanks for listening. Join the investment club, simplepassivecashflow .com/club. And let’s get on the phone and let’s see what we can do to move you guys forward to financial freedom. It might not be an apartment deal, might not be a turnkey rental, sometimes it might just be a little a referral to the right CPA or some kind of tweak. Something’s better than doing the whole 401k thing, all right, guys, we’ll talk to you guys later. Bye