\n<\/p>\n
If you want to start <\/strong>investing in real estate<\/strong><\/a>, you\u2019ll need to know how to get a mortgage<\/strong>. But with so many home loans available, which is the right one to pick? Do you go FHA or conventional? Do you work with your local bank or call a broker? How much can you even afford? These questions alone might put you into analysis paralysis, so today, we\u2019re breaking down what it takes to get a home loan, how much YOU can qualify for,<\/strong> and the best real estate investment for beginners.<\/strong><\/p>\n To demystify the home loan process is David Mackin<\/strong>\u2014the third David in today\u2019s episode\u2014mortgage broker, house hacker, and home loan expert. He knows what you need to qualify for a <\/strong>mortgage<\/strong><\/a> in 2024<\/strong> because he qualifies buyers all day long. David shares how YOU can determine how much home you can afford<\/strong>, why you\u2019re getting different mortgage rates<\/strong> from different lenders, and how to find cash flow in your market<\/strong> by reverse engineering your real estate calculations.<\/p>\n And, if you\u2019re looking for the easiest, lowest cost, and arguably best way to get into real estate<\/strong> in 2024, this episode is for you. We\u2019ll break down why house hacking<\/a> has become the new norm and why skipping out on it can cost you BIG in your real estate investing journey<\/strong>.<\/p>\n David: Dave: David: Dave: David: David: David: David: David: David: Dave: David: Dave: David: Dave: David: Dave: David: David: Dave: David: David: David: David: Dave: David: Dave: David: David: David: Dave: David: David: David: David: David: David: Dave: David: Dave: David: David: David: David: David: Dave: David: David: David: David: David: David: Dave: David: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Email <\/em>[email\u00a0protected]<\/span><\/em><\/a>.<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
This is the BiggerPockets Podcast show, 880. What\u2019s going on, everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast. Joined today by Dave Meyer. It\u2019s always a good day when Meyer is in town. How are you doing, Dave?<\/p>\n
I\u2019m doing great. I\u2019m excited for this episode, but I also think we owe our audience a little bit of a disclaimer because our guest today is also named David. So we\u2019re going to have Dave, David, and another David joining us, and we\u2019ll try and use our last names when we\u2019re talking during the podcast, but that\u2019s just a little disclaimer before everyone gets really confused.<\/p>\n
Yeah, it does get fun. In the Mighty Ducks, they had a move called the Triple D, and today\u2019s show is a bit of a Triple D with a lot of David going around, but it\u2019s a really good one. So if you\u2019re somebody who\u2019s ever been struggling with getting into the housing market as it\u2019s becoming increasingly competitive, curious about house hacking, want to know what\u2019s going on when you\u2019re getting pre-approved for a mortgage or qualified for mortgage, or are not sure which lender you should be choosing, we get into all of those topics in depth and give a really good breakdown of what the lending industry looks like and how that can apply to real estate investing. Was there anything here, Dave? Oh, by the way, you\u2019ve got a book releasing today, your Start with Strategy book. So let everybody know where they can go get that book, and then as your strategical mind looks through things, let us know what you think people should keep an eye out for in today\u2019s show.<\/p>\n
Well, first I\u2019ll just talk about the show so then I can talk about the book. Thank you. Appreciate it. But I do think what you were talking about with lending makes a lot of sense and it\u2019s more practical and more important now than ever to really have your financing lined up because the number one thing that is impacting the housing market that is impacting investors is affordability. And it\u2019s really important to understand what kind of deals you can afford, what kind of loan products are going to be best for your particular strategy. So definitely make sure to stay tuned and listen up for those nuggets that are going to be in there in our conversation today.
But I appreciate you bringing that up, David. This episode will come out after the release day, but the day we\u2019re recording is the day my book comes out. It\u2019s called Start with Strategy, and it\u2019s basically a step-by-step guide to help investors of all experience levels develop a business plan or an investing plan that will help you figure out what your specific goals are, what real estate strategies are going to help get you to those goals, and even develop a buy box and action plan to help you achieve your long-term financial dream. So it\u2019s a really good book, I\u2019m really proud of it, and if you want to check it out, you can go to biggerpockets.com\/strategybook.<\/p>\n
All right, let\u2019s bring in Dave Mackin. David Mackin, welcome to the BiggerPockets Podcast. All right, to start the show, tell me a little bit about you as a lender. How big of a broker do you work for?<\/p>\n
We\u2019re actually a pretty small broker, mom-and-pop shop per se here in Colorado. We have about eight employees at this point working on growing and such, but we have about 70 investors that we\u2019re signed up and talking to. So yeah, super awesome being a broker, love doing it.<\/p>\n
So are investors your main clientele or do you work with other people?<\/p>\n
I guess I should clarify when I say investors, I use that, that\u2019s a term I should be careful with. Different banks and financial entities that we can go to for funding, and that\u2019s what I mean by investors that clients can shop around to see what kind of pricing and programs that they can use.<\/p>\n
So then who\u2019s your main clientele? Who are you typically servicing?<\/p>\n
Well, I got into it starting off with house hackers, of course, I started house hacking myself and through speaking to my own lender when I started house hacking. I got super intrigued by the financial side of things. What intrigued me the most was that I think a lot of people go into the home buying process thinking, okay, I go to a bank, they tell me how much I can buy and then I go get a loan. What piqued my interest was, wait, there\u2019s so many options, right? It\u2019s not just, okay, tell me what my monthly payment is, how much I need to bring to the table and let\u2019s get it. It was the, wow, there\u2019s so much to consider here on all the options I have. I wanted to learn more about that. Curiosity took me in the direction of falling backwards into the mortgage space.<\/p>\n
David\u2026 And David, can I call you Mackin? Can we just go by last name, guys? This is going to be very confusing if we all call each other David.<\/p>\n
Call me Mackin. I\u2019ve been called Mackin my entire life, so you can go ahead and call me Mackin.<\/p>\n
All right, Mackin.<\/p>\n
You can call me Batman.<\/p>\n
Mackin, what we want to talk about today and are excited to get your take on is what it takes to afford a home and how much a person can afford. So can you just give us some of the basics of this equation? How do lenders think about how much they are willing to lend to an individual?<\/p>\n
The high level I\u2019ll start with is that the way that a lot of real estate agents and lenders go about pre-approving in the first place leads into this. A lot of times it\u2019ll say, \u201cHey, you\u2019re pre-approved up to 500,000 or you\u2019re pre-approved up to 600,000.\u201d The way that I like to think about it is, you\u2019re actually just pre-approved for a monthly payment. Everything about being pre-approved comes down to debt-to-income ratios and therefore comes down to what your monthly payment will be on a particular property. And then when you go even further into it with house hackers, it\u2019s what numbers actually make sense, not necessarily just what you\u2019re approved up to, right? If you\u2019re going to the high end of the ratios, that property might not make sense for the potential for cash flow. So there are so many things that go into it. It\u2019s the principle of your loan, the interest on top of it, the insurance on the property, the mortgage insurance you\u2019re getting for what product you choose, the taxes, all those things are going to go into what you can actually afford and actually get pre-approved for.<\/p>\n
So for our audience who doesn\u2019t have the full equation and breadth of knowledge to take each one of those things and come up with what house they can afford, where should they start thinking about? Is it income, is it the property? What is the determining factor that people should be considering?<\/p>\n
I think it\u2019s a combination of one, their income and finding a basic price point for what makes sense for them. There\u2019s a lot of rule of thumbs you can start with until you actually go work with a lender and the rule of thumb for approval is going to be just around 50% of your debts plus what your housing payment is going to be to your income. And that\u2019s a rule of thumb because it\u2019s a lot more specific than that depending on what program you\u2019re going with right there. If you go FHA, you can go up to 56.99% on the backend, 46.99% on the front end, right? I\u2019m already going too far there. So a good rule of thumb is to think, okay, take 50% of my gross income by the way, and what I\u2019m looking at properties, doing my own calculations on what the monthly payment might be on that house. That\u2019s what I\u2019m going to be approved for. But then as a house hacker, you need to go further and understand, does that monthly payment warrant the potential for cash flow at some point.<\/p>\n
You know, David, one of the things that I notice with our brokerage is that people think that the credit score is what\u2019s going to determine how much money they get. There\u2019s an obsession with credit score. Everyone\u2019s like, I have great credit, or I don\u2019t have great credit, or I\u2019m trying to get my credit up another four points and there\u2019s all this effort looked at it. But debt-to-income ratio is a way bigger piece of how much you\u2019re going to be approved for and therefore what neighborhood you can get into. And that has a huge, huge impact and ramifications on the future wealth when you look back 20 years, if you buy into a terrible neighborhood versus a great up and coming neighborhood. And that\u2019s one of the things I covered pretty heavily in my book Pillars of Wealth was debt-to-income ratios are based off of your debt and your income, right? Keeping your debt low and saving money, playing defense is very important.<\/p>\n
So ratios work.<\/p>\n
An income is how much money you make. So you could just simplify everything by saying, how do I go to work every day and become better at my job and to make more money. And how do I remain disciplined and avoid lifestyle creep by keeping my eyes on the prize, which is buying investment properties, which is the third pillar, right? And if you just follow those principles, I find it amazing that everything starts to fall into place. It also, you don\u2019t ever have to worry about your credit score, because if you\u2019re managing your money well, you don\u2019t ever get yourself so into debt that you can\u2019t make your payments. What\u2019s your thoughts on that?<\/p>\n
Well, I\u2019m glad that you said that because there\u2019s also a lot of people that get into house hacking look at conventional versus FHA, and if you end up looking at the FHA strategy, FHA allows for credit scores in the mid 600s. If you\u2019re somebody that\u2019s starting at that point, you can look into the FHA option. And by the way, FHA is the option that allows for a higher debt-to-income ratio. So the credit score part of it more determines what option you may end up going with for a particular deal. But like you said, if you are somebody that is in tune with personal finance in the first place, things take care of themselves, like you said with credit score and things like that.<\/p>\n
Another common problem that I\u2019ll see is people think that if I go to lender A, they\u2019ll pre-approve me for this much, but if I go to lender B, they might pre-approve me for more. That\u2019s very, very rare because almost all of these loans eventually go to the same investor, like you said, that has hard and fast rules that are put in place because they\u2019re all insured by Fannie Mae and Freddie Mac, where the companies that aren\u2019t doing those loans, they use those guidelines to underwrite. Is that something that you\u2019ve seen as well, that shopping to different lenders, you may get different service, they may have different loan programs, but you\u2019re not necessarily going to say, well that one pre-approved me for a million even though this one only pre-approved me for 500,000.<\/p>\n
That\u2019s a rabbit hole. That might be another episode on shopping different lenders and why you might see different pre-approval amounts from the different lenders, but the end result, you\u2019re right, ends up being the same. I think it\u2019s important to shop multiple lenders for the sake of making sure you\u2019re working with someone that will help you plan for the future in your investments and someone that you like talking to and someone that knows what they\u2019re doing as far as helping you with the investment side of things and finding the right lender and shopping lenders to do so is smart in that way, but shopping just for the sake of trying to get a bunch of lenders to nickel-and-dime their way down to approve you for more quote unquote is a waste of time.<\/p>\n
All right. So we\u2019ve covered some of the basics. We now know that the debt-to-income ratio is the most important thing lenders look at when figuring out how much they\u2019re willing to lend to you. And in that regard it\u2019s actually more important than credit score, but how can you get the best possible rate? David Mackin breaks that down right after this.<\/p>\n
And welcome back, everyone. We\u2019re here with lender David Mackin, talking about the ins and outs of lending.<\/p>\n
When you think about the pre-approval process, like you said, for each individual debt investor, let\u2019s just call them the people who actually provide these mortgages, they have similar underwriting processes, but when it comes to rates, does that change? Because I\u2019ve seen personally pretty different rates when I shop around between providers.<\/p>\n
There\u2019s a couple of different factors that go into why different investors are going to give you different rates. For one, as a broker myself and David Greene knows this as having a broker shop himself, you\u2019re going to get different interest rates from all the different investors that you might or banks that you might send the loan to, right? They have different equations and algorithms for what they need to make before they might sell it to another servicer. They have more employees maybe, and they need to make more on the upfront interest to pay those employees to do their work. It all comes down to margins. And by the way too, when you\u2019re working with different brokers, brokers have their own margins for commissions involved in the rate that you\u2019re seeing as well too, and they can defer. So you are going to see different rates and what the cost for rate is when you shop for different lenders, different mortgage brokers as well as them actually going out and shopping to different banks and financial entities that are going to finance your deal.<\/p>\n
Yep, that\u2019s a great point. So I think what you\u2019re getting at there, David, you said something earlier I wanted to cover. I think what you were saying is, there are lenders that will tell you, we will pre-approve you for this much to get your business. And then once you\u2019re in contract and they\u2019re actually talking to the underwriters, they\u2019re like, \u201cActually it\u2019s not going to be that, there it is.\u201d And by that point, you\u2019re already halfway into the escrow, what are you going to do? You\u2019re just going to be pissed, but you close with them. So sometimes finding the person that tells you what you want to hear is not wise. It can be bad, and the same come with rates.
In general, the lower rates are lower because the loan officer is going to be making less money or the brokerage makes less money. And while that, no one\u2019s going to be mad about that, oh, I get a better rate because you make less money. You may find yourself working with a person who doesn\u2019t know what they\u2019re doing. They\u2019re new, they\u2019re inexperienced, they\u2019re going to mess things up, they communicate terribly, that same thing you found.<\/p>\n
You have to consider how much is this person worth, right? For investors especially, is this person worth the money because they\u2019re the person that\u2019s going to help me buy multiple properties and build my portfolio and I don\u2019t have to call another lender to do so. I have them on speed dial. And typically you might find a middle ground where someone\u2019s offering really good rates and their service is incredible and what their knowledge is super incredible and great, that\u2019s the person you found and stick with them.<\/p>\n
I just wanted to ask a clarifying question to you both, because we are talking about rates and the difference between rates and you both talked about something that\u2019s very important that getting a good loan officer is super important, but from my understanding, there\u2019s no reason why a good loan officer should have any higher rates. So it\u2019s cost the same for an investor or a home buyer to work with a good loan officer as a less experienced or less high quality loan officer, right?<\/p>\n
It is different between lenders who you\u2019re working with. There is a margin, the amount that a loan officer is making on a loan actually factors into what you are being offered as far as rates. If a loan officer is making more, let\u2019s say for example, you\u2019re looking at, let\u2019s say the same rate across two lenders, you have 7% with one lender, 7% with the other, maybe 7% is costing half a point with one lender and it\u2019s costing zero with another. That means that the lender that it costs half a point is making half a point more on the loan amount than the other lender where it doesn\u2019t cost anything. It\u2019s as simple as that. And so you as a buyer, as a house hacker have to determine is this person worth half a point to work with, because this transaction is going to be smooth, they\u2019re coaching me on my future goals, et cetera, et cetera. And that\u2019s where the difference really comes into play for most situations.<\/p>\n
Yeah, that\u2019s a great point. So I\u2019m sure a lot of people here are wondering why would I ever, ever want to pay a half point if I don\u2019t have to, right? My advice there, if you\u2019re a really easy borrower to work with, you have a good job, you have a good debt-to-income ratio, you\u2019re using normal run-of-the-mill loans, you\u2019re going to get approved. It\u2019s not going to be anything tricky. You probably don\u2019t need a rockstar superstar lender. Those are the people that can maybe find the online, click here for a 2.99 rate or whatever and they can roll the dice on that gas station sushi and they got a strong GI track, so they\u2019re probably going to be okay.
But for the people that are listening that are buying investment properties that want to get multiple properties, maybe you\u2019re self-employed, that\u2019s the person that can find themselves in big trouble. If they use the basic loan officer, that\u2019s the cheapest one they could find that does not understand how to read those tax returns, how to argue the case with the lender for why this income should be included or even how to package it together to give it to the underwriter.
I\u2019ll tell you guys what goes on behind the curtains. A lot of the time when you hire the cheapest loan officer you can find, the reason your loan took three extra weeks to close is they did not know how to give the underwriter what they needed and the way they needed it. And every time the underwriter looks at it and says, \u201cI need this thing,\u201d you get bumped back in the queue another week. So would you agree that if somebody has goals of owning more than one property or they\u2019re an entrepreneur, anything that would complicate their file, that\u2019s when they want to get the more skilled professional loan officer?<\/p>\n
I couldn\u2019t agree more. In our market, especially two, three years ago when the competition was super high, one of the biggest factors in going under contract was how quickly you could close. If you go and search an article on the internet, at the bottom it says apply now and you end up at some online lender that you don\u2019t even know who you\u2019re talking to, they\u2019re probably not going to be able to guarantee that you\u2019re going to be able to do a 14-day close, sometimes a 10-day close. So in a market like that where there\u2019s a lot of competition for your loan officer, your lender to call the listing agent and say, hey, we can get this done in 10 days, that sometimes is a make or break for being the one that actually goes under contract in a competitive environment.
That means that you are going to be working with somebody that isn\u2019t just a salesperson, isn\u2019t just a intake at a call center. There\u2019s someone that knows what they\u2019re doing on the underwriting side, the processing side, the planning side. They understand all the options that are available to you. There is so much that goes into it and typically that takes more time and knowledge. I can\u2019t remember where this quote is from, but it\u2019s like I heard a story where someone was having a plumbing issue. All these people came in, they couldn\u2019t figure out what was going on.
And then finally they had this guy come in that was a master, been doing it for a long time, comes in, spots it in a second, fixes it in 15 minutes and slaps a $500 bill down on the table. And they\u2019re like, \u201cWait, what the heck? You did 15 minutes of work. Why are you having me pay $500?\u201d He said, \u201cYou\u2019re paying me for the time it took for me to get all this knowledge. You\u2019re not paying me for the 15 minutes of work that I just did there.\u201d And I think the same thing is true in any service industry and especially in real estate.<\/p>\n
So on that point, one of the things that we do at our brokerage is, we\u2019re sort of a coach, we are going to coach you through what the best loans would be and how you should pursue if you\u2019re trying to buy more properties, if you just want to buy one property, that\u2019s different than if you\u2019re looking to try to scale. If you\u2019re going to use the BRRRR Method, if you\u2019re looking the house hack, if you\u2019re buying a second home, if you\u2019re getting into short-term rentals, there are different loan programs that work better for those. And sometimes you have to think ahead, once you got four of them, this isn\u2019t going to work, so do we have a plan to switch to something different? For you in the business that you\u2019re running, how is it you\u2019re coaching investors on purchasing properties? Do you talk them through the purchase and make recommendations or are you more of the person who says, you just tell me what you want and I\u2019ll go do what you say?<\/p>\n
That\u2019s a great question. The way that I go about coaching, especially house hackers is, here is every single option that you have. We\u2019re going to get on a screen share, we\u2019re going to get in person, whatever, and we\u2019re going to put every option that you have for this next purchase and future purchases on the screen. And together through our conversation, we\u2019re going to break it down into the one that makes the most sense. And the reason we do that is because say, write on paper, FHA makes sense. In our market, we\u2019re a super high purchase price market, right? Cash flow is pretty hard to find in Colorado right now. And the enticing thing that people see is when they\u2019re looking at an FHA loan versus a conventional loan, typically it\u2019s about 10 grand more to go 5% down conventional with closing costs and everything, but the monthly payment is exactly the same as an FHA loan where you\u2019re putting 10 grand less at the closing table, and that\u2019s super enticing.
But then someone has to take into consideration, \u201cOkay, I got this FHA loan. If I\u2019m going to stay in the same market, then I\u2019m not going to be able to use FHA on the next one.\u201d Maybe it makes more sense for them to go, they have more cash in hand now. Maybe they want to go conventional first and then be able to utilize FHA when they turn this property into an investment property and buy the next one as a primary. And so there\u2019s a lot to consider there. And I would say the biggest struggle right now is that difference between FHA and conventional, ever since FHA decreased their factor on their mortgage insurance. It\u2019s a very enticing product now for a lot of people, but there\u2019s a lot to think about with the FHA one.<\/p>\n
All right, David has walked us through the debt-to-income ratio and interest rates, but what other variables should investors focus on? Stay tuned for more on that after this quick break.<\/p>\n
And we\u2019re back. David Greene and I are here with our third David, lender, David Mackin. Okay, so we\u2019ve talked about the main thing about how much house you can afford being your income and the debt-to-income ratio. Obviously rates matter where they are, market rates and what rates that you\u2019re getting offered by your loan officer. Mackin, are there any other variables that people should be considering when thinking through how much they can afford for an investment property?<\/p>\n
Definitely the other factor is going to be the insurance that you might get on the property and then the taxes on the property. Those are all going to be considered as part of the debt-to-income because that\u2019s going to be a part of your monthly payment, right? And it actually goes even further. Right now in our state, we had a reassessment period this year for taxes rather last year. It\u2019s early January, I keep doing that. And taxes went up 40, 50% for a lot of people, which is insane. And so they might be able to afford the house that they\u2019re in right now, but when they get hit with that new tax bill and escrow reaches out for them to start increasing their contribution to their escrows, all of a sudden they might be in hot water.
And the same goes for anybody closing on a property before that new tax bill takes effect because we pay taxes in the arrears. They may be buying a property right now and the numbers make sense right now, and then very quickly that tax is going to go up and all of a sudden it changes their numbers completely.
So much like we were talking about working with a good loan officer, working with someone that foresees that and says, here\u2019s what your taxes are probably going to look like in the future, make sure the numbers make sense for those taxes right there. And then the insurance too. I\u2019ll speak on that real quick. You can choose different deductible amounts, things like that. You could have a very low deductible, but your monthly contribution to your escrows for that insurance policy are going to be higher and may affect your affordability. So some people really just want to get into a house and may opt for a higher deductible on their insurance so that their monthly contribution is lower because that might be the make or break for them even getting into the house. So there\u2019s a lot to consider outside of just interest rate and what your principal balance on the loan is.<\/p>\n
That\u2019s great advice, David. I think it\u2019s something that doesn\u2019t get talked about a lot, especially for newbies. You just look at the price of the house, you look at interest rates, but there are these other costs, and particularly right now as you mentioned with insurance and taxes going up so much that will impact your affordability, I kind of think about states like Texas. I actually thought about investing there because there\u2019s a lot of good fundamentals going on in those markets. But Texas has no state income tax, but their property taxes are super high and it can actually really impact your debt-to-income ratio, it could impact your cash flow. And so that\u2019s something everyone should be thinking about when they\u2019re analyzing deals or approaching a loan officer to talk about what they can afford.<\/p>\n
Couldn\u2019t agree more. And, Dave, if you\u2019re someone that\u2019s investing from out of state and you\u2019re not in Texas, cool, there\u2019s no income tax, but that doesn\u2019t really change anything for you as an investor. Higher property taxes absolutely changes.<\/p>\n
It actually works against you if you don\u2019t live in Texas, but you invest there because you\u2019re still paying the state income taxes like me in California that are high and I\u2019m paying higher property taxes when you go to Texas, right? So it is wise to be looking at different advantages and on that topic, how you look at your investing will make a big difference on the choices that you make. So there are some people who think buying cheaper properties is inherently better, so buying a house for 500 instead of 550 is wise just because it\u2019s cheaper. But if you\u2019re a house hacker or if you\u2019re an investor, I don\u2019t think that the actual price of the house is what you should be looking at. What you want to be looking at is how much income does it bring in versus how much does it cost.
We\u2019re back to that whole offense defense debt income. So for instance, if you borrow another $50,000 to buy a property at a 7% interest rate, so the house you were going to buy one for 500 instead, you buy one for 550, your principal and interest on that extra 50 grand is about $333. But what if that house that has for $50,000 more has an extra bedroom that you can rent out for $700, right? In that scenario, the more expensive house is the smarter financial option, especially if it\u2019s in a better neighborhood and the price of all your bedrooms, they\u2019re all going to be raising. And so now not only are you getting an extra bedroom, but when rents rise, you have the rents rising on an extra bedroom every single time. What\u2019s your thoughts on when you\u2019re working with house hackers kind of creating that framework for them to be looking at this purchase through?<\/p>\n
I think it\u2019s working backwards, right? When you\u2019re looking at a particular property or you\u2019re looking at multiple properties, do a really good analysis on what you think you can make for rent and the strategy that you\u2019re going to use for making rents and work backwards with it. Okay, I go to this property, maybe it\u2019s a five bedroom home, which you can find and I can rent out four of the bedrooms. And some houses in Colorado, you can rent out these rooms for a 1000 bucks, right? Okay, cool. I\u2019m making four grand on this property and in order for me to be cash flowing, then I need to go and make sure that the mortgage on this property is going to be less than and therefore cash flow.
I mean, that\u2019s the simple equation of doing cash flow. I just think that it just needs to be worked backwards, and that\u2019s going to help you not waste your time going and seeing too many properties because you\u2019re analyzing the rents on it first as a house hacker, right? Your typical home buyer\u2019s going to go, \u201cOkay, I want 30% of my income to be my housing expense.\u201d Cool. Simple, right? It\u2019s a little bit more complicated for a house hacker, but not too complicated. Start with the rents, work backwards, see what the payment\u2019s going to be.<\/p>\n
What\u2019s your experience been like with the type of people that are crossing your desk that are looking for real estate? Are you seeing more primary home buyers? Are you seeing more house hackers? I\u2019m wondering because with rates going up, cash flow is getting a lot harder to find, so I\u2019m wondering if you\u2019re seeing less investors and more creative approaches.<\/p>\n
I\u2019m seeing in my market is that house hacking is no longer investment only strategy. I actually think that for the new wave of home buyers, that house hacking is simply just the way to buy a home right now, especially in higher price markets. The word is out, everybody. House hacking isn\u2019t just this secret sauce or anything like that. I\u2019m not sure people are necessarily knowing the term house hack, but they\u2019re going in and considering, \u201cOkay, I\u2019m someone that is young. I already have roommates that I live with at a rental property, I rent myself. What if I can ask them to come and move with me into a house that I buy, rent out the other rooms and I\u2019m not paying nearly as much as I am right now in rent.\u201d You may still be paying something out of pocket, but I\u2019m seeing more people that are your normal home buyers doing the house hacking method to simply just have a lower housing payment. That\u2019s it.<\/p>\n
One thing I want to call out about house hacking though, is that I think sellers are catching onto this. I don\u2019t know if you guys have noticed this, but I\u2019m seeing that sellers are pricing duplexes outside the realm of reason for a non-owner occupant. And so if you look at a duplex and the cash flow that it can generate or the rent to price ratio, they\u2019re getting a little bit outsized, at least in the markets that I\u2019ve been looking at over the last couple of months. And I noticed that on the listings, all the listing agents specifically pitch them as house hacks because as you guys said, the numbers work for house hackers, but they don\u2019t work for investors. And so that\u2019s good for a house hacker, but it also means you might be paying up a little bit.<\/p>\n
Something interesting happened with multifamily homes recently, and that was when Fannie Mae came out and said, \u201cYou can put 5% down on multifamily.\u201d That announcement alone increased the value of multifamily homes, in my opinion. I mean, all you did was increase demand, right? You brought more people interested in multifamilies because of that, right? And so I agree that there\u2019s a bit of a\u2026 I don\u2019t want to say bubble button overpricing on the duplexes, the triplexes, the quadplexes, but if you go buy a 2-1, 2-1, you can find single family homes that are four bed, two bath, and you can rent out all the rooms and you\u2019ll probably cash flow more on just buying that single family home and not have to pay a premium because it\u2019s simply a duplex.
A lot of people that I work with that start to analyze the multifamily start to realize really quickly that potential for increasing cash flow is not as likely as they thought it was, right? And it depends on the property, but I do not blame the listing agents and the sellers on those multifamilies for marketing it that way and trying to get a higher price point. Of course, they\u2019re going to do that. That\u2019s what their job is to do. And people will go buy it with that strategy in mind. But don\u2019t underestimate the single family home when there\u2019s a shiny element to a duplex or a triplex, right?<\/p>\n
Yeah. I remember as a kid that people who own duplexes, there was sort of some pity for them. Like, oh, you\u2019re poor, how sad. Too bad you can\u2019t buy a real house, and you had to buy one of those pretend houses. It was like you didn\u2019t have a motorcycle, you had a Vespa. It looks kind of like one, but we all know that that\u2019s not anything that anybody wants, right? The duplexes were the Vespas of the housing industry and now they\u2019re the Ducati. Everyone\u2019s fighting to get those duplexes. And I think that it\u2019s worth noting the reason that small multifamily is so popular is because housing\u2019s so damn expensive. When you really don\u2019t want to pay that full four grand a month and you can get a duplex or a triplex and take a big edge off of it, it makes a lot of sense. It\u2019s going to put them in demand that they\u2019re going to sell for more.
But the reason that housing is so expensive is we don\u2019t have enough supply. Things can change if they figure out a way to incentivize home builders or technology improves to where 3D printing of houses becomes a thing that can happen all the time and boom, boom, boom, boom, boom, housing just starts to go up all over the place. Those people that really wanted that duplex are going to find it\u2019s very difficult to sell, because someone\u2019s going to say, \u201cWhy would I pay all that money for a tiny little duplex that\u2019s 90 years old, when I could go buy the big brand new shiny house that just was 3D printed for half as much money?\u201d And as investors, we always have to be aware that the trends change and what is popular now may not be popular in the future, and what nobody wants right now might be something that people wants in the future. But what doesn\u2019t change is financial responsibility. Making more money was always going to be a result of increasing your value to the marketplace, and that\u2019s going to encourage personal growth, and I\u2019m here for it.<\/p>\n
That\u2019s certainly a perspective thing too, of understanding where you\u2019re at and enjoying it as well. Not everything is about what money can buy you, it is about freedom. It is about independence. And money goes, when all is said and done, you die. But the independence that it can give you while you\u2019re still here is where the value actually is. So I couldn\u2019t agree more with that.<\/p>\n
Dave Mackin, anything that you\u2019d like to say before we get you out of here?<\/p>\n
One thing I will say is that anybody that may not be buying a property right away, or they\u2019re really in the analysis period or they\u2019re just interested in real estate, if you have any inclination to get into real estate as a career, that is something that is super powerful for me. You can buy deals and you can have as many deals as you can, and you\u2019ll learn from all of those. But the opportunity to work with a lot of investors and go help them and be a part of their transactions, the knowledge that you gain from it is exponential, as compared to just doing your own. And so anybody that has any interest in it, I would highly encourage getting into it. Making sure that you can still qualify for homes when you get into it is another conversation, that is the danger of it. So I will asterisk with that. But if you\u2019re someone that has that time, two years to get into it and get going, I would recommend it.<\/p>\n
But a good loan officer will help you find a way to make income and find loans that you can use, whatever income you make to qualify as opposed to a mid-one. So don\u2019t go mid. You heard us mention on the show, my book, Pillars of Wealth: How to Make, Save and Invest Your Way to Financial Freedom, and Dave has a book out as well, Start With Strategy. You can find both of our books at biggerpockets.com\/storemine. Woo woo.<\/p>\n
Woo woo. Yeah. Today is the day.<\/p>\n
Right on. If you want to learn how to make and save enough money to buy a house, and then once you\u2019ve got it, you\u2019re like, \u201cWell, what should I do with this money? I need a strategy.\u201d Those are two books that you should go pick up. I\u2019ll let you guys get out of here. This is David Greene for Dave, my Stratego Amigo, Meyer, signing off.<\/p>\n