House Hacking (Part 2)
This week on the Mind of Millionaire podcast, we are continuing our discussion of house hacking. Dan Makin, Norah Lile, and TJ Lile are joining us again. As well as Austyn Garcia, co-host of the show.
Austyn is native to Colorado but plans on venturing to live in another state at some point.
If you have not listened to part one of this podcast, go check it out to get a better idea of what the term house hacking means.
Note: the interview below was condensed from the original form. For complete commentary, listen to the podcast above
Blair Braden, CFP®: Dan, you mentioned collaborating with others to house hack, what do you mean by that?
Dan Mackin: House hacking doesn’t have to be alone; you can partner with someone to better qualify for purchasing a property.
I did this with my brother. We went on the loan together, I fronted him on the down payment and his income made us qualifiable to purchase the property. Come February, we will fully be renting it out.
Blair Braden, CFP®: As financial planners, we must evaluate the worst-case scenario before engaging in business. When Zak and I went into business, this was something we did and something I recommend anyone do when entering a partnership.
If you have questions about this, please give us a call (303) 261-8015 or schedule a free consultation on our website and we would be happy to chat with you.
Norah and TJ, is there anything else you can do for more financing options?
TJ: From a financing perspective, you can have one individual be on the loan by themselves to get the first-time buyer benefits. The other individual can finance those loans to get the best financing terms.
Blair Braden, CFP®: You mean that if you’re married, you could split the loans between each other and finance separately?
TJ: Yes, you can both be on title and deed. But you can keep the loan separate so that you can maximize your ability to finance up to twenty properties.
Blair Braden, CFP®: Do you know if they can still file their taxes jointly?
Norah: Yes, you can file together or separate. The optimal financing route is capped out at ten properties per individual l right now. In my 25 years in this business, I have seen it as low as four. It is important to be strategic about this in terms of qualifying for a loan.
Blair Braden, CFP®: Dan, do you see many people doing this?
Dan: Yes, I do. For most people, when they get close to the ten number limit, they then get into specialty loan products.
Norah: Are they trying to diversify their portfolio with bigger and better properties?
Dan: Yes, or they are trying to open loan limits by using blanket loans. Mortgages get very complex, but these people have been doing it for a while.
Blair Braden, CFP®: Hearing all this makes me want to discuss how the structure of ownership plays an important role in estate planning. Could one of you talk about that?
Dan: Yes. For anyone who doesn’t know, there are three ways to hold a property.
Severalty: you own it yourself. Joint Tenancy: You own with someone else and if you die, all the rights pass to the other person. Tenancy and Common: Each of you designates who their rights will pass to if someone dies.
In most business agreements you should have a tenancy and common.
Blair Braden, CFP®: There are lots of things that can be affected by this, like divorces or tax implications when you pass away or gift assets.
Please make these kinds of decisions with a financial advisor, CPA, estate planner, etc. because it is not always cut and dry.
Switching gears, at Denver Wealth Management, we love our veterans and what they do for us. This makes me think of VA loans, can they come into play with house hacking?
Norah: Yes, we encourage veterans to use VA loans whenever possible because they have many benefits and are high-performing. Some lenders suggest refinancing later but we don’t know what interest rates will be like at that time.
There is also a VA rehab loan, if you have a property that needs some repair, you can get 100% financing at the time of buying the property.
Austyn: As Blair mentioned, we are very grateful to veterans. Every July, on July 1st this year, we host our Clays for Cause charity event at Kiowa Creek. This is our fifth year, and we are trying to get to 100 participants so please come out and join us, we would love to meet you all.
You can find more information on our website or by emailing me at austyn@denverwealthmanagement.com.
TJ: I won’t have my dad bring all his friends and win the tournament again this year.
Blair Braden, CFP®: No, they should, come put pressure on the rest of us to try and win it. If you want to win you better be good because TJ’s dad can smoke those clays.
Let’s talk about numbers. Dan when you are looking at options for you or your clients’ what kinds of financial aspects do you look for that make it a great house hack?
Secondly, what do the markets here in the Front Range or anywhere else you’re familiar with look like?
Dan: I look at flexibility, whether that be types of renting (long term or short term), cash flow, number of bedrooms, etc. Austyn has a one-bedroom condo which can be limiting.
In the Front Range, it is important to specify by city. In Denver, there are a lot of contingencies, but numbers can be great. One of my clients just bought property near Mile High stadium. They rent out part of their condo that is just a basement, but they still profit well because of the location.
Another client bought close to 1st and Sheridan, they rent it for half the month, and it covers the entire mortgage.
Some clients have been looking into other cities that are more investor-friendly. In Arvada, you can own up to three short-term properties. Restriction wise though, you can only rent short-term for 240 days per year.
Standard house hackers are trying to get a 10-15% cash on cash return. More advanced house hackers are generally looking for a 40-60% return.
Blair Braden, CFP®: What does 40-60% on cash return mean?
Dan: It is simply your net profits from the year over how much you have spent in cash for the acquisition and getting the property up and running.
Blair Braden, CFP®: So, you are saying, be aware of the market you’re buying in, the rules and regulations, and the opportunity for flexibility?
Secondly, use the resources mentioned in part one of this podcast to figure out if you will be able to get a 40-60% return?
Dan: Yes, and if you are buying purely as a rental, a 20-40% return is more to be expected because you are putting a lot of cash down.
And do your research by reaching out to other landlords and management companies to get reference numbers and rates.
Blair Braden, CFP®: You can also chat with Norah and TJ to figure out how to be as little as cash down as possible.
Moving on to management, what is it like managing, and should people hire a management company?
Dan: I recommend trying it yourself at first to get an understanding of what you will be expecting them to do. It will be a 25-40% fee every month. Consider all factors, like finding reliable cleaners. In some areas, it is harder to find cleaning companies than in others.
Joining short-term rental groups will help you find solutions to these problems and make connections.
Blair Braden, CFP®: Using these points and the others mentioned, such as collaborating with experts on the front and setting up clear goals, you can certainly prepare for success.
Austyn: I have a question on that note, one of my fears of short-term renting my condo is having a nightmare tenet. Do you have any experiences with this you can share?
Dan: I haven’t personally but my friends have. I have learned (in Colorado) to not market yourself as a 4/20 friendly house because you don’t want your place to be the hub for that.
Secondly, don’t pick money over comfort. If you are not sure about a possible renter based on their profile, it is fine to say no. You can lower your rent price for a while to attract more renters and have a larger pool to choose from.
Blair Braden, CFP®: With lower prices, you will also be able to up your ratings and have more stringent requirements as to who stays there.
My wife and I are Airbnb hosts, and we make sure our rules are very clear so that if something happens Airbnb will cover the incident cost.
Are there any other tips you three would like to leave our listeners with?
TJ: Homeownership allows you to start building equity now. From personal experience, we use equity from properties we already own to leverage for buying more properties. This helps us offset our mortgage.
Work with experts to prevent falling into pitfalls. Dan, Blair, and Austyn are great people to reach out to for this.
Norah: To reiterate, make sure you are speaking with professionals rather than googling or talking with your friends. Be honest with your intent and don’t disqualify yourself right away based on your financial status.
Blair Braden, CFP®: On a similar and final note, I have had a lot of people come to me for their second and third purchases because they didn’t do enough research in choosing which real estate professional to work with.
I love real estate. At Denver Wealth Management we like to eat what we are cooking which is why it is a part of my portfolio.
In my experience personally and with clients, cash is keen. Having availability to cash for these opportunities is great. It is also important to have cash reserves to take care of accidents that come up.
If you are clients of ours or interested in becoming so, that is a part of the plan, piecing all of this together to build your real estate and liquid portfolio.
We are not real estate professionals, that’s what Dan and his team are for. Check out his podcast Millennial Real Estate Investor or contact him at (720) 466-3378.
If you have questions for TJ and Norah, you can contact them at (303) 809-5418 or visit their website, www.integritymortgageco.com.
Thank you each for joining us today, I have learned a lot today. I look forward to continuing our relations and seeing our clients excel, pay off debt and build wealth.
Disclosures:
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Denver Wealth Management, Inc., a registered investment advisor. Denver Wealth Management, Inc. is a separate entity from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All investing includes risk including the possible loss of principal. No strategy assures success or protects against loss.
Norah and TJ Lile of Integrity Mortgage Co. and Dan Mackin on Millenial Real Estate Investing Agents are not affiliated with Denver Wealth Management, Inc. and LPL Financial.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
All information is believed to be from reliable sources; however, Denver Wealth Management, Inc. and LPL Financial make no representation to its completeness or accuracy.
