How 20-Something Me Bought a Fourplex in L.A. With Only $15k Out of Pocket 🏘️

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I believe that Millennials are selling themselves short financially.  They're not thinking outside of the box.  Heck, that's why I started this blog (which, by the way, made me over $10,000 its first three months of existence and is growing every month).  I wanted to help others in my generation see what's possible if they're willing to think creatively about their financial future and what they can do to get ahead.

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A good example of this “selling themselves short” mentality is with respect to real estate.  Millennials simply don't think that investing in real estate is something they can do.  They often think they need hundreds of thousands of dollars in the bank to get started.

But they don't.  And I'll tell you why in a minute.

Look, folks.  Real estate is an amazing investment.  Unlike stocks, you can buy it for less than market value.  You can use leverage in amazing ways.  The tax benefits are enormous.

🏘️ Read: How to Make Your Money Work for You, Part 5: Real Estate

Knowing all this, I decided in my 20s that I wanted to buy property.  And not just a house to live in, but multiple units where multiple people paid me rent every month.  So I researched my options for a few months, and quickly found myself in a dilemma.

🤔 My Dilemma 

When I decided I wanted to be a real estate investor, I had a dilemma: living in an expensive market like Southern California, should I invest in more affordable prices out-of-state that cash flow better or get my feet wet by investing locally?  After talking to real estate investors and running some numbers, I decided that given my place in life I would be wiser to place my bets on California appreciation over the next 20-30 years rather than investing in some beat-down property in Cleveland for an extra $400 or whatever in cash flow per month.

But here was the problem: multi-unit buildings in the Los Angeles area were crazy expensive at the time (and are even more expensive now).  You were looking at $400,000.  So what did I do?  I house hacked.

💡 My Solution

What is house hacking?  Does it involve taking a machete to a house and going to town?  No.  It means buying a multi-unit rental property (i.e., a duplex, triplex, or fourplex) and living in one of the units such that the income from the other units covers your mortgage.  In that way you are “hacking” your biggest expense: housing.  You’re basically living for free (and then some) if you buy the right property!  You can do this with very little cash up-front: as low as 3.5% down if you get an FHA loan, which is common among house hackers.  House hacking a 4-unit property, living in one of the units and renting out the other three, was actually my first venture into real estate, and I’d like to share my experience.

Given the facts that (1) I could get into a property for a measly 3.5% down, which would free up cash to invest in other places if I so chose, (2) I was already throwing away rent every month such that I could still be cash flow negative of $650/month (what I was paying in rent) and still be better off because a portion of my monthly payment would be building my equity and the rest would be tax deductible, and (3) I’m in my 20s and have the time to take a long-term view of appreciation potential, it was a no-brainer to go the FHA 4-plex route in SoCal, despite the fact that it is one of the most expensive markets in the country.

Think about it, especially you young ones: if you’re in your 20s and currently unattached to children, house hacking is a no-brainer. If you do nothing else in real estate, you will have succeeded by getting into a fourplex as a young man or woman with only 3.5% down. Assuming the rents cover your expenses, in 30 years when you’re in your early 50s and the mortgage is paid off, and you’ve done the smart thing by raising the rents over the years, you will be sitting on a multi-million-dollar asset that cash flows thousands of dollars per month at the cost of a measly $20k or so out-of-pocket when you were 20-something. I can’t think of any better way for young people with limited resources to prepare for their future so early on in life with so little cash out-of-pocket. Run the numbers and see for yourself.

🕵️ How I Got the Deal 

This isn’t to say that the process was easy.  It took time.  I really wanted to find a “great deal,” so I ended up spending about $2,000 marketing to fourplex owners in my local market, and not one callback was one of those sellers you dream about, e.g., the guy who just about lost his shirt and needs to liquidate his assets for $0.70 (or even $0.85 for crying out loud) on the dollar–and these kinds of people typically would need a cash, not an FHA, buyer anyway–or that older widow who’s sick of dealing with tenants but still wants the monthly cash flow and would be open to seller financing.  They all just wanted to know how much they could get for their property.

I’m sure distressed multi-family owners are out there when the market’s hot, but obviously they will be much farther and fewer between than distressed SFR owners, both because there are so many more SFR owners and because multi-family owners, in general, are more sophisticated real estate-wise than SFR owners, most of whom aren’t investors at all.

Maybe I didn’t spend enough on marketing or didn’t know what I was doing or how to negotiate, but that was just my experience.  And at the end of the day, I bought something off the MLS, and the numbers still penciled out.  Would I have done it if I already had a primary residence and I had to put 25% down?  No way.  But since I was kicking money out the door every month for rent and because I could get in the property for a measly $15k down + $10k repairs, it was as no-brainer.  Purchase price was $435,000, and the seller gave me a credit for $15,000 to cover various repair costs, particularly roofwork.  I think it was off many people’s radar because it’s definitely out there, geographically speaking. That being said, the location is between two rapidly-growing cities, and if I stay with the property for the long-term, I shouldn’t have any problem with appreciation and growth over the long haul. In any case, it cash flows with only $15k down payment + $10k repairs out of pocket.

💸 FHA Self-Sufficiency Rule 

One thing to keep in mind when looking for an FHA owner-occupied triplex or fourplex is that 75% of the sum of the market rents on all units (including the one you will be occupying) need to cover your monthly payment (principal, interest, taxes, insurance, and mortgage insurance). This is known as the self-sufficiency rule. It only applies to 3- and 4-unit properties (not SFRs or duplex) bought using FHA financing.  There are other FHA requirements concerning which you should contact your local lender, but determining whether or not a triplex or fourplex meets the self-sufficiency rule is a good place to start as this rule will immediately eliminate many properties from your search, especially in expensive markets like mine.

The fact that the self-sufficiency rule only applies to triplexes and fourplexes in no way means that you cannot purchase a single-family home or duplex using FHA financing.  It just means there’s an additional requirement that 3- and 4-unit properties must meet because as these are typically larger, more expensive properties with bigger mortgages and bigger monthly payments and hence pose a greater insurance risk to the FHA, which, by the way, is a mortgage insurer, not a mortgage lender.  As FHA’s credit and income requirements are not as strenuous as they are for conventional mortgages, it seeks to mitigate its risk of insuring a 96.5% loan-to-value mortgage on a larger property by making sure that the rental income is high enough in relation to the mortgage.

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