My Real Estate AHA Moment
Webster defines an "AHA moment" as an instant of sudden realization, inspiration, insight, recognition or comprehension.
My "AHA moment" about the possibilities in real estate came after I had an interesting conversation with my landlord while in college. The landlord was also a college student. Although this exact conversation wasn't the real trigger point, replaying the content of this conversation in my head many years later acted like a lightbulb.
When I moved to San Diego for grad school from overseas, I needed boarding and was really desperate to find something that fit an extremely modest budget around the campus of San Diego State University (Go Aztecs).
As an international student, money was tight. While screening the bulletin board on campus, one ad caught my eyes. A student was looking for roommates to occupy a room in his house. He only rented to grad students. The rent price was close to my budget, and the house was located near public transportation. I went to visit the house and decided to sign the lease on the spot. It was a 3 bedroom house with a garage. I would occupy one bedroom and the remaining 2 rooms were occupied by other grad students. The landlord himself had turned the garage into another bedroom. That was his bedroom. The landlord had very strict house rules and later I will realize that he was enforcing them diligently. My bedroom wasn't furnished, so I needed a mattress. Since I didn't own a car, I asked the landlord to help me pickup a mattress I found on sale. As we went pickup the mattress, I asked him questions about how he came about owning such a large house. He gave me answers that I vaguely remembered, but a few words caught my attention: Co-signing mortgage, Cashflow, Rent Payments, make-ready costs when a tenant moves out. Honestly I was asking those questions more to make conversation. His answers were completely un-actionable things for me at the time. So, I "forgot" everything he said ...
Fast forward many years later, I came across “Rich Dad, Poor Dad” and read it. As I processed the information in the book, I started to remember the conversation with my landlord. Bizarrely, many of the answers he provided me back then were coming back to my mind and they started to make some sense. Cashflow, mortgage payment, co-signing, only rented to grad students, clear house rules, tenant turnovers, ...
Shortly thereafter, I purchased my first property. I rented a room in the house and had strict rules for my tenants... Just like my previous landlord. And so started my real estate journey.
Later I came to learn that this strategy is known to seasoned investors as "House Hacking".
Here is a quick summary of 5 key concepts I learned from my landlord and why they can be important, when purchasing a property.
- House Hacking: This is the process of purchasing a house using owner occupant financing, occupy part of the house, and rent other parts to paying tenants. Owner occupant get much better financing terms than investors. Using FHA loans allows for a very low down payment, sometimes as low as 3.5%.
- Co-signers: Aspiring home owners who don't meet the financial requirements to purchase a home use co-signers to qualify for the loans. A lot of young investors use this strategy to purchase their first property.
- Make-ready: Tenants turnovers are some of the most costly times for landlords. Once a tenant moves out, the landlord is not only faced with an empty unit that doesn't generate any rents, but also with costs to paint, clean up or replace the carpet and possibly new appliances. Landlords are therefore very thankful, if they have tenants, who really take care of the property well to avoid costly make-ready costs.
- House Rules: As a landlord, I learn very quickly that house rules are very important to ensure that your investment is not being taken advantage of by tenants. Especially, when sharing the same house with tenants.
- Property Location. When catering a particular type of tenant, buying a property near public transportation is very advantageous. Proximity to bus stops or metro stations makes the property very attractive.
If you are already investing in real estate, what is your AHA moment about Real Estate? When did you realize that this was a way to supplement your income and have control over your income. Leave a comment below and tell me how you feel about this aha moment.