House-Hacking Your Way to a Mortgage Free Lifestyle – Interview with Scott Trench of BiggerPockets


(chiming) – Well, guys, I wanna
welcome Scott Trench, the CEO of BiggerPockets, and an active real estate investor. BiggerPockets pretty much coined the phrase house hacking, so this blog post would not be kosher if we did not have them represented here. So, Scott, thanks, man, for coming, and doing this interview with me today. – Yeah, thanks for having me, Jaren, it’s great to be here, and I gotta give credit where it’s due. The person who coined
the term house hacking is actually Brandon Turner, who also works here at BiggerPockets. – Yeah, it’s pretty
funny how much marketers can actually change industry, ’cause like, the BRRR strategy is like a household name, like I use that terminology, I use house hacking, a lot of things that you guys have coined, primarily Brandon. – Primarily Brandon, yeah. – Primarily Brandon, has
become household names. It’s interesting how you guys have been able to create culture, so, man, tell us about who you are, how you got started, and obviously, your whole experience in house hacking. – Yeah, awesome, so the goal is to talk about the house hacking tactic
in particular, right? – Yup.
– Okay, awesome. So, in the context of house hacking, you know, when I first, I actually first stumbled
across that concept when I read Brandon’s article, I think he published it in 2013, about that, and there I was, at that point, sitting as a, I was earning a salary of $48,000 a year, and I had basically no wealth, and no debt. That was a big advantage, coming out of college with no debt, but you know, two or three grand in my bank account to get me through the first, you know, that was my leftover savings from my jobs in college, after I blew it all on a trip to Europe, that kind of stuff, right? So I’m sitting there in that position, and I wanna move towards
financial freedom. – Yeah.
– Right? And as a $48,000 a year
financial analyst one, I don’t have that many different levers I can pull, right? If I wanna build wealth, I got four levers. I could earn more, I could spend less, I could invest my accumulative wealth to produce investment returns, or I could go out and be an entrepreneur and create an asset, right? So, of those, the thing that seemed most, the only option I had was to spend less. I could only spend less. I saved up my first 20K, read that article, and was like, okay, now I can invest this 20K. How do I invest this to get the biggest
possible bang for my buck? And so, I’m going through the math, and I’m saying, if I put down, if I buy, I’ll use exact numbers of my duplex that I first bought. It’s my first house hack. I put down $12,000. 240,000, that’s 5% of
the $240,000 investment. The other side rented for 1,150, and then the second bedroom, they’re both two bed one bath units, in my side rented for 550. So if you’re following those numbers, that’s $1,700 a month in rent. And the mortgage was 1,550, including PMI, you know, principle, interest, taxes, and insurance. So that’s a spread of
$150 to cover utilities, and basic maintenance, stuff that I was doing myself. I probably put in another
four or five grand, maybe eight grand in plumbing repairs, and other, going to Home Depot. That first couple of months was basically a whole bunch of go to Home Depot, get a bunch of parts, go to the property, start my project, realize I got just the wrong size on whatever pipe I need, go back to Home Depot, then try again three more times. So just a nightmare of figuring out how to do handyman stuff. But this was the best thing I could’ve been doing with my money and my time at the time. I gave you my situation, right? How can you invest money more effectively at lower risk than what I did, right? You know, I put down that money. I’m effectively living rent free. Rents would have to collapse, collapse before I start
paying more to live there than I would’ve paid as
a renter to someone else. So that’s really low risk, right? As long as I’m happy living there, and at a much lower risk than I was as a renter, or than I would’ve been
if I bought a house without any extra
tenants coming in, right? And also, also, you know, at 3% appreciation, if you put down 5%, you’re getting what, 60% return on your investment every year? Right? – So here’s a big question, though, man, ’cause I know on paper, it sounds amazing, but practically, you’re sharing a wall with your tenant. So what do you do with that? Like, how do you navigate
the waters there? – Well, I mean, it’s like, you ever live
in an apartment complex? – Yeah, I live in one right now. – Yeah, so how often do you have a contact with your neighbor? – Very rarely, very rarely at all. – So I mean, you know, maybe I’ll see the tenant when I’m coming in or going home, maybe they have a problem once every three months, and I’ll go and take a look after work, but honestly, I think
I can probably count, I probably had less than
10 to 20 interactions with my tenants per year, just as neighbors, for the most part, right?
– Did you have to coach them or frame them that way? Like, did you tell them that, did you say you’re the property manager, not the owner? ‘Cause the biggest fear is, if you rent out a property to a tenant, and they’re knocking on your door because their sink is leaking at three o’clock in the morning. You know, like, little petty stuff like that. How do you get a lot of personal boundary in place when you’re living right next door to people who kinda legally can call you if something is going wrong? – Well, look, if the toilet explodes, and is leaking all over the place at three o’clock in the morning, I’ll wanna know, ’cause that’s gonna come through the wall and affect my unit, right? That ever happens, right? So the answer is, that simply never happened. If it did happen and it
was a true emergency, I would’ve dealt with it just like I would’ve dealt with it if I had investing in a rental property somewhere else, that you have to deal with at three o’clock in the morning. I’ve never had that happen, and hopefully won’t have that happen. Every landlord will have that happen, but hopefully it won’t be a major part of my life. It would be a recurrence that I can count on one hand, right? It’s just, I think that
people have this fear about house hacking, where they’re gonna
live next to this like, crappy tenant who’s a huge pain in their rear the whole time, but I mean, your odds
of having a bad neighbor are way higher in an apartment complex where you don’t control who you select as your neighbor than in a house hack. I wasn’t gonna pick somebody I thought was gonna cause
me a ton of problems. It’d be a pain in the rear to live in. Look, if they did, I would ask them to leave, which is my right. So, I think that is pretty overblown. If you’re afraid of that, simply go month to month with a tenant, and then you can– – Have more control. – Simply not renew the lease. It’s not an eviction. Hey, when this month comes up, I am not gonna renew your lease. Please move out. – So, were you able to find a house where the numbers work for you to live virtually mortgage free, straight off the MLS, working with a licensed agent, or did you do like, a direct mail campaign? How did you actually find the place that you lived in, when you first got started? – So, I actually found my
agent on BiggerPockets. I posted this, before I ever worked here, I posted, hey, I’m a newbie, I’m looking to house hack. Look at me go. Which, by the way, everyone should do. I’m making fun of myself, but that’s what everyone should do, because that’s how you introduce stuff to the community and start getting connections. And someone followed up a few months later and suggested this property, and the great thing
about this property was it was a HomePath property, so it was not in perfect condition, which meant that, and by the way, the way HomePath works is they want someone who’s going to occupy the property to purchase it. So I had 30 days to look at this duplex that was on HomePath, before any investors
could bid on it, right? And because it was a duplex, and it was not in good repair, not very many families or the competitors for single family properties were there, and the investors were locked out. So I as a house hacker had a leg up in taking my time on that particular one, and probably got some luck in not having competition for higher offers that might have beat me out. That’s how I got the first one. – That’s awesome. So, how does the HomePath program work? Like, how do you sign up? Do you just talk to a real estate agent that is connected in
that program, or what? – Well, I should know a little bit more about this, but really, she just
suggested the property and kinda gave me that high level overview of the situation, and then I was like, the numbers work here, I’m gonna call up a
couple of investor buddies and see if they think it is, and they were like, yeah, I’d buy that if you didn’t. So I was like, that’s good enough for me. I’m gonna pull the trigger on this and get to work. – Man, that’s awesome. So, another big question I have is what do you do with vacancies, right? So, obviously, if push came to shove and you needed to cover
the mortgage yourself, like, everything, like, all units are vacant
and it was just you, obviously, you can cover the mortgage cost, right? Like, how do you navigate
the waters with that? – Well, I’ll give you two scenarios, one from then, and second from now, right, ’cause then and now are different for me. When I bought the place, I was earning that 48, maybe I’d gotten a raise at that point and was earning 53 or something. You know, somewhere in that ballpark of annual income. Actually, no, I started
my job at BiggerPockets right around the time I bought that place. Yeah, so, let’s call it 50 to $53,000 a year, okay? And I told you I saved 20K. So that means I had 20 to 25K in cash, after tax accessible liquidity, maybe 18 to 20 a year, which could easily cover that, which could’ve covered
that mortgage in a pinch. I wouldn’t have been saving much, but I could’ve covered the mortgage. So, for me, that was, yes, it was an aggressive investment. It was pretty much all of my net worth I put into this property at the time. But it wasn’t outrageous from the sense that I
wasn’t able to finance it. I’m sure people have made much more irresponsible housing decisions than purchasing a house like that. And it would have to be a pretty catastrophic set of events for me to have that long a period of uninterrupted vacancy, or it’d have to be pretty
terrible operating. Oh, and then now, I guess, is the next question, right? So now that I’m a few years out and have had a chance to stabilize other parts of my
financial position, right? Now I maintain a very strong
savings rate generally, and can cover the mortgage on all of my properties
if I really need to, through other sources of income. But again–
– And for how long? Like, six months? – Indefinitely, from my general position. But my cash savings, that I’ve set aside for the properties, in particular, are $15,000 for that first unit, and then $10,000 for each of the two additional properties. So we have about $35,000 in cash set aside in case something were to happen at these properties, to fund vacancies, repairs, all that kind of stuff. And then, the way I kinda
manage the expenses is, every time I dip below that, I will not take any distributions until I pull it back up. And if I’m above that, I have, you know, a solid couple months of distributions. And then, last thing people want to know, there’s probably about 8,500 to $9,000 in gross rent across the three properties. I don’t know why I keep
saying four properties. I have two duplexes and a quad plex. So the four is probably coming in from the four plex I’m talking about. And then, the aggregate
mortgages across those is probably about 4,500 to 4,800. I gotta check it. But so, that’s a nice hefty little cushion there for me, that can account for some of that cap ex, and vacancy, and all that kind of stuff. – 100%, man. So, what my question was gonna be was related to the 50% rule. So, a lot of people talk about, when you approach a small apartment, or a two to four unit, essentially, your plan for your expenses to be 50% of your gross rent. Have you found that to be true? What’s your approach? ‘Cause I actually had another interview with Lucas Hall, that an alternative to the 50% rule that I thought was really nifty, and that he actually just saved six months worth of the
gross rent per property, and then kept that nest egg per property, and that’s how he offset it, and then after six months of savings, once he hit that number, he was taking all of the cashflow home. So, what’s your approach? Do you think 50% is extreme? How do you navigate that? – By the way, I love Lucas, and while I work here at BiggerPockets, he’s a much more seasoned real estate investor than me, so I’m sure he’s got some great ways to go about that. I think that’s a great approach. As far as my opinion on the 50% rule, I think it is total nonsense. That’s completely fabricated, and has no basis in reality, maybe in low end markets in the mid-west. Let’s use my duplex that I just described, that first house hack. You take that thing and you transplant it
from Denver, Colorado, and you stick in the
middle of Indianapolis, or Memphis, or Jacksonville, Florida, and suddenly, it goes from being worth, let’s call it $300,000 now, to $80,000. Suddenly, the rents go from $1,400 a side or $1,500 a side to $600 a side, right? So, let’s call it $800 a side, for easy math here. So, just because that property is sitting here in Denver does not mean that my refrigerator costs more, or the shingles on the roof cost more. You can argue that
labor is more expensive, because it is here, if you get a contractor in, but it’s simply not
that much more expensive for materials here in Denver to kind of do basic
maintenance and operations. On the two components of, the cap ex is not gonna change, here in Denver versus Memphis. Maybe it will, to a certain degree, but certainly not, it’s not gonna double the cap ex, right, just because the expenses are just not a function of your rents, not at all, and this compounds even more if you go to a market like San Francisco, where just ’cause I take my duplex that’s worth $300K here in Denver and put it in the financial district of San Francisco, now it’s worth $2 million, does not mean that my cap ex, and it rents for $7,000 a month each side, does not mean that my
cap ex is now $3,500. You know, it’s ridiculous. It’s ridiculous. So, the two expenses that do scale with rent growth, by definition, are gonna be property
management and vacancy. So, in a hot market like Denver where there’s less housing, because there’s more demand than supply, you tend to have lower vacancy. I still budget a
conservative vacancy number and suggest other people do as well. The next question is property management. If I stick my duplex in a place where it’s gonna rent for $800 a side, I’m gonna get a very
different type of tenant than the current tenants
who pay $1,400 a month. So, that tenant is gonna take me, I’m gonna spend more time
managing my property, at $800 a door, than I do at $1,400 a door, and it’s gonna be a
worse experience, right? So if I spend one hour managing my property right now a month, which is maybe light, but it’s one or two hours a month, ’cause it all comes in big batches, right? I don’t spend any time at all most months, and then I’ll spend five or six hours when there’s turnover, or maybe 10 hours when there’s turnover, dealing with a bunch of things. So, you know, if that averages out to two hours a month, and I’m getting $2,800 a month, then I’m getting $140 an hour to manage that property, right? And I’m spending two hours a month, and I’m spending four hours a month managing my $1,600. I’m getting $40 an hour. So, property management costs, I think are not accounted for by a lot of people who are attempting to self-manage. Yeah, I absolutely do have a calculation estimate within my analysis for
property management, but I didn’t throw that away and say, hey, I can pay $140, I can pay 10%, 12% of rent
to a property manager, and this deal still works, but I like my $140 to $280 an hour job, and I’m gonna take that one, thank you very much, instead of hiring out to somebody else, until somebody wants to pay me more than $280 an hour. – Yeah, man. Now, that makes a lot of sense. I have one more real question for ya. You mentioned earlier when
you first got started, learning how to be a handyman when you weren’t really that handy. So, what’s your biggest tip or your biggest advice on trying to figure out how to, like, you know, you have a tenant that has a leaky faucet, or like a toilet explodes, and you don’t know how
to replace a toilet. Like, do you just kinda
do the whole YouTube, and then just hope and pray that it figures itself out, or like, what’s your approach? – Well, if the toilet explodes, and well, toilets don’t explode, so let’s use a more
realistic example, right? So, the toilet’s simply
not working, right? It’s not a big pile of brown stuff that you’ve gotta dig through in order to fix it, it’s just not working correctly. If it’s a big pile of brown stuff, you know, like, maybe I’ll hire somebody else to do that, and again, this is me talking from my position a few years ago, right? Nowadays, I am starting to outsource more and more of the handyman stuff. Doing the handyman work myself was an enormous spread in returns of my investment and the cost of my time, a few years ago. And those things are starting to change as my career portfolio is growing, which every successful
investor will experience over the course of a five, 10 year plus career in investing in real estate, right? But if I’m still early on in that, then that’s a major part of my portfolio, big part of my financial position, and that’s real dollars that I can’t afford to lose by not doing it myself. So, yeah, I would get on YouTube, and I would say, how do I fix this thing, and I’d shut off the water, ’cause once the water’s shut off, what’s the worse that could happen? There’s a drain, right, so then you just replace the toilet. That’s a lot of heavy lifting, and not very fun, and kinda dirty and messy, but you know, you just gotta go buy the toilet, you install it, and nothing in there is rocket science. You got a problem in the sewer, that’s like 20 feet deep. Now you gotta call somebody. That’s just blocking things up. I don’t know how you solve
that one on your own, but… – I just know, man, that me and my wife, the only time I manage
has ever been in danger was involved with me putting up curtains, and it is not very
conducive for our situation for me to be a handy guy, so… – Oh, look, I literally was at my rental property yesterday, right, and we just remodeled it after kicking out tenants, and the handyman, for whatever reason, did everything but hang up the curtains. So we went to Home Depot
and did the curtains, and it took me like, what, 30 minutes? Come on. – And straightening it…
– Screw, screw, screw, screw, hang, boom, you’re done. – I’ve become a very evil person when it comes to curtain, man, I just gotta be honest. – Aw, come on, that’s, yeah, curtains and blinds, they make it so easy these days, so… – Yeah, maybe it was a few years ago, so maybe that’s what it is. They got some new technology or something. All right, man, so, to land the plane a little bit, here’s my situation. I love Chicago. I know that when you
look at the market signs, population’s declining, and second highest property
taxes in the nation, the taxes are going up across the board every year, it’s not looking good for the future of Chicago. I’m a licensed broker
in the state of Indiana. Northwest Indiana is 35 minutes from downtown Chicago. I live on the northern tip of Chicago, so right now, it’s about 30, 35 minutes
to downtown Chicago from where I live. I wanna stay here in the general area, do a lot, go to my favorite restaurants, hang out with my friends. My wife’s from Kazakhstan. There’s a huge Kazakh community out here. And so, I’m looking at northwest Indiana, and just kind of jumping the bullet to live in the middle of nowhere, USA, so that I can have access to my life here in Chicago. Things are really expensive. The property taxes are crazy, man, like I mentioned. I mean, it’s not uncommon to have 10, $15,000 a year in property taxes. It’s just nuts. So, I just talked to Ben, right, and talking to Ben, you know, he’s kind of the guy over house hacking through Airbnb, and his suggestion was like, you should get out of Chicago. Chicago is horrible. Why are you there? And nobody likes Indiana. Don’t even go there. So, in your opinion, I could probably move to Indiana, and get a duplex to quad plex, live in one unit and be mortgage free, very comfortably. It wouldn’t be hard. I can just literally grab something off the MLS and just run the numbers. Do you think that it’s wise, with the market conditions as they are? The only two cities in the mid-west that are growing, as Ben said, are Indianapolis, and Columbus, Ohio. So, being in Chicago, being all of the signs, do you agree with him that I should just move to like, Florida or Arizona? Would you bite the bullet and live in the middle of nowhere, just so that you could house hack? – Well, it sounds like your goal is to, what your end goal is is you wanna live in downtown Chicago and enjoy all of the, you know, a nice house, and being in close proximity to certain attractions, restaurants, bars, sports, all that kinda stuff, and that’s your goal, it seems like, right? And the question you’re asking is, what I’m gathering from your thing here is that you, if you had all the resources in the world, you’d do that. – Yup.
– Right? So, the question you’re asking is, do you move away temporarily in order to build up a financial position capable of supporting that dream, right? And I think that’s a very fair, you can certainly say that, right? Ben and I are probably
in agreement of like, why would you wanna live in Chicago? Just kidding, everyone. But (laughs).
– No, I mean, it’s true, it’s–
– I bet you got like, the cold winters. We got Denver here, it’s like, pretty nice all year round. – I went to Denver like, two years ago at a Mastermind, and it was freezing. It was snowing. It was probably like, I don’t know if it snows a lot. Doesn’t it snow in Denver? Just like…
– It snows in Denver, but like, you’re overall in for a much milder winter experience. Like, the typical winter day here is 50 degrees and sunny, and then it’ll get down to like, the high 20s at night. But you know, during the day, it’s quite reasonable here. It’s a very different winter than Chicago. – Yeah, Chicago’s pretty tough, but I just love the summers. I don’t know what it is. Maybe it’s just the architecture, but… – Let’s get to the financial part of your question, right? So, it sounds like you
have the opinion that Chicago is not likely to see a lot of appreciation
in the next few years from a real estate perspective, or at least, you know, the real estate, the cash flows now is not likely to appreciate over the next 10 years, right, in Chicago? Is that your assessment?
– At least over the next 10 years, I think there’s gonna be probably a local economic collapse. I honestly do. – Okay, so, I don’t think that’s a outrageous opinion of yours. I think that’s (laughs) pretty reasonable opinion, looking at some of the
things going on there, that I would tend to think, hey, the risk of that happening in Chicago is probably higher than anywhere else and the appreciation prospects do not seem high enough there to warrant investing there, versus somewhere else, right? So, if you’re thinking, how do I invest 50K to
100K most effectively? Maybe you go 35 minutes out to Indiana and invest in cash flow properties in an area that you think will have good cash flow potential, right? If you don’t have that, and you have more limited resources, and you’re looking to make
your first investment, then that’s when you have to go house hack if you want to get a reasonable return on your investment of real estate, right? So, you move to Indiana
if you have to do that, and you have limited resources, and otherwise, you can probably still live in Chicago and enjoy the fact that rents are probably not gonna continue climbing dramatically, as these things happen, and you’re gonna be able to enjoy the lifestyle there maybe at a lower than
inflation cost, perhaps. So you could still live there and invest elsewhere, or you could, if you need to, go out of town to invest and live. – Yeah, so that’s interesting. Maybe buying a rental property in northwest Indiana, and live in Chicago, and just offset my rent. Do something to that effect, you know. – I think that’s exactly one way to think about it, right? So, if I look at my end goal, right, like I know one day that I’m gonna want a nice house in a nice school district, through a future family, at some point, right? So, the question is, do I go out and build a large cashflow so I can buy that house and then offset it with rental income from somewhere else, or do I just rent that house, paying for it with cashflow, right? Both are viable, so, yeah, it’s kinda just like, back into the lifestyle
result that you want, and then go from there. – Yeah, no, man, that makes a lot of sense. Well, I got a lot of thinking to do. I really appreciate your time. I’m excited about this blog post, man. It’s the best blog post I think I’ve run across on house hacking, ’cause it attacks it from
three different angles and covers the three
major different strategies on how to do it. So, once it goes live, I’ll send you a link, and if people wanna connect with you or get a hold of you, man, what’s the best way for them to find you? – Check me out on BiggerPockets.com and send me a message through our system. – Awesome, man, will do. I’ll send the link, both in the description box, and if you’re watching this on the actual post, it’ll be right underneath this video. – Awesome, sounds good. Thank you very much.
– Yeah, I appreciate it, Scott, thank you. Talk soon. – Bye bye. (chiming)

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