What to Know Before Structuring a Creative Finance Deal (Rookie Reply)

0:00So you're ready to start investing, but the next step can look very different depending on your situation. Maybe you're 21 and trying to house hack in an expensive market. Maybe you're about to inherit a large amount of cash, or maybe you've made an offer and suddenly need proof of funds. Today's questions come straight from the bigger pockets starting out for him, and they're all about slowing down just enough to make the first move the right way.

0:28This is the Real Estate Rookie Podcast. I'm Ashley Kerr. And I'm Tony J. Robinson. With that, let's get into our first question for today. So question number one comes from Brandon. And he says, I'm currently in college and very interested in getting into real estate investing. I'm in a local networking group where I have a few real estate investing people. And that's how I discovered BiggerPockets and Podcasts, which I've used as my main resource. I'm very interested in house hacking as I feel that'd be my most realistic way to get started. Has anyone gone down this path? And could you share any thoughts, advice, et cetera.

1:01I'm in New Jersey. The market is extremely high, which is my biggest concern about getting into it, but I've built good credit, which I know is useful. Thanks everyone. Now, first, before we jump in, let me just clarify for those that maybe don't know, what do we mean when we say house hacking? So basically house hacking is you buy a property and instead of living in all of that house yourself or all of that property yourself, you're simply renting out any additional living space. It could be you buying a big single family house where you're renting out other bedrooms. It could be you buying a house with a walkout basement.

1:32It could be you buying a small multifamily. It could be a house with an ADU. There's a lot of different forms that house hacking can take, but the essential idea is that your primary residence, you leverage that extra additional space to turn into a rental. So just clarifying what the strategy is. Ash, you've never house hacked before, right? No, I haven't. I mean, besides my college dorm, I guess. But I didn't own it, I guess. So it's just hatred. I haven't either, but we've interviewed a ton of guests, a ton of ton of guests on the podcast who got their start in house hacking. And I mean, you're just asking for advice.

2:11I'll give you my take from all the stories that we've had on the show is, I think for someone in your position, it is the absolute lowest barrier entry way to get started. Like Ashley just said, she already had roommates when she was in college. and say you are to buy something, you probably already got roommates right now. So you're just transitioning from you and your roommates paying some landlord to now all of your roommates paying you. And I think that is like the easiest transition. You literally take all the people you're living with and say, hey guys, you want to come with me and we'll get this nicer place and I'll maybe charge you guys a little bit less.

2:44And that's how you can get started. So the benefits of house hacking are that typically your costs to get into the deal are going to be a lot lower. 5 % down, 3.5 % down, sometimes 0 % down if you can get the right loan. And it allows you to live in a place that's maybe more expensive like New Jersey and still reduce your own living expenses by having someone else cover that cost. So all in all, I think it's probably one of my favorite strategies for someone in that specific situation. I think you really emphasized a key point as to reduce your living expenses because I think sometimes there's this theory that in order to be successful at house hacking, you are paying zero dollars to live there and you're getting all of your expenses covered.

3:30That doesn't necessarily make it the successful deal. Like even if you reduce your what you would go and pay rent somewhere else, you're able to save that little extra money. So you're already making out. Even if you were to, you know, pay two thousand dollars towards your house hack mortgage and that's the exact same amount you would be paying for rent somewhere else. Like it seems like a wash, but it's not because you're getting equity in that property. You're getting mortgage pay down. You're going to get depreciation on it when you turn into rental and you're going to actually have an asset that you own compared to if you were paying rent.

4:11And, you know, if you're buying in a high cost of living area and has seen a lot of growth, a lot of appreciation, that appreciation can be big money even if you are paying the same amount or similar that you wouldn't rent because you're having a tenant pay for at least part of your mortgage payment. So I think don't get too caught up in having a successful deal of not having to pay anything to live. A great deal could just be that you're paying the same amount you wouldn't rent somewhere, but you're having a bigger place. You're having some of your utilities paid or whatever it may be sharing with the other person you're house hacking with.

4:53But really just that appreciation, that equity you're building from appreciation and mortgage pay down plays a lot into building wealth in the long run. Let's just clarify next steps because just to kind of give a bit of an action plan here. I think the very first thing that you need to go do is go talk to a lender to see what can I actually get pre-approved for. I remember long before we bought our first primary residence, I went and I talked to a lender and I'm in Southern California and she was like, I can approve you for like$275 ,000. And for me in California at the time, that like truly couldn't buy me anything in the city that we lived in.

5:28So I was like, okay, I'm still a few years away from actually being able to own something in the area that I live in. So I think just going there first to get an idea of what can you currently get approved for? and you might be surprised. Maybe you get approved for a little bit more, maybe you get approved for a little less, but either way, you walk away with some clarity on what you need to do next. Because if you are approved for an amount that actually gets you into something in that part of New Jersey, well, now you can start using that to build out your buy box. Say, okay, well, what kind of property do you actually want to purchase?

5:57Then you go start talking with agents and you build your buy box and you submit offers, right? And you can go down that path. And if the lender is like, hey, you're 21, we can't approve you for anything, but here's what you need to do in order to get that approval. At least now you have a roadmap on what to focus on next to get you there. And I think that's a great idea too, because you'll be able to talk to the lender about having that renter in your unit as additional income, because a lot of lenders won't actually take 100 % of the rent and actually allocate it as income, sometimes only take a percentage of it.

6:28So that's something to talk about with your landlord, or with your lender, because if you plan on, okay, I'm going to have somebody pay$1 ,000, That's$1 ,000 I don't have to worry about for my debt to income, but sometimes I'll only take a percentage of that and not the full amount for your primary residence. So make sure you ask the lender about that too. And when you're going to get pre-approved as to see what amount you actually need to charge and rent to make it work because you don't want to get pre-approved for an amount and then realize that it's not going to work out because the tenant isn't going to be paying the amount of rent that you actually need.

7:06because they only take a percentage of that. Okay, so coming up, we have a rookie investor who is inheriting$700 ,000 and wants to know if it's enough to go full-time in real estate investing. We'll be right back after a word from our show sponsor. If I had to hire someone to join the BiggerPockets team, I wouldn't just go looking for someone who checks a few boxes on a resume. I'd want someone who understands real estate, can move fast, communicates well, and can jump into a fast-paced environment without missing a beat. When you need that kind of person, this is a job for sponsored jobs. Sponsored jobs posted directly on Indeed are 95 % more likely to report a hire than non-sponsored jobs.

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8:28Just go to indeed.com slash podcast right now and support our show by saying you heard about Indeed on this podcast. Indeed.com slash podcast. Terms and conditions apply. Need the right hire fast? Then this is a job for Indeed-sponsored jobs. I think a lot of us grow up believing that if the bills are paid, we're doing okay. And honestly, that was my mindset for years. But as I got older, started investing, and had more financial goals, I realized I didn't just want to know my account balance. I wanted a clear picture of where my money was actually going. That's what I love about Monarch. It brings all of my accounts, investments, saving goals, and spending into one place.

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10:17In some cases, investors get 50 % to 75 % of their down payment back at closing, plus interest rates as low as 3.75%. They've partnered with BiggerPockets for over a decade, helping thousands invest smarter. If you want to do the same, visit biggerpockets.com slash retirement to learn more. All right. So we talked about getting into a house hack. Now let's look at a different rookie situation. Someone's having a large amount of cash come in and wondering what's the best way to use it and how they can actually go full-time real estate. So this question is from Andre. I want to build a real estate portfolio to replace my income from my jobs.

10:55As the title states, I'm very lucky in likely inheriting roughly$700 ,000 by the end of the year. I earn about$4 ,000 per month net for my job. Since I was 13, I would watch Brandon Turner and meet Kevin videos on the Burr strategy and house hacking. It might finally be the time to make it a reality. Is it possible in LA to make this my full-time thing already, or is$700 ,000 dollars, not enough. Thank you. Okay. Well, first of all, Andre, I'm glad that you are planning to use this lump sum of cash that you are getting very wisely instead of going out and buying your very own Lambo. And also awesome that you've been learning about real estate investing since you were 13.

11:40That's great. So you've already got a lot of knowledge, I'm sure, and done a ton of research on this. So I guess, Tony, I'll take this more from you, but as far as living costs and cost of property, I know LA is a high cost of living area, but ideally, could$700 ,000 buy you one property? Would you recommend splitting it up into different down payments. I mean, in my market,$700 ,000 would get you several properties, decent rentals. But what about in LA market? I mean, you could get a property in LA for that amount. So I don't know if investing all of that capital necessarily into the LA market would be the right play if we want to focus on cash flow, right?

12:35Now, obviously, there's a lot of different strategies that we can focus on to get you there. But I think if we just kind of look at the facts around the table, we've got$48 ,000 a year in income that we want to replace. We've got a 700K kind of pile of cash that we can go work with. There are several real estate strategies today that can get you at least a 10 % cash on cash return, right? And even more that can get you higher than that. And even at 10 % on 700K, that's$70 ,000 a year, which is more than the$48 ,000 that we need to replace. We still got some room above there. So I think the very first thing that I would do here is first just try and identify what cashflow focused strategy do I feel aligns best with who I am, how I like to operate.

13:29And I would maybe narrow down the strategy first. again we've we've had the good fortune of interviewing a lot of people on this podcast who have done a lot of different things uh you can you can rent by the room um we actually just interviewed han stone uh who did uh in not too far from la but he was doing assisted living facilities and he was making almost what you make in in a year he was making that per month uh with with his assisted living facilities right um could you do something like a sober living facility Could you do short-term rentals? Could you co-host for other people where you're managing?

14:03There's a lot of different strategies. So is the pile of cash enough to replace$48 ,000 a year? I think absolutely yes. But the bigger question is what strategy do you want to focus on to actually execute that? But is buying just like a traditional long-term rental or even a house hack in LA, is that going to be the best move? I don't think so. There's probably some other place we can go focus on that'll get you there a little bit faster. Okay. So I'm going to take a little different route on this. I got two different options for you. One option, you throw it all into a brokerage account in the stock market.

14:41If you got 6%, okay, just in one year, that would be $43 ,000 in interest. That basically covers your salary. So you could keep that$700 ,000 in the stock market and just pull out that$40 ,000 each year and you would continue to have$700 ,000. If it earns more, I think I actually looked at one of my retirement accounts and so far this year I've had a 20 % return, even more. So that is also an option. I love real estate, but I also like index funds and brokerages. Next option is you do a mix of both of those. So the first thing is you're going to take some of that money for a down payment to do a house hack.

15:26I'm assuming probably don't have a property now. There was no mention in it if he has a primary residence or not. If you do not have a primary residence, I would buy a property, use part of the money as a down payment and start house hacking. Then I would take the rest and I would put it into a brokerage account and let that money grow. So then I would get your house hat going and I would continuously do a new property every single year. So live in it for a year, move out, rent it out, go to the next property. I would take money out of your retirement account or not your retirement, your brokerage account to fund the next property purchase.

16:07And this may not be the best way to actually go full time real estate investing. but I think that if the longer you can work your W-2, it's going to be easier to get pre-approved for loans. Maybe you could cut down to like part-time because now if you're house hacking, you're having a lot of your living expenses covered for you. So that's what I would do. I think I would do a mix of both of those. I wouldn't go and blow it all on real estate investing in the first year, at least. That's a great point, Asha. I like that approach. You're just like sticking it in somewhere and to the market or wherever it may be and letting it grow.

16:50Like, you know, they're even like just high yield savings accounts right now that are still paying like 3 % just for leaving it in a savings account, right? So that's a good point, right? I guess there are a few options here. Yeah, and I think like just starting out too, like you're going to be a better investor if you take your time. And if you have this large cash, instead of taking all of this and investing, like putting all your eggs in one basket, I like the part of breaking it up and like house hacking every single year and doing that for the next five years. You can accumulate some really nice properties and a good size portfolio.

17:26I think the other thing too, right, is that, you know, I wonder because a lot of people talk about wanting to leave their jobs. And sometimes maybe it's not necessarily that you want to stop working. Maybe it's just like a change of the work that you're doing. And maybe that 700K gives you some flexibility to maybe you go work with like, you know, a big flipper or wholesaler. in Southern California, I'm sure there are a lot of them who would love someone who can, you know, help project manage or do things like that. So could you even just like transition into something that's maybe more real estate related?

17:58And even if you're making a little bit less to begin with, that's where you can use the 6 % that's coming off of the 700K to help kind of tie things over while you build that up. So lots of options here, but I like that we're at least having this conversation about how to use the money the right way. Yeah. And the last thing I would add is look at the market that you're looking and buying in and like see what appreciation has been over, you know, the course of 10 years and then compare that to how the money would do in the stock market too. So I would look at, you know, both of those and kind of compare and make sure you take into account your mortgage pay down that your tenant would be paying as part of that calculation too.

18:38All right, we're going to take a quick break, but when we're back, a Ricky has an accepted creative offer and needs proof of funds by Monday. We'll talk about what proof of funds really means and why Rickies need to understand financing before they write the offer. A few weeks ago, I took a trip down to Pensacola, Florida with my dad and my kids. We spent our days at the beach in the pool. We cooked dinner together one night and I got to experience the simple joy of just watching my dad suck up time with his grandkids. We played a round of mini golf that ended up being the best part of the whole trip.

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24:07So here's the question. Jayhu says, I'm looking for some guidance from experienced investors. I have an accepted creative offer on a triplex in Winston-Salem, North Carolina. I need proof of funds by Monday. I'm a newbie and I've never heard of proof of funds until now. So here's the offer structure. The price is$445 ,000. The cash at closing is$385 ,000. There's a due diligence cost of$2 ,000. Seller financing for$60 ,000. 7 % interest, 30-year amortization, a 24-month balloon. There's a promissory note, and the seller will contribute up to 5K towards closing costs. Jayhu says, I'm exploring private capital to fund the 385K needed at closing.

24:52For those who have structured deals like this, how do I provide proof of funds by Monday? What's the best way to raise the capital on a tight timeline? Would hard money make sense here, or would you avoid it? I'm open to advice, introductions, or potential partners. think in advance? Well, first, let me say, for all the people that I've met who want to get started in real estate investing, their typical blocker is analysis paralysis, is that they look at a million deals, but they never actually pull the trigger on anything because they're like, I have to figure everything out. So Jehu, even though you may be in a little bit over your head right now.