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How to “Hack” Your Housing and Get Paid to Live for Free

by Brandon Turner on November 2, 2013 · 72 comments

  
How to Live For Free

The internet is full of “hacking tips.” I’m sure you’ve seen them, with clever tricks like storing your pancake mix in old ketchup bottles or dipping your Oreos with a fork through the frosting. Sure, those are fun little tricks – but how much do they really improve your life?

Today I want to share a “life hack” that, when properly implemented, can have a dramatic effect on your wallet and the financial destiny of your family. This is much more than simple tricks or ideas to shave five minutes off your work day.

This is epic, life changing stuff.

I’m talking about hacking your housing and living for free. I’m talking about building wealth automatically and getting paid to do it. I’m talking about buying an owner-occupied multifamily property and getting paid to live for free.

Wait, what?

You heard me – it’s often called an “owner-occupied multifamily property” but you probably have heard other names for it, like “duplex,” “triplex,” or “4-plex.” Yes, I’m talking about the properties that have more than one unit but don’t quite fit the “apartment complex” category. There is a good chance you’ve even rented a unit in one of these places in the past or you know someone who has. They exist in every market, every neighborhood, and every price point – and by purchasing a small multifamily property, living in one unit, and renting the other units out – you can live for free and get paid to do so.

Let’s get started.

Are You Ready to Buy a Home?

When I bought my first house, I took a hammer and put a giant hole in a wall – just because I could.

You see, buying my home was exciting because it was mine.  I could do what I wanted, when I wanted to – and no landlord was going to tell me “no.” For me, owning a home is one of the greatest feelings there is.

However, buying a home is not for everyone.

If you are flat broke, up to your eyelids in debt, switching jobs every 2.5 weeks, and can’t seem to avoid calling those late-night informercials for crap you can’t afford… maybe it’s best to get your life and budget in order first. Buying a home is not a light-hearted, flippant decision.

However, I also don’t believe buying a house needs to be a task only for old, boring people. If you have decent credit, a stable job, and a small amount of savings – you can enter the world of the homeowner.  Even more so – if you are smart about it, you can enter the world of the real estate investor at the same time and start hacking your living expenses.

Why Purchase a Small Multifamily?

By purchasing a great small multifamily deal, the rent that your tenants pay each month can cover all of the expenses for the property – and more.  For example, if you buy a 4-plex, live in one unit, and rent each of the other units out for $500 a month, you could be making $1500 per month in income. If your loan, taxes, insurance,  utilities, and other expenses come to just $1200 – you could get paid $300 a month just to live in the home.  Even better- when it comes time to move out into your future home, you can rent that 4th unit out for even more income.

However, I’m getting ahead of myself a bit.  Let me explain first how to buy a small multifamily property.

Where to Find Small Multifamily Properties

Trust me – these properties are everywhere.

The easiest way to find them is by speaking with a real estate agent. Ask your family and friends for recommendations and start up a conversation. The best part about working with agents is that it’s totally free for you! The seller of the property typically pays for the agent, which means you can ask a thousand questions and get a thousand answers without needing to pull out your debit card.

Use this!

Keep in mind, however, that you are only looking for properties that have 2, 3, or 4 units. Once you hit 5 units or more, the entire world of real estate changes into something you don’t want to mess with (commercial real estate.) So for now, focus on the duplexes, triplexes, and 4-plexes.

If you want to just start looking, you can also use sites like Realtor.com, Zillow.com, or Trulia.com to start looking at properties. With each of these sites, you have the ability to limit your searches to only multifamily properties.  Start looking at the cheapest properties in your area and try to find neighborhoods that you would want to live in.

Don’t be scared of homes that are a little “ugly” or have been foreclosed on. Although they may require a few weekends of painting with your buddies – you can often get substantial discounts because everyone else is scared away.  In fact, my favorite feature in any property I am considering is the smell. The worse, the better.  Why? Because smell is the easiest and cheapest thing to fix (usually just by installing new carpet and re-painting) but drives 99% of home buyers from even considering the deal.

What Makes it a Killer Deal

If there is only one lesson you learn from this post – it’s this:

Find a killer deal. 

You see, if you are trying to “hack” your housing, not just any deal will work. In fact, I’d wager that 90% of the small multifamily properties out there are not going to give you the results you are looking for… which is cash flow.

Cash flow is the extra income left in your bank account each month after all the bills have been paid. If you can get your rental units to pay all the expenses and there is money left over – that money is yours. The trick, therefore, is finding properties that provide this cash flow.

The best trick I know for quickly estimating if a property is going to provide cash flow or not is known as the 50% rule of thumb.  Essentially, this rule of thumb goes like this:

Take the total income of a property and divide it in half. Those are your expenses. Now take out your loan payment. The remaining money is your estimated cash flow.

Let’s do a real life example of this:

You find a 4-plex for sale for $200,000, where each unit would rent out for $800 per month. If you rented three of the units out, the total income would be $2400 per month. Divide that in half and you are left with $1200 per month to pay the mortgage. A loan on $150,000 (Cause you don’t pay full price, and then you put down something for a down payment), at 4% for 30 years is about $700 per month, which means you could get paid $500 per month to live for free. This would be a killer deal.

Keep in mind, however, this rule is just a rule of thumb – so make sure you use this as a quick and dirty way to filter lots of properties, and when you find some great potential properties,  look at all the expenses for the property and figure out what all the costs truly are. To learn more about the analyzing properties using the 50% rule, check out this post and YouTube clip.

How to Fund Your Property Purchase

Maybe you have lots of cash and can simply write a check for a home. In that case – awesome!

However, chances are – you are probably not able to pay the hundreds of thousands of dollars needed and are going to need to get a loan (mortgage) from a bank. With any loan, you are going to need to supply a certain amount of money to get the loan, known as the down payment.  While the “no down payments” mortgages have mostly gone by the wayside, there are still options for purchasing properties with low down payments, ranging from 3.5% down payments for FHA loans (offered at most banks) to 20% down for conventional mortgages.   There are even loan programs (like the 203K loan) that allow you to include needed repair costs into the loan, so you can come to the table with even less cash.

The best way to determine what the best loan is for your deal – speak with a qualified mortgage professional at your local bank or credit union.  Just like with real estate agents, these mortgage pros are free to use and talk with (they get paid from fees from the loan – you should never need to pay upfront) so don’t be afraid to pick up the phone and start fielding your options.

Managing the Property Without Going Insane

After closing on the purchase of your small multifamily property, you are now a landlord! At this point, it is imperative to learn how to be a landlord – and start running your business like a business – not a hobby. Read a few books on being a good landlord, make friends with local investors that you respect, read blogs that talk about landlording, and don’t stop learning.

Being a landlord is not as difficult as the horror stories you may have heard of – if you follow some very simple guidelines:

  • Screen your tenants like you would a job applicant. Keep your emotions out of it and look at the facts. For an exhaustive guide on the best way to find awesome tenants, check out The Ultimate Guide to Tenant Screening.
  • Have a written policy to refer to. Stick to your policy when dealing with tenants.
  • Outsource things you don’t want to do. If you don’t want to fix toilets – don’t fix toilets. Find handymen, property managers, or others who can handle the aspects of the job you don’t want to do. If you found a great deal when you bought your property (which you should have!) the cash flow can pay for these things.
  • Never rent to family or friends. Trust me – it never ends well.
  • Treat your business like a business, not a hobby. Set up processes and systems to handle the problems that will arise.

Being a landlord is not always the most fun activity, but by following these simple guidelines the process can be much easier and your problems minimized.  There are over twenty million landlords in America, so you are not alone in your journey. If you run into any problems, just ask those who have come before for help and you’ll find most seasoned landlords are more than willing to help.

What Next?

I truly believe that purchasing a small multifamily property can change your life, free up your finances, and start you down a path toward building wealth through one of the most powerful channels there is: real estate. This article is the start of a conversation, and I hope you continue this conversation after reading.

Feel free to leave any questions or comments in the comment section below and let’s chat!

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{ 72 comments… read them below or add one }

Bobby November 2, 2013 at 6:34 am

This is exactly what I am doing right now with my VA loan. If it works out, I get a free house (0% down) with 3 units rented. I get to save my money for other RE purchases (or major repairs). I found the strategy right here on BP!

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Brandon Turner November 2, 2013 at 8:43 am

Hey Bobby – nice! Best of luck on this, and be sure to let us know how it works out for you!

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Karin DiMauro November 2, 2013 at 7:27 am

Thanks, Brandon! You’ve got me thinking.

Can you clarify a point in this paragraph: “You find a 4-plex for sale for $200,000, where each unit would rent out for $800 per month. If you rented three of the units out, the total income would be $2400 per year. Divide that in half and you are left with $1200 per month to pay the mortgage. A loan on $150,000, at 4% for 30 years is about $700 per month, which means you could get paid $500 per month to live for free. This would be a killer deal.”

In this example, are you saying it’s listed for 200k, but you wind up purchasing it for 150k? (Whether by negotiating a lower purchase price or some combination or lower purchase price plus downpayment.)

Thanks!

Karin

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Brandon Turner November 2, 2013 at 9:00 am

Hey Karin,

I think I was thinking to offer $180k, put $30k or so down , but I didn’t really explain that, huh!? I’ll tweak the post above :) Generally, I always assume getting a 10% discount or more any time I buy anything! Thanks for reading and commenting!

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Bernard Hall November 2, 2013 at 12:46 pm

Hey Karin. Brandon actually came up with the $150,000 dollar amount by subtracting $50,000 dollars from $200,000 dollars. The $50,000 dollars is the 25% down payment he paid when he closed on the property (since most mortgages require you to pay at least 20% down for your purchase). That left him with the $150,000 dollar amount that he would actually have borrowed from the bank. So, $150,000 dollars would be his mortgage amount. Hope that helps.

- Bernard

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Karin DiMauro November 2, 2013 at 6:27 pm

Thanks, Brandon and Bernard, I figured it was something like that! And whoops on my own question – I meant to ask whether the amount being financed is actually 150k, not the purchase price (unless, of course, that IS what you wound up buying it for … which it isn’t … so never mind. haha).

Anyway, thanks again!

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Nancy November 2, 2013 at 7:40 am

I live in one side of a duplex that I own and there are definitely great benefits. Unfortunately, I bought it in 2005 when the market was peaking, however, it is still paying off. I get additional benefits as opposed to owning a single family home such as write offs for 1/2 the power washing done annually, landscaping and maintenance, the lawn tractor I purchased, gutter cleaning, and the list goes on and on.

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Brandon Turner November 2, 2013 at 9:01 am

Hey Nancy, yeah buying in the peak isn’t fun, but at least the mortgage is dropping each month and prices are on the rise again! And yeah, there are a number of other good benefits too – thanks for sharing!

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Joe Kato November 2, 2013 at 8:22 am

I used this strategy last year and it is working well for me! Last year I bought a 3 family that came with tenants on 1st and 2nd floors. Got a 80% loan at primary-residence interest rates and remodeled the 3rd floor for the wife and I to live in. Took 4 weeks to remodel with some additional help and been living here a year now. House was $250K, rents $850 and $850 from floors 1 and 2. Mortgage on $210K is $1500 with tax, insurance, water, and sewer. So I get paid $200/month to live here. And mowing the lawn and a little upkeep is just like any homeowner would do. When its time to find a new primary residence (hopefully another multi), then cashflow goes up to ~$1000/mo

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Brandon Turner November 2, 2013 at 9:02 am

Hey Joe, nice! I love hearing that this is working for people! And when you move out, this will pay a good portion of your new house payment, so you’ll be able to continue to live almost for free! This is why I love this strategy!

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Troy November 2, 2013 at 9:48 am

As an OO of a 4plex, it’s fantastic! Mostly.
The tenants know I own the place. That’s got me down. And it could be part of it was that there was little to now screening going on when I filled the place. (Learning from the school of hard knocks!)
I have the fear every time I have to post a 5-day my car is going to vandalized, bricks through the window, and heaven forbid if I actually have to evict someone! Ooof.
I’ve got a Property Mgmt Company that manages my properties, this one included. So my tenants feel like it’s okay to come to me and tell me about their problems with the units and asking me to take care of it.

So I’d say be wary of the way you deal with the people that you rent to if you go this route. Because not only are they your renters, but they are also your neighbors.

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Nancy November 2, 2013 at 2:44 pm

You make a good point. With the duplex I reside in, my “school of hard knocks” was getting to know and befriending the very first tenant. Without all the detail, I might have well have rented to a relative which we already know is a big no-no. So, for the last 3 tenants, I am just the landlord/neighbor who only says hello – AND THATS ALL! If they invite me to stop by because they’re having a barbeque, I politely tell them I’m busy. This has worked out great for the last three tenants. They just leave me the rent money each month and let me know if there are any problems, which are usually only minor repairs from time to time.

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Brandon Turner November 3, 2013 at 6:31 pm

Great lesson, Troy. It’s for this very reason I don’t tell the tenants I’m the guy in charge. I’d rather just be the maintenance guy. But what’s great is that you are able to learn this stuff on a small scale, with 4 units, and apply it to bigger investments later on!

Thanks for commenting!

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Troy November 3, 2013 at 7:50 pm

Brandon,

It tough to be the “maintenance guy” when:
You live there.
When Rents are coming to handed or mailed to you
You are the one to unlock, lock-outs.
Etc, etc.

So you just need to screen really well, a fact that didn’t not become apparent until too late.

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Karin DiMauro November 4, 2013 at 7:39 am

Hi Brandon – I have the same question as Troy has here. How do you handle the rent scenario? Even if they mailed them in and didn’t physically see you, what happens when someone is late and you have to deal with that situation? I understand you thoroughly screen tenants up front to minimize this, but sometimes things come up.

Also, if you’re the maintenance guy, who’s the property manager (or whoever it is they deal with when applying, paying the rent, have a question or problem, etc)?

Thanks!

Terry Pratt November 2, 2013 at 12:27 pm

These are available at every price point? That is doubtful, they appear to be well out of reach for low-wage workers in Portland.

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Brandon Turner November 3, 2013 at 6:37 pm

Hey Terry,

I haven’t been everywhere, but yes – I do believe they exist in every market, somehow. I know of people in Portland, LA ,Boston, Seattle, etc who do this very strategy, successfully. Obviously, you may need to be less picky on location than a single family home – but I don’t advocate buying in the ghetto either. Hope that helps some!

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Sharon Tzib November 2, 2013 at 1:45 pm

Taking this one step further, Brandon, because the FHA only requires you to maintain the owner occupancy requirement on a continuous basis for at least one year after purchase, you could theoretically rinse and repeat this every year. In five years’ time, you could have 20 units, if you were purchasing 4-plexes each time.

Also, another very helpful FHA feature is the 6% sellers assist, which means most buyers only need to bring 3.5% to the table (the down payment), and the seller can take care of the rest (the closing costs).

For negative commenters who think this strategy is out of reach, keep in mind that if you could find a $100K 4-plex (these are common in Houston, for example), that would be a $3500 down payment (3.5%). That’s $9.59/day you would need to save over a year, or $4.79 over two years. I’m sure if a low wage employee gave up smoking, lattes, cable tv, or other nonsense American consumers consider necessary that are actually discretionary, this strategy would be very, very doable. It’s all about your priorities, and more than that, your attitude.

Henry Ford once said, “Whether you think you can or can’t, you’re right.” Great post, Brandon!

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Lindsay Wilcox November 3, 2013 at 1:35 pm

Sharon, you can only have one FHA loan at a time, so unless you’re going to get to 20% equity and refinance in that first year, there’s a gaping hole in your strategy.

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Sharon Tzib November 3, 2013 at 7:21 pm

Yes, Lindsay, good point – maybe one year is a little bit aggressive for my example, but the strategy still works. After purchase, I would use all the cash flow and my rental savings towards extra mortgage pay down. I would keep at this, coupled with any market appreciation, property improvements, and possible value adds, until I had 10% equity, which could be doable in the first couple of years. As soon as I could, I would refi into a 80/10/10 using a private or commercial lender for the second and move on to the next property.

There’s more than one way to skin a cat with this strategy, but even if it took me 10 or 15 years to acquire those 20 units, all the while only having to use 3.5% of my funds for each purchase and having the ability to save on my rental costs, it’s a pretty powerful tool as an investor, which was my overall point (and I think Brandon’s too).

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Nancy Hendryx November 3, 2013 at 4:20 pm

Sharon,

The scenario of a $100k 4-plex–in markets where those deals exist–is within reach for more people than may realize it. But in the Northeast state where I live, there are no such deals available. Even a dilapidated 4-plex in a dicey neighborhood lists for $200k minimum. Then you’ve got your reno costs, which you may or may not be able to finance. I think geography is key to opportunities and entry points for many people who would love to do this but don’t have the resources.

Nancy

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Sharon Tzib November 3, 2013 at 7:29 pm

Yes, Nancy, I totally agree that geography can impact the feasibility of enacting a plan like this. But I still say it’s not impossible – as Brandon has already commented here, there are people doing this 30-60 mins outside of most major metropolitan areas. And besides a no money down investment, 3.5% is about as good as it gets, so if people can prioritize their spending, make a plan, and then find a multi like Brandon describes, it certainly can kickstart your investment career. Good luck!

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Brandon Turner November 3, 2013 at 7:01 pm

Hey Sharon, yes very true. As Lindsay pointed out, you’d have to keep refinancing them out of FHA to make this fully work, but yes – I totally see your point. I did this with single family houses for a few years, which is how I built up a lot of my rental portfolio! Thanks for jumping in and commenting!

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Jeff Brown November 2, 2013 at 4:44 pm

Been advising folks to do this for decades.

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Brandon Turner November 3, 2013 at 6:40 pm

This is why we get along so well, Jeff! You’re a smart man :)

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Tosin O. November 3, 2013 at 1:29 am

“The best part about working with agents is that it’s totally free for you! The seller of the property typically pays for the agent, which means you can ask a thousand questions and get a thousand answers without needing to pull out your debit card.”

Its totally free until you make a purchase.

In a any deal, there is only one side truly paying for everything – THE BUYER!. Whatever you think a seller is paying is simply the buyer’s money being redistributed.

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Nancy Hendryx November 3, 2013 at 4:02 pm

Tosin,

Not sure I agree with this. In the strictest sense, yes. I pay the seller. The commission comes out of the proceeds to the seller, so I’m paying the commission. But I figure out what I will offer, and that number is based on *my* bottom line. I don’t jerk around with counter offers. I put in my highest and best offer at the start. The seller accepts or declines. But I don’t pay more than I think the property is worth or more than will work for the financial scenario I have calculated to cover any of the seller’s costs.

On the deal I closed in August, when the building inspection turned up a big-ticket item, I sought a $20,000 seller concession on the agreed upon sales price. I was not going to bring another penny to closing. I later found out that the broker matched the seller’s contribution by reducing his commission to close the gap and make the deal work.

So, yes, redistribution, I suppose. You say “tomato.” I say “tomahto.” I got the property for market value, not market value plus 5% commission. That money came out of the seller’s pocket at the end of the day.

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Brandon Turner November 3, 2013 at 6:43 pm

Hey Tosin, Yeah I’m with Nancy on this one. Yes, in the philosophical sense of the word, it’s being paid somehow and reflecting in your price. However, if a person decides to not use a real estate agent and buys the same house… guess what… it still costs the same amount! The agent get’s paid from the seller’s proceeds, whether or not you use an agent. So if it costs you $0 less to use an agent vs not use one… wouldn’t you call that free? $0 is free in my book!

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Jim Swanson November 3, 2013 at 8:56 am

As a real estate agent for the past 10 years, most of that time working with investors and a real estate investor myself, I hear this stuff from time-to-time. Especially after some seminar has just blown through town. One thing to remember, “The rest of the world is not stupid!” … at least most of the time. Deals like this are possible for only a small window, usually just after a downturn when the vast majority is either too scared to get into the market or “too smart” and are waiting for prices to fall further. As all real estate investors know, the better cash flow comes form the worst neighborhoods. (hence the term “Slum-lord”)

Returns on rental properties will always even out over time. A mulit-unit property with cash flow of over 25% (which is what you’d need to do this “hack” on a 4-plex), would be very rare, indeed. As with any investment, the higher the return, the higher the risk. A return as high as this would be associated with either a neighborhood you would not like to live in, or a property you should really sell, NOW. The former because that’s where the cash flow is, the latter because it is worth a great deal more than you paid for it, and that money could go to a much better investment.

If this scenario were possible, anywhere, it would very quickly dissappear as other investors would snatch them up, bid it up, or the sellers would wise-up and raise their price. The real estate market in the US is very efficient. That means, all parties are well informed about everything available in it and what properties are worth. So, getting a killer deal that no one else sees is not likely – corruption and “shyster-ism” notwithstanding. An exception is “for sale by owner” properties, where the seller may not have the advantage of a full view of the market.

The rule on any real estate investment is, “The way to get the best deal is to discover value where others have not seen it.” Any 4-plex with a return of over 25% is going to be obvious to almost everyone. Professional investors in real estate are happy with an 8-10% return. If they have passed on this deal, be very careful.

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Nancy Hendryx November 3, 2013 at 4:14 pm

Jim,

I would never invest in a neighborhood in which I would not live, nor would I ever be a slumlord, regardless of how it might boost my returns. I am sure what you say has validity and that because I’m new at this I just am missing the finer points. I had planned to either buy a fixer-upper at rock bottom in a good neighborhood or pay more for a turnkey in a good neighborhood. I just bought a turnkey in a top neighborhood (where I had lived for many years previous to starting a family). It’s a 5-unit. I will be moving into one next summer. I had a good down payment but still financed nearly a half-million on the property. The rents are much higher (in some cases two or three times what I’ve seen most post here on BP). I will be living mortgage-free and will clear (yes, after the 50% rule), $2,500 a month. So…that saying, “Your mileage may vary…” I think we have different experiences. I don’t think deals like the one I just closed are common. But they do exist.

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Brandon Turner November 3, 2013 at 6:47 pm

Hey Jim,

I appreciate the comment, though I have to disagree wholeheartedly. We have dozens of people, every single day, introduce themselves in the BiggerPockets Forum from all across the country, in every city. And this strategy is mentioned over and over and over. People are doing it all the time. Yes, you can’t be as choosy in location as a homeowner, but I don’t advocate living in the ghetto either. Within an hour’s drive of every major metropolitan area in America there are locations that work. Perhaps that’s not the area you are a working agent in, but that doesn’t mean it doesn’t exist. I know folks in Portland, LA, Seattle, New York, Boston, Minneapolis, Sacramento etc who are all doing this very same strategy. Are they living in the $1,000,000 house in the best neighborhood in town? Nope! But are they living cheap or free while building wealth for their future? Yah, you betcha! :)

Thanks again for reading and commenting!

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Mehran Kamari November 3, 2013 at 8:57 am

Very awesome and much needed article Brandon! As you know I started out renting out the spare rooms in my house to help with expenses, buying a multifamily would’ve been a step up.

I have a feeling that I’m going to be linking people to this article quite often :)

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Brandon Turner November 3, 2013 at 6:47 pm

Thanks Mehran! Yeah, you gotta get yourself one of those small multifamilies! :) But maybe not in your expensive area! The roommate thing is the same principle. Smart!

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Joe November 3, 2013 at 12:32 pm

This is a great idea! I currently manage a vacation rental in Costa Rica, and get to live for free. Eventually I’d like to move back to the US and do this in a city that would have good units like you mention, and be kind of touristy, so I could rent them vacation rental style or to long term tenants. Austin, New Orleans, LA come to mind. I guess vacation rental rules vary by city, but I think it would be a good way to increase cash flow and not get stuck with bad tenants. Any ideas about this?

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Brandon Turner November 3, 2013 at 6:49 pm

Hey Joe, thanks for reading! That’s cool you get to live for free in Costa Rica – I’m very jealous! And yeah, I think that would be neat to do a vacation rental in a busy tourist area – and you can get even more cash flow that way if done correctly! Best of luck!

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Jonathan November 3, 2013 at 12:52 pm

Great article, Brandon! This is exactly what I did. I bought a multi-family at the end of 2011 using a FHA Loan. After some general market appreciation and some cosmetic updates, I’m now looking at cash out refinance that will eliminate my PMI and net me $19,000. It’s time to go shopping again and do this all over again. Cheers!

All the best,
Jonathan

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Brandon Turner November 3, 2013 at 6:49 pm

Hey Jonathan, Nice! I love to hear this stuff! Best of luck on your shopping! Go buy something even better now!

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Lindsay Wilcox November 3, 2013 at 1:45 pm

I just bought and moved into my first triplex within the last month, and just got the last unit rented this week! There was one 48-hour span where I was paid $880…which is almost as much as I take home in my bi-weekly paycheck at my regular job!

Purchase price: $49,900
Repairs: $85 to replace a stove
3.5% down would have been $1,747.50, but with 6% seller’s assist, I closed for $30.69 out of pocket. Yes seriously.
PITI: $520.72
Utilities: ~$250 (single water/electric meters for the house, so owner has always paid utilities)
Monthly income from other two units: $975 (they’re very small–less than 1,000 sqft together)

Getting used to being paid $200/month to live in my house!

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Brandon Turner November 3, 2013 at 6:50 pm

Hey Lindsay, That is so cool! Congrats on your success so far. You are going to learn so much this way, which will help you so much in your future! Keep us updated on how it goes!

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Lindsay Wilcox November 4, 2013 at 7:42 pm

I think I’m realizing I don’t want to go larger scale with it. I like the property I have now, but to be successful in real estate, like anything, requires a lot of time and attention. It’s basically a career or a side career, and I think I like the field I’m in too much to want to split my focus on a bunch of properties that aren’t right here attached to where I live. Yeah, I have to live somewhere, and yeah, it’s certainly nice to be making money each month instead of “throwing it away,” but more and more I’m realizing I don’t want to “be a real estate investor.”

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Brandon Turner November 4, 2013 at 10:57 pm

Hey Lindsay – that’s a great realization. A lot of people try to become investors and then realize way too late that they don’t really like it! I think you gotta do what you love, and if being this kind of investor ain’t it – don’t do it! That said, there are a lot of other ways you can use RE to help build a financial foundation that doesn’t have to do with landlording, so maybe another tactic may intrigue you some day? Either way – do what makes you happy and fulfilled!

Susan Cain November 3, 2013 at 2:22 pm

This is not only a great way to get started in R.E. investing but can also be used to supplement Social Security. A friend sold the family home, paid cash for a nice duplex. She then retired and lived on her SS plus rental income.

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Brandon Turner November 3, 2013 at 6:51 pm

Hey Susan, excellent advice and so true! I often talk about this strategy for young folks, but it’s maybe even better for retirees! Thanks for the tip!

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joe sillaman November 3, 2013 at 2:52 pm

I wish there were $200,000 4-plex’s in Hawaii…

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Brandon Turner November 3, 2013 at 6:52 pm

Hey Joe – Ironically, the podcast that is coming out this week is with a guy who did this very strategy in Hawaii, on a $400,000 house with a mother-in-law apartment. So it is possible! Be sure to listen to the show this coming Thursday! :)

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Stephanie Cobb November 3, 2013 at 3:31 pm

Unfortunately, the law just changed in Tennessee. Triplexes and 4-plexes are now classified as commercial. Duplexes are as well unless they are owner-occupied. So basically, if you purchase a duplex as an investment property and end up moving out, it becomes commercial as well.

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Brandon Turner November 3, 2013 at 6:55 pm

Hey Stephanie, interesting! I didn’t hear about this. However, I’m curious – it’s not generally a law that makes any difference, it’s Fannie Mae, Freddie Mac. So I don’t think (I don’t know though) that it would make any difference at all what your state legally calls it. The Federal Government and the Banks are the one’s that matter. Again, don’t quote me on this, but I’d be surprised if banks no longer lent on 4plexes as residential, since it’s a federal designation. Do you know any more info on this? Am I wrong?

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Stephanie Cobb November 4, 2013 at 1:35 pm

I was referring to property tax classifications. Sorry for not being clear!

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Bill Turner November 3, 2013 at 4:09 pm

I know you are a brilliant man, just look at your last name. : ) I have often heard you speak of this on the podcasts. As a new investor and new landlord, do you recommend this scenario because I have often thought about doing this as a first time home buyer.

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Brandon Turner November 3, 2013 at 6:56 pm

Hahaha thanks Bill! And yes – terrific last name, designated for those smart enough to carry it. And for Pirates in disney movies!

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Dave Mays November 3, 2013 at 5:25 pm

Do this before you get married and start a family

Sincerely, Mr. Obvious

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Brandon Turner November 3, 2013 at 6:39 pm

Yeah, being single definitely helps a lot! However, I would say that if someone is looking to get started – no matter how many kids they have – this should be a consideration. The question becomes: how bad do you really want financial freedom? Enough to move your family into a small multifamily?

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Nick November 3, 2013 at 5:39 pm

That’s a great post Brandon and is exactly what my wife and I are looking to do.

The problem we are running into however is the fact that the cash flowing deals are in very iffy neighborhoods where we personally don’t want to live.

It’s been common for a duplex in a nice, safe, desirable area to sell for $200k (and I’m not on either of the coasts….I’m in the Midwest) This is where we struggle because we know we wouldn’t be happy in the iffy areas but I also don’t want to knowingly buy a dud of a deal just to be in a safe, desirable area.

Feeling stuck at the moment not knowing really what to do!

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Brandon Turner November 3, 2013 at 6:58 pm

Hey Nick, thanks for the comment! This is a concern, cause you don’t wanna live in the ghetto – and I would never advocate for that. The question is though: will you sacrifice one year of living in the “not perfect” neighborhood where this is possible in exchange for getting started? How much does it mean to you? This obviously isn’t for everyone, and “happy wife, happy life” but true financial wealth does take sacrifice sometimes – so this may be a way to do that. I dunno – just a thought! (Please don’t move to the ghetto though! That’s not what I’m saying! :) )

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John Maloney November 3, 2013 at 10:32 pm

Great post! This is a strategy I’m thinking about using for my next residence.

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Brandon Turner November 4, 2013 at 12:31 am

Thanks John! Let us know how it turns out!

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Nikki H. November 4, 2013 at 9:02 am

Great article. My husband and I have been looking for this type of deal in the SF Bay Area for months now, and we can’t seem to get the 50% rule to work for us. I work in silicon valley and it is just not feasible for me to increase my commute from 1-2 hrs to move far enough outside the bay (like sacramento). Any of the deals that would make sense are either in very sketchy areas, (we are already looking in the “less desirable” neighborhoods) or sell way over asking price or for cash. We are working with an FHA 203k because most of these properties are over 100yrs old and have considerable work that needs to be done, but an FHA loan puts us at a disadvantage in this area with many flush investors willing to put down more or all in cash. We are now in contract on a place which will help us build wealth in the long term, but we will certainly not be living there for free.

We are from Houston and its been tempting to just buy a rental there since they are so cheap, but we want to stop renting and gain the first hand experience of being local.

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Brandon Turner November 5, 2013 at 3:22 pm

Hey Nikki, thanks for the comment. Yeah, I know some areas are real tough to make this kind of thing work – Bay Area being one of the worst. You may need to settle for less cash flow, or just avoid this scenario until the right property comes up.

Thanks and best of luck!

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Alex November 5, 2013 at 1:10 pm

Well this is not free. 50K or what ever you manage to put down to get to 150K from 200K divide by how many month you end up living there.

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Brandon Turner November 5, 2013 at 3:19 pm

Technically yes, it would take money to do this. However, when you put money down, that money isn’t “spent” because it’s equity. So there is no change in your net worth. So when you sell, you should (as long as prices don’t drop significantly) get all that money back. So in the grand scheme of things, when done correctly, it is “Free” but it doesn’t necessarily take $0. (though it could – see the comments above this where some people have paid under $1,000 to make this work!)

Thanks for the comment Alex!

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Bruce May November 5, 2013 at 9:26 pm

Great comments from everyone. We sold our house almost two years ago and have been renting. My plan has been to use this technique when we buy our next property.

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Brandon Turner November 6, 2013 at 10:51 pm

Thanks Bruce – hopefully you can find a killer deal to move into!

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Frank O November 6, 2013 at 3:57 pm

I definitely will use this advice when acquiring a buy and hold. You can’t go wrong with this strategy. Now all I need to do is sell my current house first.

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Brandon Turner November 6, 2013 at 10:52 pm

Hey Frank, thanks for reading and commenting! And now seems to be a good time to sell! :)

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Erik November 11, 2013 at 1:25 pm

It may be possible to borrow against your house and take out a conventional loan on a multifamily. If it produced sufficient cash flow it may even help reduce the cost of your current home! I would be interested to hear your thoughts and others on if this method makes sense.

Thanks ,
Erik

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Jag Sekhon November 6, 2013 at 6:55 pm

Great article Brandon! This is exactly what I was planning to do with my first property!

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Brandon Turner November 6, 2013 at 10:53 pm

Thanks Jag! Do it!

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Erik November 11, 2013 at 11:23 am

This is exactly what I did in July, 2013. I worked with a real estate agent and he pushed me to check out a duplex. I was not all for it but by the end, I have moved to only 4plexs and finally purchased a great one. I got a fully occupied complex for under $145k. Since then I have made some upgrades and increased rent $100. It has its times, but I love doing it and would not do anything different looking back. At 23 years old I feel like this has been a blessing as I do not have to pay anyone rent!…well except Wells Fargo…

Cash flow is king!!!

thanks,
Erik

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Susan Cain November 11, 2013 at 12:23 pm

Way to go, Erik. A Real Estate mogul in the making. Best of luck to you. At your age, you can do this every two years and have a nice portfolio while you’re still young.

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Shaun November 13, 2013 at 7:11 pm

Nice piece Brandon.
One thing I would change in an analysis would be to evaluate and apply the 50% rule based on being fully rented.
So with for 4-plex potential rental income is $3200 so by the 50% rule expenses would be $1600 and if you got that $700 mortgage you’d clear $100 with the $2400 of actual rent. Still pretty awesome given no house payment and accounting for your units expenses and maintenance as well.

I think this is important since things like a roof or furnace won’t cost less because you live there. Lawn care and snow removal won’t cost less (unless you want to do it) because you live there.

Even if you do save on things you still want to make sure it will work if you turn it to a full rental property in the future. I assume that for most that is the goal.

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Henry November 15, 2013 at 6:20 pm

Good article, however everytime I hear people say “i’m essentially living for free” it makes me cringe. You have to take into account opportunity cost since you could rent out the unit you are living in. Once the property is owned and in one’s portfolio, each unit should be considered independently. The time spent managing the property should also be taken into account and priced accordingly to how valuable one’s time is. I know its being picky, but “living free” might be too generous.

As for the actual investing method, I think it is a great way to invest (especially for young investors wanting to get in the game).

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Darius moody April 8, 2014 at 8:01 am

I have a question. I’m only 20 years old, i’m in the military, and i’m very interested in investing in real estate. Do you think i’m too young to get started, am i in over my head? If not, any advice?

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