Why House Hacking Didn't Work for Me?!

At the young age of 18 and after reading ALL the books Bigger Pockets Publishing had to offer, I was on fire and determined to become a real estate investor. 

My favorite form of investing turned out to be what Brandon Turner coined as 'House Hacking.' The reason HH (House Hacking) interested me so much was due to the simplicity of it. It almost seemed as if it was cheating. "All I have to do is save up roughly 5 grand, live in a property for 1 year, then rinse and repeat until I'm a millionaire?" ...Say less. 

At 18 years old I already had a 40 hour a week day job as a HVAC technician in Pittsburgh's local union. I was making great money! Roughly $40 an hour in Pittsburgh was quiet the income, especially at 18. There was no reason why I shouldn't have been content.

Why Real Estate?

Unfortunately, money can only bring you so much happiness and most successful investors are after much more than money... Freedom. 

No matter how much my HVAC boss could pay me, I still had to go to a job, that I didn't enjoy, everyday, no. matter. what.

REI gave me that little glimmer of hope, that maybe I didn't have to listen to the old men at work say "We'll get used to it kid, you got 40 years left." 

Hopefully, my struggles will give you some encouragement that your goals ARE possible! 

This is a story of an 18 year old, with no credit, job history, or assets trying to get a loan.

Start Off with a BANG(Failure)

With my little knowledge of real estate, I thought my book and BP podcast knowledge would have to do. My first step was finding an agent. 

As every experienced investor does (not really) I went straight to Zillow, found a property I liked and called that agent. After a short 10 minute chat, the phone call disconnected, coincidentally right after she asked my age. I would call back... no response. Once more, same result. "Okay, avoid the age question next time" Were learning.

Still agentless, I decided to turn to the local community Facebook page. "Hi, my name is James. I am looking for a property I can buy as an investment. If anyone has a recommendation for a real estate agent, it would be greatly appreciated. Thanks." Send. 

I'll spare you the details, but days go by, not one comment. 

Finally my mother informs me that a friend of hers reached out and explained that she saw my Facebook post. She was an agent herself and wanted me to know she would be willing to help with the property hunt! 

Within a matter of hours, I was set up with an MLS search and a list of properties we would be touring in the coming days.

I really had no idea what I was doing, I was mostly leaving it up to the agent. I can still remember the feeling of having completely and utterly no idea what was going on. Not knowing what I was signing (agency agreements), not knowing what any of her fancy terminology meant (PMI), and not even understanding what I was really looking for (SF, Duplex, etc.) All I knew was that rich people own real estate and that worst comes to worst, I'll be forced into paying down a mortgage, resulting in equity, if nothing else.

Eventually, we found a nice SF, 3 bedroom house about 5 minutes from my current residents, my parents basement. The property was priced at $80,000.

Not too much work, but enough work to build a fair amount of equity. The plan was to live in the basement of the new house and rent out the three bedrooms. I was really excited. 

Where HH Doesn't Shine

Only thing left to do was to get a loan and get it under contract! Right?!

I knew nothing about mortgages so I asked my agent for a referral. She recommend her brother at a small local bank.

"Hi, my agent recommended me to call you, your sister. I'm looking for a FHA loan with 3.5% down. I have $5,000 saved. I'm going to live there. The address is ____."

"How old are you?" ... UGH, this again.

"I'm 18 sir."

"Well yanno, in order to qualify for an FHA loan you need either 2 years of W2's or a college degree? Do you have one of those?" He knew the answer.

"What's a W2?" 

You see were this is going? I only had about 6 moths of W2 history and hardly any college credits, much less a degree. 

I tried everything, to the point were I'm sure he was temped to block my number. Once he wouldn't entertain me anymore I would call a different bank. I'd explain my situation and the same result would manifest. 

I called 24 different banks. Sometimes I couldn't even get past the "how old are you," to even be able to explain my dilemma. I quickly learned to talk in a deeper voice. 

After many failed attempts, my agency agreement ran out and I had to back out of the deal. Luckily, the owner felt bad and gave me my hand money back. How embarrassing.

Why You Should NEVER Quit!

Being a tad discouraged. I knew I had no other option but to try again. I definitely wasn't working for the next 40 years and the embarrassment of explaining to all the guys at work how my deal fell through, as they exclaimed "I told you so," was all the motivation I needed.

I did some crazy stuff looking back, but I'm proud of it. 

I would go on to call 10 banks a day. I would call banks I already called before over and over just to see if they 'changed their mind.' Noticing their answers weren't changing, I knew I needed a different strategy. 

You always hear the story about someone asking for a ridiculous amount of money, then someone giving it to them just because they asked. I'm not sure if it was just a marketing gag, but hey it worked on me and I was going to try it. 

I decided what the 3 richest cities in Pittsburgh were and I went door knocking asking for a loan. Many people laughed, some were impressed, some were angry. 

As I was in one of the neighborhoods, I remembered I knew a distant family friend who lived in the area and was quite wealthy. I asked my mom for his number and proceeded to text him my situation (he was hard of hearing or I would've called.)

After a long waiting period, he finally texted back. To my surprise, he told me that if I brought him a deal that he thought was worth my while, that he would fund it free and clear.
With tons of excitement, I thought I finally did it. I went right to running my numbers and getting everything ready to present to him. 

Not Every REI Story Has a Happy Ending

Upon arrival at my angel investors residence, I was very nervous. I was wearing the nicest clothes I had, dress pants, dress shoes and a button down shirt. However, I still felt out of place in-front of his giant mansion. 

After knocking, 2 times "Was that too hard? Did he hear me? Oh, here he comes. Maybe I should've knocked 3 times."

As he opened the door I noticed he was wearing sweatpants and a tee-shirt. I thought 'Oh no, maybe I'm overdressed?'
 
He let me inside and told me to sit down on his far too expensive fur couch. 

As if he could read my mind he asked, "What are you wearing? Do you not own a suite? When you come asking for money you wear a suite."

In shock, I tried to explain to him that these wear the nicest clothes I had and I apologized. Off to a great start, I gave him my well prepared binder of the current deal I was interested in. I gave him the MLS page and my Bigger Pockets analyst. 

After, taking a long look at it he finally looked up and said, "you have no idea what you're doing." Ouch.

With my confidence at an obvious all time high, he began to tear my deal apart to no end. He used words so big, explained things so out of my knowledge, that I left his house with a pounding headache. Oh, and no money. 

Light at the End of the Tunnel?

I would meet with an older friend about once a month. He retired around the age of 40 from stock investing. It interested me, so we would meet and he would teach me some things about stocks. At our next meeting he asked, "So how's the real estate hunt going?"

I explained to him my difficulties. I jokingly told him if he could just teach me how to hit big on a stock, I would be golden. His name is Joe and Joe always had faith in me and would tell me that he knew I would figure it out. 

That next day Joe called me. He explained that he believed in me so much so, that he would give me a $20,000 loan at 8% yearly interest so that I would have a downpayment for a property. That way, I wouldn't have to go through FHA. I knew I still wouldn't qualify for even a conventional loan, but without hesitation I accepted. What other choice did I have?

However, this time I was a little smarter.

Don't Ask Me How I Came Up With This

Knowing I was most likely not going to qualify for any 'typical' loan programs, I knew I had to get creative. 

I ending up calling the head mortgage consultant at my personal bank that I use for my checking account. I asked her if she had any relatives that were real estate agents. To my surprise, she did! She told me that her sister-in-law was one of the top agents in town. 

"This is perfect," I thought. "The lender will want me to qualify for a mortgage, so that her sister-in-law can get the commision!"

And that's exactly what happened...

I ended up qualifying for a portfolio loan!

A portfolio loan is a mortgage loan held in the banks personal portfolio, which makes it easier for the borrower to qualify when not having to jump through secondary market hoops.

Just like that I found a Triplex for $130,00, negotiated it down to $120,000 and closed the next month. 

Once closed, I renovated the top unit with my prior construction knowledge, moved in, and kept the same renters that came with the property in the other units. (Who have been great to-date!)

I wasn't living completely 'rent free' at first, due to my $20k loan and other small expenses. However, as of last month (roughly 1-1/2 years later,) I paid off the $20k loan completely!

On top of the that, the property appreciated from $130,000 to $170,000, which allowed me to pull out a $60,000 credit line!

I now have a $60,000 credit line, roughly $80,000 in equity, and $300 of cash-flow a month, while living RENT FREE. 

Isn't real estate great?

Final Words of Wisdom 

I now own 3 properties and I'm still learning every day. I still have my day job, however, it's a lot less painful knowing that I have the option to switch to something I may enjoy more. Sometimes embracing the suck of a well paying job you don't like is the sacrifice you have to make to propel yourself that much closer to financial freedom.

If you take anything away form this blog, please know that even when you can't understand, are scared, don't have enough experience, are to young, or don't qualify... Don't give up.

I my experience, the place where you feel the most uncomfortable is the place you learn and grow the most. 

House hacking is one of my favorite strategies, however, sometimes it may not suit you. Regardless, don't quit. Make it work. Don't take no for an answer. You'd be surprised how much easier things are than you first believe. 

Ask for help, READ, take educated risks and LEARN from failure! 

If you like to know more about my story, I am featured in Brandon Turner's new book, 'Investing in Real Estate with No (and Low) Money Down.' Click the link to grab your copy.

James Baker