Robert Leonard (03:26):

And because of me hosting a relatively popular podcast, they found my name and they reached out to me. They’re like, “Hey, from Simon & Schuster, we’re offering you a book deal. You want to write this book?” We got into some of the details. And so, was it harder than I thought? Not really, but we had a little bit of an interesting situation, because most authors have an idea for a book or they even write the book already and then they go and pitch that to a publisher and then go through it that way or they at least pitch the idea of the publisher, get the book deal, and then they write it. And so, usually they have a year, two years. A lot of the authors I’ve talked to, they said they took five years to write their books.

Robert Leonard (04:06):

Even for me, what was different was they came to me and said, “Hey.” We’re talking about this end of August, early September. You need to have your full first draft to me by December. So, I had three to four months to write this. That in and of itself was very difficult. It was very quick process. And the reason that it had to be that way was because we had these deadlines that we had to hit in order for publishing to happen. And now, it’s going to be published in September of 2022. And I’m like, “Why do I need this nine months in advance?” But it’s because then there was four or five rounds of editors that went through it. Then we did some videography stuff to promote the book. Then we had bunch of cover art done.

Robert Leonard (04:43):

Then they had to actually put all the programming to make it a book itself. So, there’s a lot that goes into it, and then there’s supply chain issues to actually get the physical books themselves. So, it just is a long process. So, we had to shorten my writing period. So, that was definitely tough. The other really difficult piece was that I wasn’t allowed to use the word I. So, I couldn’t say I at all in the book. So, that was very difficult. And also, it was very strict on the length of things. So, chapters had to be an exact word count and then the total book had to be between 72,000 to 77,000 words. And so, you’re like, “Oh, 5,000-word difference. That’s a lot.” But when you sit down and you think about writing that many words and having to finish in such a tight window, it was difficult.

Robert Leonard (05:29):

Also, I couldn’t write about any stories. So, just the way that they designed this style of book, I’m not allowed to tell any stories, which honestly, I think is a little bit of a bummer for the quality of the book, but it also made the writing difficult, because at times, I didn’t necessarily have enough to say to fill the word count. And if I could have just imported a story that I’ve experienced, because I’ve house hacked a bunch of times and I’ve helped other people house hack and I’ve talked to other house hackers. So, if I could have included some stories, that would’ve been really helpful to the book and also extend the length of my writing and would’ve made the writing a lot easier. It was about what I expected.

Robert Leonard (06:04):

It was difficult, especially given the timeline, but like you said, we’ve gotten to talk to some really good authors. So, I had some really good strategies to how to go into this. And I really just broke it down into digestible pieces. I knew that I had to write 600 words every single day without skipping a single day from the day I started until mid-December. And then I would hit my 77,000 words or whatever the exact breakdown was. But I knew I had to sit down and write that exact number of words every single day or I was going to fall behind. And then in a future day, I’d have to write more. It was difficult, but thankfully, Clay, as you know, I’m relatively efficient and I have pretty good time management skills. So, I was able to get it done.

Clay Finck (06:43):

You mentioned all these strict rules around writing the book and it just reminds me of university, how annoying some of that was. I’m honestly really surprised you wrote it in three or four months, given how long it is and how detailed it is. I was just like, “Wow, you just knocked this thing out of the ballpark in my opinion.” So around 250 pages, I just brought it up and it reminds me of when I spoke with William Green. You and I were in Omaha for the Berkshire meeting and he just casually mentioned to me he wrote his book in five years. I was so surprised and just had a whole new level of respect for his book. And I know he put so much quality into everything he does with the podcast. So, really interesting.

Robert Leonard (07:21):

Yeah. It’s definitely hard and I’ve heard both sides of it. I’ve talked to some people such as William and some others who said that… I actually have two friends who are also in the podcasting space and they also write books and they were assigned a book from their publisher, but they had no end date. They were assigned the book a year ago. They’ve made no progress. They don’t lack motivation. T they are very motivated, very successful people. It’s just they don’t have a deadline, so it doesn’t force them to do the writing. And so, for me, yeah, it was really tough to have the short window, but in a different perspective, I’m very happy that I had that, because it forced me to sit down and make sure I got it done every single day.

Clay Finck (08:00):

Like I mentioned in the intro, your book is called The Everything Guide to House Hacking. So, for those who maybe haven’t listened to too much of your show or haven’t heard too much about your background in real estate, walk us through what exactly a house hack is.

Robert Leonard (08:15):

Yeah, you can make house hacking really difficult or really complex, but really in its simplest form, all house hacking is purchasing a property that has extra space that you’re not utilizing and then renting out that extra space to reduce your expenses. So, let’s just say your total mortgage is $1,000. You have some extra space, whether it’s a bedroom, a unit, a backyard, a parking space, whatever it is. There’s a bunch of different ways you can do it. Whatever you do to reduce that $1,000, maybe you get $500 a month for something and now you only have to pay $500, that’s house hacking. It’s doing something where you rent out additional space in your residence to reduce your living expenses.

Clay Finck (08:59):

It’s funny, you mentioned that Simon & Schuster reached out to you asking you if you wanted to write a house hacking book. What makes you qualified to write this book? What’s your experience with house hacking and the deals you’ve done?

Robert Leonard (09:11):

They didn’t know this I don’t think in terms of what I’ve done for house hacking. Maybe they had heard some episodes about it, but I think they just knew that I had a pretty popular real estate podcast and I post on social media. She’s mentioned she saw me on social media as well. She actually said she saw me on Instagram posting about real estate stuff. So, that was helpful. But in terms of my knowledge and qualifications for house hacking, I’m a three-time house hacker myself. I have done it three separate times and I’ve done three different strategies each time. So, I have a little bit of experience with pretty much all the different approaches to real estate that you could have.

Robert Leonard (09:45):

So, my first one was actually, what’s really interesting is that I got into real estate because of an accidental house hacking. I’ll briefly tell that story, but the approach was a single family, rent by the room strategy. Going into college, my dad told me that when I graduated college, I was earning a salary, I would have to pay him rent. And I thought this was fair, but I didn’t really want to do it. So, I was 18, going into college. I knew I had four years to figure something out. So, I saved as much money as I could, learned everything I could. Actually, all through college, I worked almost full time, became a loan officer, started to do underwriting for loans myself. So, I learned everything I needed to do to qualify for these types of loans and mortgages.

Robert Leonard (10:28):

Not because I had no intentions of being a real estate investor. I just wanted to buy a house when I graduated college. So, I didn’t have to pay my dad rent. I told him and I told all my friends and family, I said, “Before I graduate college or right after I graduate college, I’m going to buy a house that I don’t have to pay you rent.” And so everybody laughed, thought I was crazy. Nobody in my family had ever purchased a house until my dad did when he was in his 40s. So, it was just a different experience. Nobody thought that I was going to do this. Sure enough, like I said, I learned everything I needed to do, put myself in a really good position. And I bought a small pretty nice condo my senior year of college. And I moved there and I didn’t plan on house hacking.

Robert Leonard (11:03):

I didn’t even know that was a thing. I just, again, wanted to live there. So, I didn’t pay rent. So, I moved in and it was two bedrooms. I was a single guy by myself. And so, I moved in and I didn’t even open the second bedroom door for a couple months. It was two or three months where I don’t think I even opened the door to go in there. So, one day, it just hit me. I was like, “Man, I should probably do something with that room. It’s just sitting there. Maybe I’ll turn it into an office.” But I didn’t really need it as an office, because I had another room that was an office already. It’s like, “Yeah, maybe I’ll rent it out. We’ll just see what happens.” And so ended up finding a guy that I knew at the gym who was looking for a room to rent and he ended up renting the room.

Robert Leonard (11:40):

And so, I had a roommate. My total cost for the condo with mortgage, insurance, taxes, HOA, everything was about $1,100 and he paid me about $700 or $750 a month. So, I was living for $350, $400 a month. It was awesome. He worked nights. I worked during the day. So, he’s home when I was at work and I was home when he was at work. And so, we pretty much never saw each other and I got to live for really, really cheap. It was great. And I realized that I’m not that smart. So, there’s no way that I just invented this strategy. I just did a little bit of searching, stumbled upon house hacking. I found that this was a strategy coined by a guy named Brandon Turner. And that opened me to the world of BiggerPockets and Real Estate Investing.

Robert Leonard (12:27):

I realized that there were thousands and thousands of other people that were just like me that were real estate investors and taught me that I could do it too. And from there, it’s history.

Clay Finck (12:37):

It’s funny, you mentioned the condo experience you had. When I was in Omaha, I actually lived in a condo, got a two-bed that I owned. I just had one of my good buddies live with me and I never told anyone I was house hacking. When I think of house hacking, I always think of some a multi-family duplex, triplex. That’s the most common method just because real estate investors are looking for those returns and looking for something that’ll be able to rent out once they move out of the place that they are living in. Now, someone might be listening to this. They hear, “Okay, house hacking is a form of real estate investing.”

Clay Finck (13:11):

A lot of people just don’t want to be real estate investors. But I think once you realize the power of house hacking in terms of the ROI and what you get for your money relative to what else you can do with that money, we talk a lot at TIP about opportunity costs. You can spend an hour in a day only doing one particular thing. You can’t do multiple things at once. It’s the same thing with money. You can only pay a certain dollar amount towards one type of investment called stocks or real estate. Talk to us about why house hacking is such a powerful wealth building strategy.

Robert Leonard (13:43):

There are so many different reasons, but we’ll start with the very first one, which is down payment. You can purchase a property. Because it’s your primary residence, you are able to purchase a property depending on what type of property, what type of loan, but you can get anywhere from 3.5 to 5% down on a property. So, yeah, you could do that on a single family too, but that’s not really an investment. That’s more of buying a liability. Whereas this, you’re buying an investment property. You buy this and then you live there for a period of time, usually a year, maybe a little bit longer, and then you can move out and rent it out to somebody else.

Robert Leonard (14:18):

And now, you have a rental property that typically you’d have to put 20, 25, maybe even 30% down on, but now because you house hacked and live there for one year, you can just put 3.5 or 5% down and then move out when you’re done. Now, you have a rental property for very low money down. So, that’s the first thing. The second thing is that it reduces your living expenses. I think that is massive. So, for me, just in that example that I just gave about the condo, my living expenses went from $1,100 to $350 or $400 a month. Can you imagine how your life would be different or how you could do different things if you freed up an extra $700 or $750 a month?

Robert Leonard (14:57):

Now, you can save that so that you can either buy another house hack in a year or you can buy a rental property or you can even spend some of it on yourself and just enjoy life or whatever really you want to do with the money. Now, you’re not necessarily living paycheck to paycheck anymore. What I really like about this too is, I talked about this theory, where it allows you to go on offense. Let’s say that you’re working in a job that pays $50,000,$60,000 a year, $70,000 a year as your salary. You’re spending every penny you have, because you’re what I call and a lot of people will call house poor, where you have a really nice house.

Robert Leonard (15:35):

You love your house, but you can’t really do much else because your mortgage payment, your cost of living of just your housing takes up almost your whole paycheck. So, you’re stuck. There’s nothing really else you can do. Whereas you can’t go on offense. You’re always on defense. Whereas you could go on offense if you had lower housing expenses. So, let’s say you cut that way down because you house hack and now you take a job that maybe pays $40,000 a year. Maybe in the short term, you’re getting paid less. Before you couldn’t even consider that.

Robert Leonard (16:08):

It couldn’t even be an opportunity for you because you are already living paycheck to paycheck versus now you could take that reduction to a little bit lower salary for, A, a job you love, so you’re not miserable at work anymore, or B, a job with a much higher upside. Maybe you join a startup. Yeah, you’re getting paid a little bit less, but in two, three years, your RSUs are worth $1 million. That’s not an unrealistic situation or whatever the case is. You go to a little bit smaller company or whatever the situation is. You take a little bit more of a gamble with your career. And in one, two, three years, you could get a promotion.

Robert Leonard (16:42):

Now you’re making a $100,000, $120,000, $130,000 all because you’re able to take one step back and really look at something for the opportunity that it provides rather than just being stuck because of your paycheck. So, that’s another big piece of reducing your expenses. And the third thing with reducing your expenses is that for me personally, I like to go out and do things. I like to go out and experience things. I like to go out and travel and race dirt bikes and play sports and live life. And for me, a component of that is being able to invite people over to a house you would love and things like that. But for me, I don’t want to be constrained to what I can do for fun and hobbies and enjoyment because of my house.

Robert Leonard (17:23):

Sure, I need a safe, clean, good location place to live, but it doesn’t have to be a palace. And for me, that’s because I want to go do other stuff. That’s a really big component is it gives you a lot of freedom and flexibility to do things that you really want to do. Then there’s also the benefit of tax benefits. So, now I’m not a tax professional, so don’t run and do your tax returns based on this. But if you hire a landscaping company, let’s say, you own a duplex and you live in one unit, rent out the other. If you hire a landscaping company to mow the lawn, you can write off roughly 50% of your expenses for doing that because you live in half and half as a rental property. So, now half of that’s a business expense. Same with snow removal and same with pretty much all of these kinds of things.

Robert Leonard (18:08):

You also have depreciation as well. So, you have these tax benefits, because your property is half investment, half primary residence that you don’t have with a single family house. So, that’s really important as well. And then the last thing is just that it’s such an easy way to learn how to become a real estate investor. I call it landlording light or landlording with training wheels. And like we said with the down payment is it allows you to get a rental property pretty easily and now you can leave in a year and a half and turn it into a rental. There’s a lot of benefits there. Because of leverage, this is pretty applicable across many real estate strategies, but you can buy a pretty expensive asset for a relatively low money down.

Robert Leonard (18:50):

Like my current house hack, I bought a $350,000 duplex and I only put $12,000 into this property to purchase it. And a year later, it was worth $450,000 and I put $12,000 into it. Of course, it’s been interesting market, really interesting times, but you’re not going to really get those types of returns in other places. They’re not guaranteed of course. That’s not going to always be the case, but regardless, you’re building equity every month in that property and somebody else is paying for it, not yourself.

Clay Finck (19:18):

A lot of benefits to house hacking. I love the playing offense side that you mentioned there. You see a lot of people at a college, they’ll go out and buy the new car. They’ll go out and get married and get the nice house. And they really just strap themselves down to not put themselves in a position to play offense. Yeah, there’s the one hand of lowering your expenses through a house hack, but also, it reminds me of people I know that have purchased a house hack. For example, I have a buddy.

Clay Finck (19:45):

He bought one in 2017, 2018, put around $10,000 down, and today is cash flowing over $10,000 per year after he is already moved out of it. He has both sides of the duplex rented out and now he is getting cash flow of $10,000 per year. What stock out there is going to give you 100% annualized return? That’s not even considering the other things you mentioned, the tax benefits. His duplex since 2017, 2018 has appreciated significantly. That’s not guaranteed by any means, but it’s playing offense. It’s putting yourself in a position to have that upside.

Robert Leonard (20:23):

Mine is the exact same situation. So, like I said, I put $12,000 down. When I leave, I’ll probably cash flow about $1,000 a month, I think, maybe a little bit more depending on when I leave. So, my payback period is one year as a rental, $1,000 a month times 12 is my $12,000 back. That’s cash flow. That’s real cash flow. I took into consideration maintenance, repairs, CapEx, vacancy, all of that. This is just true net cash flow, and a payback period of one year is awesome.

Clay Finck (20:54):

In your book, I also liked how you weren’t overselling this strategy and you were being very realistic when explaining everything. You talked about how house hacking might not be for everyone. Some people are probably in a lot better situation to execute a strategy like this than others who just might be in a completely different part of their life. Who do you believe house hacking is good for and who might it not be good for?

Robert Leonard (21:20):

I definitely think there are people who it might not be the perfect fit for, but I do think anybody can do it. So, there’s a distinction there, but I think the people who it’s not good for is if you just can’t fathom living anywhere near somebody else, if you just have to absolutely be on your own lot, then this probably just isn’t for you. Now, it’s interesting to me because people will say, “Oh, well I have a family.” And it’s like, well, you can buy really nice house hacks. House hack, I think, gets a bad reputation in a sense, or when you hear house hack for the first time, you think of just a fourplex or a threeplex or a triplex in a really bad area in the city that’s run down.

Robert Leonard (22:04):

But I know people who have multi-million dollar house hacks in California that are beautiful and they house hack it by having a small ADU in the back. They just rent it out to a little family or a family member, or they just reduce their expenses a little bit by just renting out an ADU. So, it doesn’t have to be this rundown property, but I digress there. If somebody just can’t fathom living on the same lot or near somebody else, then it’s probably not for you. If you have absolutely no interest in being a landlord, it’s probably not the best for you. I think there are ways you could hire property managers, things like that to not necessarily be a landlord, but if you don’t necessarily want to be hands on, then it’s probably not the best strategy for you either.

Clay Finck (22:51):

For those who might not be familiar, what is an ADU?

Robert Leonard (22:55):

ADU stands for accessory dwelling unit. It doesn’t have to be, but it’s typically a detached unit from the property. It can be attached, but typically, it’s just a small spare unit basically that’s its own living space. Think of a studio apartment essentially. Sometimes they’re one bedroom that’s like off on the side of the lawn. Again, sometimes it’s attached, but in-law suite is another way to explain that.

Clay Finck (23:20):

We talked about some of your previous real estate deals. And as I’ve gone to know you, I know that you are interested in potentially getting another house hack in the future. Given your experience and what you know about real estate investing, I’m curious, what are some of the specific things you’re going to be looking for and why?

Robert Leonard (23:38):

With my next house hack, I’m running into an interesting situation from a loan perspective that’s making it a little bit difficult, but for me, what I’m looking for and I think this is a really good example for people that say they don’t want a house hack because I don’t necessarily need the house hack, but I still want to and I’m doing it in a way that fits my lifestyle. I’ve done it three times now. I own rental properties. I financially don’t need to do it, but I still want to, because it does help. It definitely reduces expenses and you can do it in a way that fits what you want. My first one and my second one were not the most optimal living situations that I could ever have. My third one that I’m in now, it got a little bit better.

Robert Leonard (24:22):

Now, my fourth one, instead of living in a fourplex in maybe not the best location just so I can get a really good rental property or reduce my expenses as much as possible, maybe I’m not going to go that route. Maybe I don’t need to now because it’s my third one. I’m doing a little bit better financially. As you progress through doing multiple house hacks, you can change your criteria. So, for me, now what I’m looking for, I want a place with land. I want to get out of the city. I want at least two, three acres. Ideally, five acres would be nice. Now this is hard to find. Where I live, there’s not typically multi-family properties on that much land.

Robert Leonard (24:59):

Now I don’t want to do a single family, rent by the room strategy. That’s not what I want to do right now. I’ve done that and it works, but it’s just not what I want to do. So, again, it’s not so much that you can’t do house hacking if you have certain criteria. You just have to find the strategy that works for you. And so, for me, I want a multifamily, ideally duplex that is on two, three, four, five acres, in the city that is within 20 to 30 minutes of some locations that I need to get to frequently like stores, friends, family, things like that. That’s my criteria right now. Whereas before, I would’ve been a little bit more strict and cared more about the financial component.

Clay Finck (25:39):

I’m also interested in learning more about maybe some of the biggest misconceptions around house hacking. What do you think keeps people from making that step and doing a house hack?

Robert Leonard (25:51):

I think the biggest thing is they just can’t ever imagine living with somebody. And I think that’s just the biggest misconception is you tell somebody that they need to house hack and they automatically assume that it’s going to be like college. They’re living in a dorm that they’re sharing this small one-bedroom house with five other people and it’s just a crappy living situation and it’s just not fun. And so, I think that’s the biggest misconception or concern that people have. Second, I think, is how difficult it is to be a landlord. If you do it right, it’s not that difficult, but I’m not going to tell you and preach that it’s totally passive because it’s not, but it is relatively passive. And like I said, if you do it right, it can be pretty easy to do. I think people overestimate the difficulty as well.

Clay Finck (26:36):

One part I really loved about your book was how you outlined the importance of building a team and that’s an interesting way to put it. When you think of building a team, you might think of building a company and having all these people on your team that are helping you deliver a product or service. And when you put it in the way that you did of building your team, it can almost feel intimidating where this person that’s never built a business, they’ve never ran their own business, and they need to find all these people, find the right ones. And one person might be a really key to the success or failure of your house hack. So, why do you believe a team is necessary and who are some of the key members that should be on that team?

Robert Leonard (27:19):

So when I wrote the book, it is important to build a team and have a team, but I wanted to explain that it doesn’t have to be as scary or complex as people think, because I could have just said, “You need to build a team,” and left it at that. But I went into detail on how building a team doesn’t mean you’re not hiring people fulltime. You don’t have to start an LLC, start a legal entity, hire these people full time, pay them a salary, benefits, pay their taxes, do payroll, all that stuff. You’re not hiring a full-time employee. What it means to build a team really is another way to say it is you’re just building relationships with a group of people that you can consistently rely on for your rental property. I call that building a team.

Robert Leonard (28:01):

You’re adding them to your team because you have already vetted them and know that they’re going to be in your corner. They can help you out in a situation. So, they’re like in your group, they’re on your team. I personally think the best way to do it is to build those relationships before you need them. If you have a tenant who sprung a massive leak for some water plumbing problem in their unit or even yourself in your unit, it’s a little bit different. You’re under the gun. You got to find somebody quickly and you’re not going to make the best decision when you’re finding these people to come work with you. You’re just going to rush it because you’re going to accept somebody lower quality than you otherwise would because you just need the problem fixed.

Robert Leonard (28:42):

Whereas if you know there’s a couple different types of people that you’re probably going to need at some point in your real estate career, you’re probably going to need a plumber at some point, probably going to need HVAC if your plumber can’t do it, you’re going to do your heating and air conditioning at probably at some point, you’re probably going to need maybe a handyman, and then you might need an electrician from a construction perspective. Those are going to be some of the big four people that you might need to fix problems.

Robert Leonard (29:06):

If you know that those are probably going to be an issue at some point, why not get in front of that, find one or two of these companies or people in each group, start to build a relationship with them, start to vet them, make sure they’re high quality, make sure they can do what you need, explain to them what you’re doing? And then when the time comes, you can actually have them come out and do what you need. That’s just from a construction perspective. Then on the other end, when you’re actually buying or managing the property, you have your real estate agent, which is arguably the most important person on your team. You can have a lender as well. A lender can be important. And then an attorney on occasion. You can even get a virtual assistant.

Robert Leonard (29:44):

Those are more on the business side and then even maybe a CPA or a tax professional that can help you as well. So, again, it’s really just building a relationship, building a business and working relationship with these people. So, that when you need them, you don’t have to just pick anybody because you’re in a rush at that time. Knowing and having that relationship going in, you have a lot more trust in what they say, their opinions that they give. You feel a lot more confident about the decisions that you’re making.

Clay Finck (30:11):

You mentioned LLCs. Did you ever use an LLC when you purchased your house hacks? Maybe you can paint some color on why.

Robert Leonard (30:20):

No. So, you actually can’t use an LLC when you purchase a house hack. That’s the first thing. Generally speaking, when it comes to real estate, outside of just house hacking into other real estate strategies, I have a little bit of a funny story about LLCs, because before I really knew anything and I still have a lot to learn. But when I really knew nothing, I thought that I would never buy a piece of real estate without an LLC. I always said, “I have to have an LLC to buy real estate.” So when I went to go buy my first rental property, I opened an LLC. I was getting excited. I was like, “All right, I’m ready to go. I’m ready to buy this property.” I go to buy a property. Lender would not lend on an LLC. I’m like, “Okay, well this is just one lender. Maybe I’ll find somebody else. No problem.”

Robert Leonard (31:04):

I called almost 100 lenders. Not a single one would lend to an LLC on the type of asset that I was buying, which was just a single family house. It was a rental property. Turns out residential lenders will not lend to LLCs. The reason for that is because they have to be able to sell their loans to Fannie or Freddie. And in order to do that, it can’t be to an entity. It has to be to an individual. I said, “Okay, well, I got to figure something else out.” So I ended up doing that in my personal name. And then you can do an LLC for commercial if you use commercial lending, totally different situation. But when it all comes down to it, house hacking, you cannot use an LLC for your house hack.

Clay Finck (31:42):

That makes sense. Now I’d like to talk a little bit about tenants and finding a deal. In regards to the tenant’s side, say someone goes out and purchases a duplex. They’re going to live in one side, because many times with something like an FHA loan, it requires you to live in one of the units. And then you’d go ahead and rent out the other side of the duplex. A common perception, I think, people have when it comes to renters is that they’re not going to treat something as well if they’re renting it versus if they owned it. How do you go about finding quality tenants that you’re more comfortable with them living in your space and that they’re going to take good care of your asset?

Robert Leonard (32:24):

Yeah, there is some truth to that, not just houses, whatever it is. You let your brother borrow something. You let your dad borrow something. You let anybody borrow something. Your friend, people just don’t take care of things like you do when you own it. It’s just the way it is. You hire a property manager to manage your property. They don’t manage it as well as you will because it’s yours. You care about it more than anybody else. There is definitely some truth to that. Now, when it comes down to the tenants, the very first thing is the type of asset that you’re buying. It’s a pretty logical thing. I think a lot of times, if people just slow down, spend some time, I know Buffet talks about this a lot.

Robert Leonard (33:04):

People should spend more time thinking. He spends a lot of time thinking. If you just slow down, did a little bit of critical thinking and thought about some of these things, it would make perfect sense to most people. And so, if you buy a fourplex that is more designed like an apartment and it’s in the middle of a city, maybe not the best area, what kind of tenant do you think you’re going to get? You’re probably not going to get the highest quality tenant. You’re probably going to have some issues there. They’re not necessarily going to be bad tenants, but they’re probably not going to take the best care of the property.

Robert Leonard (33:33):

Versus you buy a beautiful duplex in a great part of town with great school districts, maybe a little bit of land. It doesn’t have to be acres and acres, but half an acre, a quarter of an acre, a nice little yard, fenced in, a nice area with good neighbors, things like that. What kind of tenant quality do you think you’re going to get there? Much different than the more apartment style fourplex. And then even within a duplex, if you get an up-down versus a left-right townhouse style, you’re going to get different style tenants, because up down is more like an apartment. Left-right and townhouse style is more like a single family house. The very first step is deciding, “What type of tenant do you want?”

Robert Leonard (34:14):

And you can’t just say you want the best tenants, because sometimes you need to make a sacrifice a little bit, because in reality, that fourplex is probably going to make a little bit more money than the duplex. It’s just the way that the math works, the way that the numbers work on a house hack. You’re going to sacrifice a little bit of profitability and I talk about this in the book. I have a nice explanation of it on my website that explains there’s this comfort versus profitability diagram. The more comfort you give up, the more profitability you get. The less comfort you give up, the less profitability you get with a house hack. And so, that’s the very first step is pick the right property that’s aligned with the quality of tenant that you want and also with your goals, your financial goals.

Robert Leonard (34:51):

The second thing is you have to have the right screening criteria when you are searching for these tenants. Not only from a legal perspective, you have to have a definition for what kind of tenant you’re going to accept, but more than that is you need to set it strict enough that you’re okay with that quality of tenant. The law says you should have a list of qualities that you’re looking for in terms of credit score, background checks, jobs, income, things like that. But there’s a difference between setting your credit score minimum at 600 versus 500 or 700. Those are going to lead to different tenants.

Robert Leonard (35:27):

Or if you require three times the gross monthly rent as your income, that’s going to be different than if you require one times gross monthly rent. That’s going to be a different tenant profile. If you require a clean background check with no criminal history, that’s going to lead to a different tenant profile than if you allow certain crime or delinquencies or bankruptcies, things like that. It’s really defining your criteria to fit the type of tenant that you want.

Clay Finck (35:53):

I really like that perspective actually and it reminds me of my good buddy. He had the duplex essentially in the middle of Omaha. When you think about the location and the building, it was pretty old building, but the location, it was five minutes away from a medical school. So, I’m pretty sure all of his tenants are just graduate students that honestly take really good care of it. They want to place that is very affordable. It’s a three-bed. They all live together. And since they’re so busy with medical school, they really don’t have the time to really tear the place up. I think the tenant side is really an area where you can get creative and really think hard. Like you say, what type of tenants is this going to attract?

Robert Leonard (36:34):

Like I said, if you really think about it, think about where would you want to live at different stages in your life. When maybe you’re coming out of college, you don’t have a lot of money, you might not be the best tenant either. Where would you be willing to live? What could you afford? That’s going to probably be the similar tenant profile that you would get in that property. And then maybe if you’re a little bit older, think about that you’re 25, 30 now. What can you afford then? And just think about different locations, type of property, design, style. I mean, there’s so many different things that can change what type of tenant you’re going to get in that unit or even bedrooms.

Clay Finck (37:09):

Now, generally, when people want to go out and buy a house hack, they aren’t searching city by city. They’re looking in the city they’re currently in assuming they’re not moving for a job or anything else. How can people know if the market that they live in or the market they’re analyzing even is a good or a bad market?

Robert Leonard (37:27):

So, this is interesting because you either make the decision to live there or not in a sense. You’re either going to live in the town or you’re not. So, you can look up the data and decide if it’s a good city, if it has the demographic data points that you want for a city that you’re going to invest in. But if it doesn’t, if you’ve already decided that it’s the city you want to live in, then it doesn’t really much matter if it’s a single family or a house hack. The city is still the city. So, it just is. And now what I personally recommend is you probably are not forced to stay in the city that you’re in. The reality, I talked about this in the book, is if you really want to make something happen, you can probably move 15, 20, 30 minutes away around the city that you live in and still make it happen.

Robert Leonard (38:19):

Maybe that’s just because there’s no deals in the city that you live in for the type of deal that you want or maybe it’s because there’s a city 15, 20 minutes away that has a lot better demographic data that makes it for a much better investment. So, maybe you go there for that reason. You can determine what this type of city is that you live in. But if you’ve already decided to stay there, then it doesn’t really much matter. But if you’re looking for the best, then just set how far you’re willing to move. And for me, it’s usually like 20 to 30 minutes from this central point I’d be willing to go around. And just where I live, there’s some pretty small towns.

Robert Leonard (38:54):

So, there’s maybe a dozen towns or so within 20, 30, 40 minutes of each other. Those are all fine to me and I’d pretty much move to any of them. So, if that’s the case, I can look for deals in any of them. That’s how I recommend people go about it. Now, if you live in a big city, it’s a different story. In that case, you want to find the best neighborhoods. So, your friend in Omaha, Omaha’s not a massive city, but it’s a good size city. It’s much bigger than where I live.

Robert Leonard (39:20):

And so, maybe you don’t necessarily want to go 20, 30 minutes outside of Omaha, but Omaha’s a city itself. You could just find the best neighborhoods. Maybe you need to go to the other side of Omaha. Maybe you just need to move around. And that’s how it works with any major city is just find the best neighborhoods. You’re not really looking at it on a city by city basis.

Clay Finck (39:38):

One question I’m super interested in is how you go about finding your deals. The obvious way to find a deal is just look on the MLS. Anyone can get online, get on Zillow, and see what’s for sale in the real estate market. And I think that can almost be a little intimidating for people. They either see something where the numbers work and they’re just like, “Oh, it must be too good to be true if no one’s picking up the deal,” because of all these real estate investors that are out there constantly looking for stuff. And then a lot of the stuff on the MLS I think might not have the best numbers. So, that might hold someone back from going into a deal. Talk about maybe how you go about finding a deal. Do you use MLS or what approach do you use or recommend?

Robert Leonard (40:20):

So, let’s break down both of the different ways. You either have on market or you have off market. So, what you’re talking about with the MLS is on-market deals. You’re looking at Zillow, Realtor.com, Trulia, whatever there might be. There’s this multiple listing service, which is what MLS stands for. It’s basically your main database for any properties, any residential properties that are for sale. There are some commercial as well, but just generally speaking, if you’re looking for residential property, it’s on the MLS. So, what Zillow, Trulia, Realtor.com, all they do is they pay the MLS that the company or organization that maintains the MLS, they pay them to get access to all their data and then they just basically make an interface that makes it look better. That’s all they do.

Robert Leonard (41:01):

It makes it easier for users to search and see what’s for sale. Back in the day, this is really why agents were really helpful back then was because there were no platforms like Zillow, Realtor.com, et cetera. Only agents could access the MLS. So, if you wanted to know what was for sale, if you didn’t see it for sale sign, you’d have to talk to an agent. They would give you a pamphlet of everything that’s on the MLS and then you could see what was there. But now, companies like Zillow just access the MLS, give you that user interface that pretty much anybody can access. I think the MLS is a great strategy. I bought every real estate deal that I’ve ever purchased except for one off of the MLS.

Robert Leonard (41:38):

And to your point that you could see something and if the numbers are too good to be true, it’s a tough situation, because the numbers could be too good to be true. If they’re really, really too good to be true, then they probably are. You’re either buying in a really bad location, which typically bad locations pencil out to be some of the best deals. But what happens is your projections or your proforma never actually materializes in reality. It’s always worse than you actually expect it to be. So, then the actual return numbers end up being lower than you could have gotten somewhere else.

Robert Leonard (42:14):

Now, if it’s too good to be true, you need to understand, “Are you projecting too high of rent numbers? Are you overestimating what you’ll be able to get for rent for the unit or the bedroom or whatever the case is that would lead to the deal seeming too good to be true? Are you underestimating some of your expenses? Are you not fully understand what your mortgage is going to be?” PMI, your private mortgage insurance or any other type of expense you might have, water, utilities, something that you might be missing. Is there something there? And if you’re not, then there are times where it’s just not too good to be true. It’s just you found a good deal and that happens. And the reason that happens is because everybody has a different situation.

Robert Leonard (42:49):

Not everybody is coming into this to house hack and they might have a different strategy. Maybe it doesn’t make sense as a rental property. Right now, maybe it doesn’t make sense. So, a traditional real estate investor doesn’t want to buy it because it doesn’t want to be a traditional rental and it’s not a single family home. So, normal homeowners aren’t going to buy it. So, it leaves this sweet spot for you as a house hacker to buy it. Now, you just are up against other house hackers and that just really comes down to your criteria. You have to live for free, or are you willing to pay $500 a month or do you want to live for $1,000 a month? It’s up to you to decide what your criteria is and maybe somebody is not willing to pay as much per month as you are.

Robert Leonard (43:33):

It’s a deal for you, but it’s not a deal for them. That’s a piece of it. The other thing is with residential single family homes, you’re competing up against 97% of people who just want to be normal homeowners. Whereas if you start to get into duplexes, triplexes, fourplexes, you are in dealing with some investors, but you can typically pay a little bit more than a traditional real estate investor, because they need the numbers to be really, really good. That leads to there being some deals on the MLS. Now the other piece of the MLS is that sometimes people will not only think a deal is too good to be true, but they’ll see something that says that it’s been on too long and they get worried. They’re like, “Oh, something must be wrong with this property.”

Robert Leonard (44:15):

And in a lot of cases, that is true. There’s a property I went and looked at. It’s been on the market 200 days. It does have some stuff wrong with it. I can clearly tell why it’s still on the market, but the house hack that I’m sitting in right now, as I record this, was on the market for 60 days during the COVID spike of demand when things were going crazy and properties were selling before they even hit the market. This property was on the market for 60 days and I bought it and I got under asking. You can find deals. It doesn’t necessarily just mean that because it’s on there for a long time, that it’s not a good deal. And so, what happens is there’s this interesting period of time where you list a property for sale on the MLS.

Robert Leonard (45:00):

And if it doesn’t sell quickly and it’s going to vary what quickly means. Sometimes it could be a couple days. Sometimes it could be a couple weeks, depends on the real estate market in that area or that timeframe when you’re hearing this. But if it doesn’t sell quickly, then people start to think exactly like I said, they think, “Oh, there must be something wrong.” If it hasn’t sold after a week or two, they’re like, “Yeah, something must be wrong here or whatever.” And then that is self-fulfilling. Two, three weeks passed, now more people are like, “Oh, there must be really something wrong.” A month, two month passes, they’re like, “Yeah, something’s definitely wrong here.” And 90% of people will just avoid that property and they’re done with it.

Robert Leonard (45:39):

And really, all it could be is that the listing agent listed it too high at the beginning and that’s all. And so, people weren’t interested and so it just sat and sat and sat. And what you need to do is just go in there and make an offer as to what you’re willing to pay. So, that’s exactly what happened for me was they just listed it too high. And so, it fell into this self-fulfilling prophecy of how the psychology of listings and days on market work. And I was able to pick it up for a little bit under asking and ends up being a great house hack. These are all your on-market strategies. Now, off market stuff, absolutely possible. Anybody can do it. It’s a little bit more complex. You’re got to get a lot more in the weeds.

Robert Leonard (46:18):

I would say it’s a little bit more complex than most people want to go, especially for their first house hack, but it is possible. And so, I’ll just briefly explain how you could do that. There are different sources on the internet. Crexi is one of them. There’s a bunch of different ones and CoStar is another one. There’s a bunch. You go on there, you buy these lists. And what these lists are it’s public record and you can define the criteria. You say, “Okay, I want any multifamily properties that are in this area that are built after this year.” You buy the list. It costs depends on how many criteria you have, how many properties, et cetera, but $50,000, $100,000, couple hundred dollars to get this list.

Robert Leonard (46:57):

You get a list of every single property in the town or city or whatever area that you have picked. And you’ll get a list of every single one. You’ll get the owner’s information, usually email, phone number, whatever is publicly available. And then you just start cold calling them or you start sending them emails or you send them postcards or letters or however you can get in touch with them. And you say, “Hey, I’m really interested in purchasing your property.” Now, 99 times out of 100, they’re going to say no, but you will occasionally get a deal. And like I said, this is a little bit more complex for a first time house hacker. When you start to get a little bit more experience, this is definitely a strategy you want to consider.

Robert Leonard (47:39):

It’s something almost every real estate investor for real traditional investment properties uses. I’m considering using it for my next house hack, because I’ve done it for my regular rental properties. And the model for them is that they’ll send out 10,000 and they’re just looking to get two or three deals. If they get two or three deals out of this, they make a 100X what it costs to send out those 10,000 letters. They’re happy to do it.

Robert Leonard (48:04):

I just had a guy on the podcast the other day. He sends out 10,000 letters a month and it costs him like $6,000 or $7,000. He gets one deal and it pays for the entire year of sending $10,000 a month. So, it can be a valuable strategy, especially for a little bit more sophisticated investors. Yeah, it’s definitely possible for a house hacker. It’s just a little bit more complex.

Clay Finck (48:25):

I also wanted to ask you how much does it actually cost to get into a house hack? Let’s just use an example of say, someone’s buying a duplex. They’re doing 3.5% down. We’ll just throw a purchase price out there just to put actual numbers on it. We’ll say it’s $300,000 property and they put 3.5% down. That’s around $10,000 for the down payment. What other costs or other things that should be thrown into consideration, whether it’s closing costs or extra reserves or maybe anything else I’m not thinking of?

Robert Leonard (49:00):

Yeah. There’s two big things, closing costs and reserves. You hit the nail in the head there, but closing cost is a broad term that can encompass a lot of different things. You have lender fees, what the lender’s going to charge you to originate the loan. You have prepaids, which are your prepaid in taxes, prepaid insurance. Usually, you have to pay for a year insurance up front. You have appraisal, title fees. You have credit report fees. You have all kinds of fees that you have to pay that all encompass your closing costs. And it really varies drastically where you’re based, because a big chunk of that is how much you have to pay for taxes, your prepaid taxes.

Robert Leonard (49:37):

If you live in an area that’s really low tax, it’s going to be different than if you buy the same exact cost house with the same exact lender fees just in a higher tax areas. Closing costs, for me, I purchased $350,000 house. I had $10,000 in closing costs and $12,000 for my down payment. So, it’s $22,000 total to close. Now, the reserves piece is another thing that’s interesting. Your lender’s going to have their own calculation in terms of what you have to have for reserves in order to qualify for the mortgage, but this is a different type of reserve. What I talk about in the book is that if you can get into a property, let’s just use round numbers of $10,000. Let’s say you could buy a house hack for $10,000.

Robert Leonard (50:16):

I don’t necessarily think it’s the best idea or most prudent idea to buy that house hack, if you only have $10,001 to your name. That’s just not really a good idea because Murphy’s law that says anything that can go wrong will go wrong. And if you’re in real estate long enough, you’ll know that when you buy that house, as soon as you move in, hot water heater’s going to break or the heating system’s going to go or it’s going to need a roof or even something small, plumbing issues, toilet, whatever. Something is going to go wrong and you’re going to have to pay to fix it. And it’s not always going to be like that, but there are going to be situations where this happens and you want to make sure that you have reserves.

Robert Leonard (50:54):

These reserves can cover if the tenant doesn’t pay, maybe you buy a duplex that isn’t rented out on one side yet. So, you need to cover the full mortgage for a month or two months while you find a tenant. These are all the types of things that reserves are good for. So, I would not buy a property if you only have the absolute minimum that you need for a down payment and closing cost. The last thing I want to mention about the closing costs is that my personal approach is I almost always use a seller credit because seller credits reduce the amount of cash that you need to close. So, in my case, again, $350,000 duplex, $22,000 bill to close, which was $10,000 for closing costs, $12,000 for down payment.

Robert Leonard (51:35):

And so, I asked the seller for what’s called a seller credit, which just means they give me cash back at closing and you’re allowed to apply that to your closing costs. I asked for a $10,000 seller credit that covered all of my closing costs. So, instead of having to bring $22,000 to the table, I only had to bring $12,000 and there’s a lot of different ways you can ask for that. You can make your offer. Let’s just say you offer $350,000 and you can ask for a $10,000 credit or you can go above their asking price and offer a little bit more so that it nets them the same. For me, I knew I would prefer to offer a little bit more on the purchase price than have to bring in the cash myself.

Robert Leonard (52:17):

So, he was asking $360,000 for the property and I was going to offer $340,000 as my offer. But instead I said, “You know what? Let me offer $350,000 and ask for a $10,000 seller credit.” On his end, he still gets a net sale price of $340,000. So, it’s just like if I had offered $340,000 for a purchase and didn’t ask for a seller credit, except the difference is now I get $10,000 towards my closing cost that I don’t have to bring at closing. House hackers are usually getting into house hacking without a lot of capital. So, really, really, really good strategy for people getting started without a lot. It can help reduce the amount of cash you need to close.

Clay Finck (52:55):

Before we close it out, I’d like to hit on the risks a little bit as well. Someone might be listening to this and just be like, “Let’s do it. Let’s go buy house hack. Let’s go read Robert’s book and do this thing.” But as you know, most definitely, there’s a lot of thought and a lot of hard work that goes into this, and it’s not a quick process. Just to close a house takes about a month. It might take months to save up the money. There’s all the time put into finding the property. When it comes to house hacking, could you hit on some of the risks that go into the strategy?

Robert Leonard (53:32):

Well, there’s no risk in reading the book. So, go pick up the book and read it because it won’t definitely hurt you in any way to do that. But in terms of house hacking itself, yeah, I mean, there are definitely risks. The biggest risk and you pretty much have this, no matter what, when you own real estate, whether it’s a single family house and you don’t house hack or you do house hack or you own rental properties or whatever the case is, but your biggest risk is liability. That’s somebody slipping and falling. That’s somebody starting a fire. Anything can happen on your property that is some liable issue that as the owner of the property, you would be liable for. That can happen. It’s just an increased risk with house hacking because you have tenants that live there.

Robert Leonard (54:13):

And so, if they slip and fall and you were negligent, then that’s going to lead to some big problems. That’s a risk for you. But I caveat that by saying that can happen on a single family house. My dad and some of his friends were out snowmobiling in the winter and they were like four almost best friends. And they got home from a snowmobiling trip. They all hopped out of the truck. One guy slipped and fell, broke his back and his neck or something in the guy’s driveway. And they were all best friends. He sued him, got couple million dollars out of it. It’s just a risk because he owned the house. He wasn’t house hacking. It was just a single family house that he owned and the driveway was icy.

Robert Leonard (54:51):

And so, you have this legal risk, this liability risk pretty much anytime you own real estate. It’s just increased a little bit with house hacking. The other thing is you are accepting sometimes a higher mortgage payment than you otherwise would. So, I think the right way to do it is that if you were willing to buy a $300,000 single family house, then you should also buy a $300,000 house hack. If that’s the case, you pretty much have no risk, because from a mortgage perspective, you have no risk because you are willing to pay $3,000 for your single family house. So, if the tenant doesn’t pay, then you’re just paying what you would’ve with the single family house. So, you don’t really have as much tenant not paying risk there.

Robert Leonard (55:35):

What will happen though is people will buy a single family house for $300,000 and then maybe buy a house hack for $400,000 or $450,000, just random numbers. And now if the tenant doesn’t pay, they’re at risk of having to cover the full mortgage payment themselves, which they may or may not be able to afford. That’s another risk is tenants not paying. You have tenants who might destroy your unit on the other side. You’ll have to deal with that. When you go to sell, depending on what kind of property you bought, there might not be as much of a buyer market for that property.

Robert Leonard (56:05):

So, if you buy a duplex, triplex, fourplex, that risk, there might not be as many people who want to buy it on the back end when you go to sell. Whereas if you have a single family house, that’s a good fit for most people. So, it’s a little bit different clientele. And those are I’d say are pretty much the biggest risk that you have with house hacking.

Clay Finck (56:25):

Robert, well, I really appreciate you joining me today. I really love the book. I encourage anyone who enjoyed this conversation to go out and give it a read. Before we close it out, Robert, I just want to give you a chance to give any final closing thoughts if you have any and where the audience can connect with you and go buy the book.

Robert Leonard (56:47):

One of the cool things about being with a major, major publisher is that they get the book everywhere. So, Walmart, Target, Barnes and Noble, Amazon, it’s pretty much anywhere you can get books. They are there. You can even request it at your local little library or bookshop so they can get some copies in there if they want. Yeah, it’s pretty much available anywhere. Of course, check out the podcast. If you’re listening to this, you probably already do, but definitely be sure to check into the podcast. You can follow me on social. My username is @TheRobertLeonard. And then if you want to learn more about house hacking, you can go to everythinghousehacking.com, a bunch of cool resources there for everything that you need to know about house hacking.

Clay Finck (57:29):

I forgot to ask. When does it get officially released and published?

Robert Leonard (57:34):

The official release date is September 6th.

Clay Finck (57:38):

Awesome. Well, congrats again, Robert. Thanks again for coming on.

Robert Leonard (57:41):

Thanks for having me, Clay. I really appreciate it.

Clay Finck (57:44):

All right. I hope you enjoyed today’s episode. Please go ahead and follow us on your favorite podcast app. So, you can get these episodes delivered automatically. If you’ve been enjoying the podcast, we would really appreciate it if you left us a rating or review on the podcast app you’re on. This will really help us in the search algorithm so others can discover the show as well. And if you haven’t already done so, be sure to check out our website, theinvestorspodcast.com. There, you’ll find all of our episodes, some educational resources, as well as our TIP finance tool that Robert and I use to manage our own stock portfolios. And with that, we’ll see you again next time.

Outro (58:20):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin, and every Saturday, we study billionaires and the financial markets. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.