Living for free in my first property

At the Very Beginning

I did not start out focused on building a portfolio of properties. My goal was much simpler – to buy my first house and live in it for a very long time. At the time, I was living in a house with a couple other people that I met on Craigslist. The personalities were all over the place and there was a lot of clashing when it came to cleaning up after oneself. There were even occurrences of having things broken and food eaten by others. The thought of having my own place sounded like the perfect solution. If I wanted roommates, I had the flexibility to choose who I wanted and do my own screening.

Finding the Right Home

So, I set out to find my first house, a long and tedious process that required patience and persistence. One of the best things that I learned to gain some advantage in this process was getting pre-approved for a loan before my housing search began. This gave me a clear idea of what I could afford. It also allowed me to act quickly when I found the perfect property.

I spent about a month looking at houses every weekend once I was pre-approved. The process was exciting, and I looked forward to every week to go tour homes. At that time, I was not focused on and didn’t really know anything about investing in real estate. My criteria was pretty straight forward in that I wanted a good area and I wanted something turn key. I also wanted it to have enough space and rooms so that I could grow into it with a family. Again, I thought this was going to be my forever home.

The house I eventually found and purchased was a four bed, two and a half baths with the fourth bedroom and half bath located in the finished basement. I bought it from flippers who had renovated the property and were selling it at a fair price. The house was not perfect and still had areas that I wanted to improve, but I was excited to finally have a place of my own.

Challenges Along the Way

During the inspection, it was discovered that the plumbing in the house was made of polybutylene. This material is prone to leaking. This is due to the plastic material used in the piping reacting to oxidants and disinfectants in public water supplies. The result from this is scaling and flaking from within the pipe that creates microfractures that will eventually burst. When I saw this in the inspection report, I immediately freaked out. I had finally found a house that I liked, and this is something that I did not want to risk. I submitted the inspection objection and worked with my realtor to ensure that either the seller repaired the plumbing or that I received credit for the cost of the repair after closing. This was a very straightforward process and was laid out in the contract. My realtor was extremely helpful in showing me how to navigate this on my first purchase. In the end, the seller decided to give me the credit so that they could close faster.

The closing process from then on was smooth. No other issues came up and I was finally able to call it mine. Soon after closing, I had a plumbing company come in to replace the pipes with the correct material. They finished this quickly. I was even able to save some money and learn about drywall repair by patching the holes myself.

The Introduction to House Hacking

A month after moving in, I had already written my first lease to rent out one of the rooms. Little did I know at the time, this strategy is known as “house hacking”. The concept of house hacking is simple – rent out rooms or a portion of your house to subsidize your mortgage payments. In good deals, you may be able to cover your whole monthly payment. In great deals, you might cash flow a little extra money on top of that too. Even if you are not covering your entire mortgage, this strategy is still a great way to save money and build equity.

With the first renter in the basement going well, I decided to get another for the extra rooms upstairs too. I wanted to have more “splurge” money. The best way I figured to do this was to bring in extra cash from additional roommates. I had created the lease from a combination of all my old leases that I had over the years. It was a franken-lease but it was tailored perfectly to what I needed at the time.

Forcing Equity

When the renter that was staying in the basement left at the end of their lease, I wanted to do some work. With two long term renters on leases in the bedrooms upstairs, I started looking for a contractor and plumber. I wanted to use this opportunity to upgrade the basement and add some more value to the house. By turning the ½ bath in the basement to a ¾ by adding a shower, I would be able to increase the value of the home. But in addition to that, it would make the entire basement a suite with private bathroom. I added a mini fridge and microwave, and it was ready. That’s right, I didn’t have enough people in my house, so I started to Airbnb the basement. My mindset had come a long way from the beginning where I was tired of living with people. The thought of renting every possible space out appealed to me and I quickly became a Superhost on the platform.

Leveraging Home Equity

I loved all the extra income I was bringing in. At this point I was living for free in my home and took the hosting very seriously. Soon though, the leases of my long-term renters ended, and they moved out. Looking back, there is not much that I would change about my strategy or time at that house except for one thing. I will get to that later though.

I wanted to use this opportunity to leverage up. The Bigger Pockets community was still foreign to me, but I had heard of HELOCs and home equity loans from my cousin. It had been coming up to the two years point since I purchased the house and it had built a lot of equity in that time. Equity not only from appreciation of the housing market but also equity that I forced by improving the house and making upgrades. I did some shopping around and found a local credit union that I wanted to do a loan with.

Now, for those of you that have never heard of the term HELOC before it stands for home equity line of credit. It is essentially a line of credit, just like a credit card, that you can take out against the equity that is in your home. A home equity loan is exactly what it sounds like. It is a straight loan against the equity in your house. I talk more about these strategies in my post 3 Creative Ways to Leverage your Home Equity.

Getting a Second Lien

After learning more about my loan options, I decided to go with a home equity loan. The loan value from my equity was $40,000 and I was able to use my home as collateral. Now, keep in mind that this is still a loan. I had to make monthly payments on it to pay it back with interest. This was an easy decision though and making a $250/month payment seemed worth it to me if I was going to be smart about how I would use the money that I pulled out. So yes, I took out the $40,000 and immediately bought a boat! …No, got you there. I was going to invest it. My interest rate on the loan was 4.5% so I just needed to beat 4.5% with however I put the money to use. As you guys might have guessed, I wanted to buy another property.

Now this is where things get crazy busy and where I made a slight mistake. So many things started going on at once. I needed to get my house rent ready with some minor touch-ups, decide whether I wanted a property manager or self-manage, find renters, close on my new loan, all while trying to find a new place to live and then close on that, all in about 30 days. That was my plan. Though, it did not go as planned.

Lessons Learned and the Slight Mistake

I had decided to find a property manager since I did not want to go through the hassle of tenant placement and management. While I was living at the house, I did the management myself.  From that, I felt like I experienced it, learned from it, and wanted to run far away from it. After interviewing a few different property managers, I found someone that I liked with good rates who was recommended. He found tenants almost immediately which was great because that allowed me to focus on getting the home equity loan closed and searching for my next home. I ended up finding a place that I discuss in my post, Stone Wall had me Hooked, Story of my Second Property.

Everything fell into place with timing. I was able to close on my equity loan and used half of the amount to cover the down payment and closing costs of the second property purchase. And then the remaining funds were put into the stock market. So, you are probably thinking, “what mistake were you talking about that you made?”. Well, before I took the loan out on my equity, I should have done a rate term refinance. Interest rates had decreased, and I may have been able to drop the mortgage insurance that I was paying. This would have lowered my monthly payment on the house and in turn made it cash flow slightly higher. I am not complaining though. You don’t know what you don’t know, and it still worked out extremely well. Join me for my next post soon!