Personal Finances and Goals for a House Hack

Having a plan for your finances and writing down your investing goals are two key habits that you want to implement. In this module we will go over some key points to keep in mind and tips on how to best plan your future, and not only buy your first house hack, but make sure you keep it through the ups and downs of the market, through the curveballs life throws at you and set you up for long term success.

Having a plan for your finances and writing down your investing goals are two key habits that you want to implement. In this module we will go over some key points to keep in mind and tips on how to best plan your future, and not only buy your first house hack, but make sure you keep it through the ups and downs of the market, through the curveballs life throws at you and set you up for long term success.

This module covers:

  • Common principles to practice
  • Four phases to investing
  • What is your cash-flow goal?
  • The 33% rule of thumb

Four Learning Options!
Ultimate House Hacking Guide for Denver
  1. Order the book on Amazon or grab a copy from us
  2. Listen to episode “#210: UHHG – #7 Personal Finances and Goals for a House Hack” on the Denver Real Estate Investing Podcast
  3. Watch the YouTube video (at the bottom.)
  4. Read this blog post, which is from the book.
Start at the Ultimate House Hacking Guide for Denver Overview for a list of all the modules.

My college degree is in finance, and I love to geek out on numbers. Having your finances in order will help you in blending long- and short-term strategies to create financial wealth through real estate. Below are some examples of how our team can help you do that. One of the unique benefits of working with us is that we incorporate financial modeling and planning with our clients for their real estate investments. This allows us to track and help you towards your retirement cash-flow number.

At the time of writing this module, we are currently in a difficult time as each of us is figuring out how to deal with the COVID-19 Pandemic, but I can assure you that our clients who have built up their personal financial foundation are the ones who will weather the storm and are resting much easier than investors who have not.

We have been preaching about this subject for years because it’s never a matter of IF there will be a downturn in the market, economic hardship, something happens to your business or in your personal life, or a pandemic but WHEN there will be one.

It’s our job to be realistic with you and set you up for success. That means making sure you are good to go when times are good but also means we help prepare you for the bad times. These are the foundational things that you have to make sure you are doing so you can keep the properties you acquire and ultimately set yourself up for long-term wealth.

Common Principles to Practice:

  • Talk with a lender ASAP
    • Know what you can or cannot borrow as it dictates what you can afford.
    • Maybe there’s something that needs attention or needs to be fixed before you can qualify. You’ll want to take care of that sooner rather than later.
    • Maybe your situation is better than you think, and you can qualify for more or have a better interest rate. You won’t know until you have the conversation.
    • It’s never too early to talk with a lender. Having your credit pulled will not ruin your life.
    • Are you recording and claiming all rent so we can use that to help you qualify for your loan?
  • Down payment and closing costs funds
    • House hackers typically need $20,000 to $35,000 in cash to close.
    • Are you keeping it in the stock market?
      • Don’t lose out on an opportunity because it’s in the stock market.
      • If you are ready to buy, move the money to the bank that is not swinging up and down with the market.
      • Have it ready to invest. I keep 100% of my real estate investing money in an Ally savings account.
    • Keeping it in bonds?
      • It’s not a guarantee to always go up or have the same value.
      • Usually less volatile than the stock market but you have to understand how the bond value changes with the interest rates. Many clients have put money into bonds since they are “safe,” but then the interest rate changes and their cash goes down.
  • Operating Funds
    • Six months of PITI (Principal, Interest, Taxes, Insurance) and HOA or $10,000, whichever is greater, for EACH property
    • It’s smart to have a “catch all” or reserve fund with $10,000 for any miscellaneous expenses for any property (think Murphy’s Law.)
    • More cash on-hand makes it easier to weather the storm
    • Good to do an annual review of the accounts to make sure you’re still on track
    • How will you fund the next property purchase?
      • Have a plan
      • Good practice to have a separate savings account for this, and when you get to the desired number, you know you’re ready to start looking for your next property.
      • Ally.com is a good example of a checking/savings account that is easy to set up and also pays high interest compared to most bonds.

This is not the only way to get your finances in order. It depends, right? If you have another method that works for you, do it! If you want to keep less cash in the bank, and if something major happens, you can pull from your IRA account, great. Just have a plan with liquidity. Set something up that you feel comfortable with and keep some liquid cash in the bank for any “Oh Crap” moments.

It’s not worth stretching yourself too thin just to get a deal. As Joe said, “Deals are like busses—another one will be along soon.” I always go with the philosophy that I’m not worried about the deal that will “make me.” I need to be prepared for the deal that will “break me.”

Four Phases to Investing

I have a four-phase approach to retiring with real estate that I personally use and help clients with.

  1. Your Real Estate Investing Strategy. You will want to identify what your strategy is. If you don’t have a plan, you won’t go out and follow it. A simple example of a plan that we’ve been talking about already: house hacking or Nomading™. For me, it helps to write my strategies and goals down. Instead of doing this on a sticky note, I publish the Denver Real Estate Investing Strategies book every year, and it not only makes me write down my strategy, but holds me accountable to the public, and I like that motivation. If you want to be part of the next book or need help with creating your real estate investing plan, email me at chris@denverinvestmentrealestate.com.
  2. Accumulating Properties. Once your strategy is in place, it’s time to start buying and accumulating properties. For many investors, this is a 10- to 25-year timeline. Most people get rich through real estate slowly. People often ask if they should pay a property off or buy another one. Generally speaking, it’s best to focus on accumulating properties before paying them off.
  3. Debt Paydown. We hear a lot of clients say they have a goal of collecting $10,000 in net rents monthly to use as their passive income. This amount can be greater or smaller depending on your personal situation. Regardless of your goal amount, once you’ve accumulated enough properties to produce the desired amount of net income, stop accumulating properties and start paying them off. This is known as the debt snowball method. You take the smallest loan balance and pay it off using all the extra cash-flow to prepay the loan. After that one is paid off, repeat the process until all your properties have been paid off. That is when you can truly count the rental income as passive.
  4. Retirement. When all the properties are paid off and you are collecting the monthly rents that do not have to be used to pay off any more mortgages, you can use that rental income to help subsidize living expenses.

There is a lot more to creating and executing a plan than the four bullets outlined above, but hopefully it gives you the big picture framework. The majority of investors we talk with have zero framework for a long-term plan. The rest of this module will walk you through the basics on creating a plan.

What is Your Cash-Flow Goal?

To start figuring out your strategy and goal, you must first identify your cash-flow goals.

  1. What are your total retirement cash-flow needs?
    • Including social security, pensions, annuities, stocks, bonds, etc.
  2. What amount do you need from real estate?

The most common goal we hear from people is $10,000/mo.

The 33% Rule of Thumb

If your goal is to generate $10,000/mo., will $10,000/mo. in rents suffice? No! Regardless of if the property is paid off or has a mortgage, it has operating expenses. These expenses are what it costs to run the property:

  • Insurance
  • Taxes
  • HOA
  • Property management
  • Repairs
  • Utilities
  • Landscaping and snow removal

If you follow BiggerPockets, then you’re probably familiar with their 50% rule, which states that 50% of a property’s rental income will go towards operating expenses. It may be true in some markets, but not the Denver market. Most of the rentals in Denver run at a 25% to 35% operating expense ratio.

To keep things simple and for quick calculations, we use the 33% rule. Out of every $1 dollar in rental income, $0.33 will go towards operating costs. Is it perfect? It certainly is not, but it’s close enough for modeling. The 33% rule works for long-term rentals as a rule of thumb. If you’re renting room by room or running an Airbnb, you’ll have a different number.

Simple Example to get $10,000/month for retirement:

$15,000 (gross rents)

— $5,000 (operating expenses) (⅓ of rents or 33% rule)

—————————————————————————

= $10,000 income (paid off properties)

This means that if I’m using the 33% rule and want to have $10,000 cash-flow when I retire, I actually need enough properties to produce $15,000 in gross rents, then start paying off the mortgages. In general, you can usually get to your goal of $10,000 per month faster if you have paid off properties than if you were to accumulate more properties with several mortgages as the mortgages come out of the rents before you get any of that money for yourself.

So, how many properties do you need to retire? Any guesses? The correct answer is… It depends!

Is it a single-family or multi-family? Does it have one bedroom or four bedrooms? In what part of town is it located? What type of rental is it? Each scenario brings in different rental rates. You have to map it out with your personal portfolio. My recommendation is to always use long-term rental rates and averages. It will even out better over the long run and it’s better to be conservative and end up happy with more if things are good than overestimate and be disappointed.

Finally, you want to remember that one 20-unit apartment building is very different from one single-family home in terms of cash-flow. Obviously, 20 units will produce more cash-flow than 1 unit. For this reason, we like to focus on a cash-flow goal over the number of properties.

In Denver, rents have generally outpaced the inflation rate. Over the last 40 years, Denver’s rents have increased about 4% annually. This is important because $10,000 in 2035 has less buying power than $10,000 today. Following the KISS principle, we can assume that if you buy a rental today, the rents should increase at inflation or slightly higher and give you the same buying power in the future.

Additional Resources

Creating your strategy, executing it and then achieving your retirement cash-flow is a complicated and lengthy process. This module is meant to give you the big picture framework. It’s near impossible to teach everything in a guide as there are many variables and options that pop up along the way.

Since creating and achieving your plan is complicated, we meet with clients individually to help map out their investing strategy. We meet with clients on an annual basis to review their portfolio to identify opportunities and make sure they are staying on track with achieving their retirement cash-flow goals. For more details and to schedule an appointment, please visit www.DenverInvestmentRealEstate.com/Consult

YouTube Video: Personal Finances and Goals for a House Hack

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Authors
Chris Lopez
Chris Lopez is a Denver area real estate entrepreneur and investor, as well as the host of Bigger Pockets’ House Hackerz and the Denver Real Estate Investing Podcast.
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