Buying A $0 House: My Real Estate Investing Strategy

What's up you guys, it's Graham here. So, as I mentioned in one of my previous videos, I read all of the comments, and yes, that includes the comments where you asked me if I read them. I read them! And it's by doing this that I can see that anytime I get the same recurring question come up over and over and over again, then I know it's going to make for a good video.

So with that said, one of the recurring comments that I got on my previous video is people asking me what I look for when I invest in real estate. What types of properties do I buy? How do I know it's undervalued? How do I know I can make money off of it? And everything else about my strategy for real estate investing. This includes what I look for in rental properties, how to buy a property for zero dollars (not clickbait), and also how to smash the like button if you haven't done that already.

But for real though, this is the type of information some people will charge thousands of dollars for, and it's all free here. All I ask for is a like; it does dramatically help out the YouTube algorithm tremendously, and that's why I jokingly ask for it all the time. So that's it, that's all I ask for.

So anyway, let's go ahead and cover exactly what I do when it comes to real estate investing, and hopefully, you guys can use this formula anytime you're looking to invest in real estate as well. Now, first of all, for those who don't know, I practice the buy-and-hold investment strategy. I do not flip real estate, I do not wholesale real estate, I do not invest in the short term. I invest with the expectation that I'm going to buy the property, have it create some passive income every single month, pay it off over 30 years, hold it for a lifetime, one day retire in Hawaii, and then pray that my future children don't screw it all up by buying stupid crap with it.

So anyway, given that my intention is specifically as a buy-and-hold investor, I practice a strategy known as the burr method, which is a term coined by Brandon Turner over at BiggerPockets. The burr strategy doesn't really have anything to do with the temperature in the room, even though I like to keep this about 67 degrees in here. Instead, what this stands for is buy, renovate, rent, refinance, repeat.

Now, if it doesn't make sense to you right now, don't worry, we'll break it down a little bit further and we'll start with the Buy. So I buy properties in high-demand up-and-coming areas. And how do I know if an area fits that criteria? Well, I look for areas that are undergoing a lot of renovation. Like if you could drive down the street and see properties being renovated and flipped, that means that developers know there's enough money in those areas.

Demand flipping, also, if you see businesses moving into an area, that's a really good sign because businesses move where the demand is. I also look at properties that are just below the average price of the area. I never try to go too high-end because I'm too worried that those tenants paying more money could just go off and buy something instead.

When that happens, I don't want to have increased turnover and through that, increased vacancy and increased cost because those tenants can just go and afford to buy something instead. I also never go too low-end either because finding a qualified tenant just becomes that much harder to do. I just think slightly below the average is really the sweet spot.

It's high enough that you can still get a good caliber of tenant, but it's also low enough that it's going to do well in any rental market and appeal to the largest tenant pool possible. Like in a booming economy, everyone should be able to afford it, but if we hit a recession, it's still good enough that people can downgrade into that price point.

Now, given that I'm buying all of these as rentals, what exactly do I look for? Well, I think my specialty, if I have a specialty, is probably two to four unit buildings. Now, the reason I like this so much is that it qualifies for conventional owner-occupied financing. This means that you can get a lower interest rate and better terms on your loan than if you go and buy it as an investment property.

On the other hand, if you get five or more units, all of a sudden it's known as commercial financing, which means that you pay a higher interest rate, and it becomes a lot more difficult to get the loan. Now, within those two to four units, I really try to find something with at least two to three bedrooms and two bathrooms. This is the sweet spot.

I found that that combination appeals to pretty much everybody. I mean, from a family to a single person to a workaholic to someone who just wants a roommate. Everyone needs at least two to three bedrooms and two bathrooms. Now, if possible, I try to avoid 1-bedroom units because I found that fewer people want them and the people that do get them tend to move a lot more often.

That means increased vacancy and turnover and more repairs. Now, in addition to that, I also try to find a property that needs some minor cosmetic renovation. This means that structurally, all the internals are fine; it just looks a little bit dated. Maybe the kitchen is a little bit 70s, and the bathroom is kind of ugly looking, and the landscape is kind of overgrown, and maybe there's some peeling paint.

Just some minor, minor things that you can fix up. To me, finding a property that just needs some minor cosmetic renovations is really the best bang for the buck in terms of getting a positive ROI on your investment.

Now, what do I think about buying houses? In fact, I'm all for it. I don't think there's anything wrong with it, and in fact, I own three single-family residences myself. Some of those homes actually make more money than the ones with multiple units. Now, I like houses in particular because there's so much room for improvement and increasing the value.

Like, you want to increase the value of your property? Go and fix up the kitchen and the bathroom. Go and improve the landscaping, go and improve the paint, go in and close a patio, go and add an extra bedroom or add square footage. There's so much you can do to increase the value of a single-family home.

Now, in the event you ever want to go and sell it, a single-family home appeals to a very wide audience. For instance, you would appeal to not only investors looking to rent it out, but you also appeal to homeowners. And as we all know, people will pay a lot more for a home once they're emotionally attached to it.

Investors don't get emotionally attached to their properties most of the time, but homeowners do, and that means you can generally charge a little bit more if someone really likes your house. However, in general, it's a lot more difficult for a house to successfully cash flow when compared with multifamily.

Now, don't get me wrong, it can absolutely be done, but I would say it takes a lot more work and a lot more skill to find the right house than it does the right two to four unit building. And then of course, because everybody asks, what do you think about condos? This is probably one of the most requested comments I've gotten so far on the channel that I don't think I've directly addressed.

Now personally, so far, I've never bought a condo, and I just see them overall as a very terrible investment unless you're going and buying it at such a low price that you can't possibly turn it down. I would probably just stay away.

Now my main issue with condos is that you don't have any yard or really own any direct land, and there's very little room for improvement. Like you can't go and add more square footage or build up a second story or redevelop it into something else. It becomes very difficult to go and add another bedroom if you needed to or enclose a patio, and you're really just at the whims of the HOA for anything that goes on.

The HOA fee really tends just to eat into your profit. All I'm saying is that the upside potential on a condo is a lot smaller than with a house or any sort of freestanding multifamily building. Another thing many people don't realize is that the HOA fees are included in your cost of ownership any time you go and apply for a mortgage, meaning that they will qualify you for less of a mortgage because they factor in the HOA cost, unlike if you go and buy 1 to 4 units.

But anyway, what makes my strategy a little bit different is that I incorporate what's called house hacking. This is where you go and buy a 2 to 4 unit building, you move in one of the units yourself, and then you rent out the others. Ideally, all of the other units should pay for your cost of living, and therefore, you can live for free.

Now, the reason that I like doing this is because it allows me to go and buy a two to four unit building under owner-occupied financing, which means that I get a lower interest rate, it's easier to get the loan, and also I can put less money down than if it's an investment property.

Now, this part is really important for you to understand that you cannot do this if you don't actually move into the property or if you get five or more units. You must actually move into the property, usually for about 12 months after you buy it. But with that said, you could go and buy four units, live in one of them, and the entire place is covered under owner-occupied financing.

I really believe this strategy is not being talked about enough, and it’s such an amazing way for you to get an investment property at a lesser price long term than if you just go and buy it without moving in. The other good thing about doing this is that lenders will often include the rental income that you'll be getting from the building towards your mortgage, which allows you to afford a much nicer place than you would normally.

Doing something like that is pretty much impossible to do with a house or a condo, but between two and four units, this works flawlessly. So anyway, let's talk about the next part of the strategy, and that would be buying a property under market value. There's a common saying in real estate that goes something like this: it says you make your money in real estate when you buy, not necessarily when you sell, and that is very, very true.

The price you end up paying for a property will ultimately determine how much profit you make. So it's so important to wait and have the patience to hold out until you find a property that's actually worth buying. How do you know if a property is priced undervalued?

Well, the best way that you could start learning this right now, or basically this weekend, is to go and see every single property that's available in the market that you want. Go and see every single property on the market, go and see every single property as soon as they come up, and then keep track of which ones are selling and how much they're selling for.

Pretty soon, after you see 50 to 100 homes, you're going to be an expert and you're going to know exactly what a property is worth just by seeing it. Like if you show me any home here in Los Angeles, I'll be able to tell you exactly what it's worth just by going and seeing it in person.

That is really the accumulation of about 11 years of going and doing this full-time, seeing every single home—that's allowed me to see what's a good deal and what's a waste of time. If I didn't put in all of the work upfront to learn all of this, then I wouldn't be able to do it.

Now, in addition to that, you can also have a real estate agent look up recently sold properties in the area you want to buy in to then be able to comp the value. This means that you'll compare your home with other similar homes that have sold recently in the area and then use that to determine what your property is probably worth.

But ideally, you really want to be so good at doing this that you can just walk through a property and know what it's worth within five minutes. That's the end goal. By doing all of this, you can tell without going and looking at sold comps and all of this sort of stuff because it's all in your head. Buying something under market value like this really just takes time and patience.

Because these deals don't come up every day, you're going to miss out on probably a dozen of them before you find the right one, and it really just takes a lot of patience.

One more thing I want to mention here is rents. Make sure the property actually earns enough money to pull in a profit; if not, it's a loser. The rent must cover your mortgage, your property taxes, your insurance, repairs, miscellaneous, and everything else that goes along with owning a property, plus enough to make some profit.

How do you know how much the property is worth to rent for? Well, I recommend you go and look online and see what other similar places are renting for and then subtract ten percent from that number, and that's how much your property is probably worth.

I like looking at Craigslist to see what other people are pricing their properties at, as well as looking on Zillow, Trulia, or Redfin. All of those websites are, for the most part, pretty much the same. Also, if you guys are curious, I made a video on how to calculate the cash flow of a rental property; it’s down below in the description if you guys want to go and check that out. Just make sure to click that link down below.

Oh, and one more thing I want to mention when it comes to renovating a property: I always just hire it out to a contractor. I never even touch a hammer or attempt to do any of the work myself. So instead, I'll find a contractor through either word of mouth or by looking on Yelp.

How do you find someone through word of mouth? Well, that's very easy. You do it by smashing the like button if you haven't done that already. Just kidding! You can often ask friends or family if they've had any good experiences with someone, or you could go and ask a realtor anytime you're going to an open house who the contractor was.

Oftentimes, I'll walk into a house and see really clean work, and I'll just ask, "Hey, who did the work? Would you mind passing along their information to me?" Most of the time, they're more than happy to give you their business.

Now, in terms of getting the right price for a renovation, I always recommend getting at least three bids for any project you want done. In addition, just to asking the contractor for their own opinion and perspective on what they would do, if you ever have a problem communicating what you want done, I would just show them a picture of what you want finished or what your goal is.

Most competent contractors will know exactly what their client wants, and as long as they can see what you want done, they'll be able to do it for you. Most of the time, from my experience, by the way, contractors will bid you a really high price up front just knowing that you're going to try to negotiate them down in price.

So make sure to always get multiple quotes and understand what's reasonable for the job you want done, and then place those bids against each other to really get them down in price. You get the rock-bottom value.

Also, just realize that anytime you renovate a property, it is always going to cost you 25% more than you think it will, and it's going to take you twice as long as you think it will. I've done multiple renovations, and this has always been the case. Even with the most honest contractor, things just change, and plans change, and prices go up, and things come up. It's outside of your control.

So always budget at least 25% more than you anticipate, and then just double the timeframe for it to actually get done. And now you rent it out, and ideally, all of the rent that you get should cover all of your expenses plus some.

I personally choose tenants to have a stable long-term job, who have a credit score above 740, who also make three times the gross monthly rent. If they don't fit that criteria, I don't rent to them. I got to say now, I'm pretty selective about who I choose as a tenant just because I've been burned in the past, and I will do anything to avoid that happening again.

At this point, I would rather keep a unit empty and lose money on it than choose the wrong tenant that could potentially not pay rent, destroy the place, or grow plants in the garage. It's just not worth it. I also have a video on how I pick tenants down below in the description; I will just link to that there if you guys want to check that out after the video.

Go and make sure to check that out; link in the description! Now in terms of using a property manager, it's really up to you if this is something you want to do. Mine right now are relatively easy to manage. I would say it probably takes me about 1 to 2 hours of work per month. Most of that is dealing with the occasional mail or text message every now and then, and just making sure rents are paid on time.

But if you plan to use a property manager, just make sure that's already calculated in your estimated cash flow. Just expect that on average they tend to charge anywhere from 6 to 10% of gross monthly rents, so just factor that in if you plan not to manage it yourself.

Now, if the numbers make sense and the interest rate is low enough to do this, you can then do what's called a cash-out refinance. This allows you to pull your profit out of the property completely tax-free, so now you have all of this cash that you can go and reinvest elsewhere at a higher return.

When it comes to me, I don't always do a cash-out refinance. I've done it twice over the last eight years because the numbers have made too much sense not to do it. But to me, if it works and the numbers add up, it's really just icing on the cake.

I wouldn't 100% rely on it, but if it happens, by all means, I think it's great. And then, of course, obviously the last step when doing this is really just repeating the process again—ideally house hack the next one and slowly acquire more and more and more properties over time.

And if the market goes up while you're doing this, then congratulations! Your properties are now worth more in value! And if the market goes down in value, well then you're buying properties now for cheaper. Like I mentioned in one of the previous videos, all I really care about is cash flow. So the value of the property really doesn't matter as long as you don't plan on selling.

But of course, always make sure to have at least six months' worth of expenses saved up just in case anything happens. This means you have six months' worth of mortgage payments, property taxes, insurance, and overhead costs just saved up in the event that something breaks or you have a prolonged vacancy or something comes up that's outside of your control.

This is going to insulate you from anything happening. So my real estate investing strategy has really just been this over the last eight years: it's the burr method combined with house hacking to get lower interest rates on the mortgage. I'm going to continue doing this, just trying to get as many properties as I can while I’m young and can still do this, and then I'm going to sit back and chill and pretty much just have the tenants pay off the mortgage over the next 30 years.

My plan is at that time just to keep the properties paid off, enjoy a pretty cushy retirement somewhere, and just continue making YouTube videos. Hopefully, YouTube is still around! I'm just the type of person who doesn't want to obligate themselves to a lot of work. I very much like the stress-free lifestyle and no obligation, and the pretty much set it and forget it investment strategy of doing the burr method and house hacking.

That's why I've really enjoyed this strategy. It's pretty much you put in all of the work upfront in finding the right deal and preparing it, and then for the next 30 years your tenants really do all of the work for you by paying off the mortgage. You can scale up as much passive income as you want while you can, and then sit back when you're done and just relax.

It's somewhat self-sustaining without you putting much work back into it. Like I said, for anyone watching, feel free to copy the strategy for yourself. If you want to learn more about this, just research the burr method of real estate investing and also look into house hacking.

To me, that is really the best of both worlds. You get a place to live in for free, usually, that also makes you money. It doesn't get much better than that! I'll link to all of my other videos down below in the description that I think would be helpful if you want to learn more about this. Everything is going to be down below.

And again, all I ask in return for all of this information is just to subscribe, hit the notification bell, hit the like button. I almost called it a like bell for a second! The like button! And that's it, and that's all I ask for in return.

So like I said, thank you so much for watching. I really appreciate it! Also, make sure to add me on Instagram. I post there pretty much daily, so if you want to be a part of it, feel free to add me there. Also, go ahead and add me on my second channel. It's called the Graham Stefan Show.

I'm going to be posting a lot over there. I'm going to try to post two to three times a week on that channel in addition to this one. So go ahead and add yourself to that. I think we're basically at 10,000 subscribers now over there, which is pretty crazy! So be a part of it there.

Thank you again for watching, and until next time!