House Hack: How to live FOR FREE by investing in multifamily real estate

What's up you guys, it's Graham here. So, as your real estate agent and real estate investor, I'm going to be sharing with you guys exactly how you can cover all of your housing expenses and essentially live for free without ever having to pay rent or come out of pocket for a mortgage every month. Now, if you do this right, you could actually get paid to live for free, and here's how.

By the way, it's not just stuff like being a house sitter, living off the grid, or better yet, moving in with mom and dad. It's none of that. So before I get into it, at some point or another, all of us will have to either pay rent or pay a mortgage for their housing expenses; it's pretty much unavoidable. Now, we go to work and we exchange our time and our resources for money, which then gets funneled through our housing expenses. Generally speaking, housing is one of the largest expenses that you have, so until the end of the world, but it's still an expense that's going to have to come out of pocket every single month.

Now, when you already have a savings and you're about to make the jump into buying a property, one of the things that so many people overlook is multifamily properties. This is why it's such a good opportunity. These are two to four unit homes like duplexes, triplexes, and four-plexes, which means instead of having one house on one lot, you can have two, three, or four units on one lot. For loan purposes, this is treated the exact same as if you are buying a house or if you were buying a condo.

What makes this really unique is that you have other units on your property that you can freely rent out to cover all of your property expenses. Not only that, it gets better! You can also count the anticipated rental income of the other units towards your own income and qualify for a larger loan. In one situation, if you can normally qualify on your own for a $400,000 mortgage, if you buy a multifamily, you can take the anticipated rental income of the other units that you would be receiving, count that as income you will be receiving, and get a larger loan. This means that you might be able to qualify for a $500,000 loan or a $600,000 loan just based off the anticipated rental income that the other units will bring in.

Now, when you buy these properties correctly, the rental income you're going to be receiving from the other units is enough to cover all of your ownership costs of the property, including your mortgage, your taxes, your insurance, your repairs, your vacancy—everything. And you can live in one of the units essentially for free from there!

So I'm going to be making up a very simple example just to give you an idea of what it's like, and then I'll show you some real-world examples of properties I've been looking at. Let's say you find a four-unit property and the cost is $500,000. Each unit you can probably rent for about $950 per month. Now remember, this is a four-unit property, so you're going to be living in one of the units and you can rent out the other three units, each for $950. Let's also assume you're a baller and you put 20% down, which is $100,000. This means you paid $100,000 down and the bank is loaning you $400,000 towards buying this property.

Your mortgage on that $400,000 is going to be about $1,900 per month. Your property taxes on average will be about $420 per month; insurance might be about $150 per month; and then we'll tack on another $200 a month for other little miscellaneous things that might come up.

Now, the total expense of the property is going to be about $2,670 per month. Now obviously for all these real estate gurus in here, I'm simplifying things a lot, but I'm just trying to give you a general understanding of what the principle is that I'm talking about here.

Now remember, you're living in one of the units and you're receiving $950 a month for the other three units. That means from the three units that you're renting, you're receiving $2,850 per month gross rent. This means you can live in the fourth unit, collect $2,850 per month, and still walk away with $180 per month in profit. This also doesn't include all the tax benefits and deductions you can get by owning real estate and living in it as a primary residence. This means you can deduct one-fourth of all the mortgage interest that you pay, one-fourth of all the property taxes that you can pay, and then use all the other expenses as write-offs against the income that you're already making from the other units.

So now let's take an actual example from a property that I was actually looking at and thinking about buying. Now keep in mind, Los Angeles is terrible for its return; it probably has some of the lowest returns in terms of purchase price for rental income, probably the entire country, maybe besides New York and San Francisco. So this isn't necessarily the best example, but it is an honest real-world example of properties I was actually looking at for myself. Other areas are obviously going to be much better for finding great cash-flowing multifamily properties than Los Angeles doesn't offer. But just keep that in mind; you'll probably find much better opportunities in other areas.

So this is the property, it's 3006 Chesapeake, and I would probably be going in with about 20% down, which means my mortgage would probably be about $2,330 per month at a 4% interest rate over thirty years. Property taxes will probably be about $635 per month. I'll probably pay about $150 per month in insurance; I'll throw in about $185 per month in random expenses and repairs. So on average, it's probably going to cost me about $3,300 per month, and that is with a thirty-year fixed-rate loan at 4% with 20% down.

Now on this property, I'll probably get about $2,672 per month in rent. Now that means once you deduct the $2,672 from the $3,300 actual cost, that means it's actually going to be costing me about $628 per month out of pocket to live in this property. But it definitely doesn't end there. Now keep in mind, out of the $2,330 I pay every single month, $716 of that is applied directly towards the principal, paying down my loan. So when you apply the $716, which is $628 I'm out of pocket every month, you actually come out ahead about $100 per month, living in this property essentially for free.

This also doesn't include the tax write-offs of owning real estate, which means I can deduct one-third of the interest from the mortgage. I can deduct one-third of the total property tax bill, and I can deduct all the expenses related to renting out the other units. If we factor all of that in—for me at least—this is probably worth about $300 per month. So essentially, I can live in this place for free and get paid after all my tax write-offs, paying down the equity and everything, about $300 per month.

And now, keep in mind, living for free and making $300 per month in Los Angeles for owning a property is incredible. So here's another example at 2817 Norton. So keep in mind same loan as before, 20% down, thirty-year fixed at about 4%. That means my mortgage on this property is going to be about $3,100 per month. I'm going to pay about $843 per month in property taxes, but $150 per month in insurance. I'll throw in a bit more than $100 a month in repairs, just to keep it a round number here, but my total out-of-pocket expenses on a property like this will probably be about $4,200 per month.

Now, of that, I'm going to be collecting $3,021 per month in rent from the other unit, which means I'm out-of-pocket about $1,180 per month. But keep in mind, like my other scenario, you're also paying down your mortgage, which means that $950 per month of that is directly applied towards your principal. It's pretty much like a forced savings account every single month; you're putting in money, and the savings account is essentially the home that you're paying down.

This means that $1,180 is out of pocket every month, but I'm getting back about $950 by paying down my equity. This brings my total out-of-pocket loss to $230 per month by owning this property.

Now, in addition to that, also keep in mind that I can just write off one-third of the interest I pay on my mortgage. I'm going to be paying about $25,700 per year in mortgage interest, and now what I write off one-third of that—and also one-third of the $10,000 per year property taxes that I'm paying—that's another $250 or more attached savings just by living in there. That means I can pretty much break even and live in this place for free, or I could come out a very small amount after all my tax write-offs and paying down the loan.

The trick is to find properties that cash flow really well after all of your expenses and tax write-offs. Like I said, other areas outside of Los Angeles will do a lot better. Los Angeles is a weird market where properties really cash flow very, very, very poorly. If I went thirty minutes east of Los Angeles, I can find properties all day long that cash flow with me living in there for free, and I'd be able to make a significantly larger profit. But living in Los Angeles, you have to make some sacrifices, so I'm totally okay with buying one of these properties and breaking even or coming out of pocket even $1,000 per month, knowing that I'm going to break even after I do all my taxes.

Now my biggest recommendation to maximize the profits and the rents that you get from a unit like this is to generally buy them vacant and in need of cosmetic repair. This means that as soon as you close on a property, you can begin renovation immediately. Generally, I like to look for properties that are in need of new floors, paint, landscaping, cabinetry, bathrooms, countertops—things like this that can be done in probably a few weeks. So you really don't have to have a lot of downtime between the time where you're working on the property and when you can finally get it rented out.

Plus, if either of the two properties I just mentioned were vacant, I'd be able to go in right after closing, renovate them up, and that would dramatically increase my cash flow on the property. That's the downside, by the way, of living in Los Angeles and having a lot of these properties with rent control.

Now keep in mind, many people are doing this already, and these are some real-world examples of properties that I have looked at for myself. Now, of course, there are downsides to doing this, and the obvious downside is that you have to manage tenants. This can take a part-time job in and of itself. I know for me, it took me a lot of work in the beginning to get to the tenants I have now.

Right now, I'm in a position where a lot of it is on autopilot; a lot of it's passive and it really doesn't require much of my time. But in the beginning, I spent a lot of time sifting through really, really, really bad tenants to find the gem. In the beginning, it almost was like having another job that I really had to work at—sifting through applications, systems, tenants, and making sure the places are rented. But once you find the right tenant, things generally go pretty smoothly from there.

You're also going to have some shared common areas because you're going to be living in close proximity to your tenant, so it's not really any different from living in an apartment or a condo per se; you do share some of the yard space and some of the common areas with other tenants. It's definitely not for everyone, but the good news is that when you're ready to buy another house or upgrade, you already have an amazing cash-flowing property that you can rent out the unit you're living in.

How to cash flow a positive property, and eventually, when that property is paid off, that's essentially your retirement right there, with money coming in consecutively every single month from tenants paying you. Or you can essentially just live there long-term, bank as much money as you can, and essentially not have to worry about coming out of pocket every month for your housing expenses because you know it's pretty much already paid for by your other tenants.

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