#NextGenCRE – Own to Rent

Forget rent-to-own. Savvy millennials own to rent. In a recent Forbes article, Lucy Mueller summed things up well when she called millennials, “a really weird brand of home buyer.”
While some research indicates that millennials aren’t buying homes as early as previous generations, plenty are putting a mortgage ahead of traditional milestones like marriage. Mueller points out, millennials entering the market early are motivated not by the dream of a white picket fence, but by the desire to move their finances from red to black.With high rent prices in markets like D.C., finding a way to reduce rent or even living rent-free (referred to as “house hacking” on popular real estate blog biggerpockets.com) is not uncommon. My first “hack” was inspired by the need to pay for a three-month backpacking trip throughout Europe. While there’s nothing new about a group of guys renting a house together, my friends and I took it a step further. We convinced our landlord to put up a temporary wall in the dining room (a room no 20-something guy uses) to create an extra bedroom. This allowed us to divide the monthly rent by five rather than four.After one incredible European adventure and three years of living in a makeshift room, I decided to cut out the middleman. I now own a duplex in an up-and-coming area of Petworth, Washington, DC. The property is walkable to the Fort Totten metro (red, green, and yellow lines), convenient to downtown, and on the cusp of development activity moving eastward across the city. Income from my renters pays my mortgage and related expenses plus some, so I am actually making money while living and investing in a neighborhood I believe in.

1) Think long term

Unless you are attempting to ‘fix-and-flip,’ real estate investing is a long-term play. As my Real Estate Finance professor said, “Never sell real estate. Buy, hold, re-fi, die.” Understand the trends of the area, future development plans, who your tenants might be, and choose a location where you want to live for the foreseeable future.

Personally, real estate ownership is as long term as it gets. While I do believe market timing is important, I don’t think it’s more important than time in the market. Real estate values fluctuate, but the longer you hold onto an asset, the more likely it will appreciate, especially in core markets like D.C.

2) It’s still all about location

As city populations grow, roads congest and car related expenses skyrocket, public transportation continues to play a large role in where someone decides to live. This leads me to my top criteria when searching for a home–Is it close to public transit? I wanted my property to be within walking distance of a metro, and not just any metro, a convenient one with multiple lines that feed into Metro Center.

As for my second criteria, I wanted to own property in a transitional area with projected growth. In order to find healthy real estate locations in DC, I looked to the experts, such as JBG, Douglas, and Donatelli. I asked myself these questions: Where are they building or planning to build? What are they building? How will the development impact the area? And, what is their vision? JBG and Cafritz Foundation have made big investments in Fort Totten, and Donatelli plans to. Their developments will shape the area and make it a place where people will clamor to live.
Take it a step further and review the “Comprehensive Plan” for the area. What does your city want that area to become? For Fort Totten, it may take five years, a decade, maybe more, but as I mentioned before, you have to be in it for the long haul.

3) Find the right realtor and team of advisors

When attempting to “house hack”, it is critical to have an investor mindset. The property must work on paper and a trusted team of advisors should verify your math. It’s best to have conservative estimates and justify every number.

Beyond the finances, another critical member of your team should be a realtor that you trust. This person will negotiate on your behalf and help you navigate the waters of buying your first property. I found it invaluable to have a realtor who was also an investor. He offered insight and wisdom about things I hadn’t even considered. All the real estate articles and books I’ve read couldn’t compete with his firsthand knowhow. We visited countless properties, and within seconds, he would turn to me and say, “this is a no-go in my mind for this reason…” He understood my vision and long-term goals, and was honest throughout the entire process.

4) Plan out the renovation, and always consult a contractor

I thought I understood the amount of work I embarked on when I bought my property; I did not. In hindsight, I wish I would have mapped out the renovation timetable better. For the last two months, I’ve spent every morning and evening (before and after work) at the house painting, sanding, meeting with contractors, picking out tile, reviewing samples, etc. I put myself under a tight timeline to finish renovations by September in time for prime rental season. Side note– If you plan on doing a lot of the work yourself, clear it with your significant other and boss beforehand.

When you’re a novice, you’re inefficient by default. There were days when I made several trips to Home Depot because I didn’t buy something that I needed to complete a project. A great rule of thumb from my contractor– “measure twice, cut once.” The same goes for planning your rehab.

5) A good landlord plays it safe

A fellow real estate investor advised, “I am in the business of tenant retention, not acquisition.” Attaining and retaining good tenants is what all good property owners aim to do. Having to remove a delinquent tenant can be timely, costly, and mentally draining.

To market the property, I used Craigslist and HotPads. Within 24 hours of posting, I got emails from multiple interested parties. Once I had a good meeting with a prospective tenant, I had them fill out an application that ran their credit, rental history, and criminal background. Taking the time to go through this process was well worth it. My now current tenants have fantastic credit, and no eviction or criminal history. Even better, they are good people that I enjoy living alongside. Now I’m ready to shift my focus to retaining these great tenants.

In conclusion, my first foray into home ownership worked out better than expected, but the vision for the property is not complete. I have additional plans for the property: building an outdoor patio, adding a rooftop deck… the list goes on! I am so thankful for all the support and guidance I received from my incredible advising team. I am also grateful for my friends and family who helped me paint, refinish cabinets, and provide a few laughs for every hiccup that came my way.

If you want to “house hack”, the only thing stopping you is you. Be bold, take a chance, and have fun with it.

– By Conner Bell, Mortgage Analyst at Phillips Realty Capital

#NextGenCRE is an occasional blog by some of the younger analysts at Phillips Realty Capital, a leader in Washington, D.C. commercial real estate finance. Connor Bell is part of Phillips Realty Capital’s EB5 Capital real estate finance team.