Creating Wealth Through Real Estate

Christian: [0:03] Hello and welcome to another episode of the Awesome in Seattle podcast. This is Christian Awesome of the Awesome Nossum group at Wilson Realty Exchange, Inc and today I have a very experienced guest and a very special guest. I have Varun Jain, who is the newest member of the Awesome Nossum group and he's also an experienced real estate investor. Varun, thanks for joining me, man.

Varun: [0:24] Yeah, I excited to be here. Uh, thanks for having me, and happy to be a part of the team.

Christian: [0:28] Yeah. This episode is cool because whether you're a new or a seasoned investor, we are going to be reviewing three very profitable investment strategy. We're gonna go over house hacking, which we've done numerous times, but Varun has a different kinda twang to it, which is kinda cool. Mm-hmm. We're gonna go over live-in flips, and then DADUs, and how a DADU can potentially supercharge your live-in flip. So we're gonna go over all of this today, and it's gonna be a very jam-packed, awesome episode. So stay to the end. You're gonna learn a lot. So Varun, let's kick s- things off with house hacking. You have a couple of higher level ideas on how to maximize a house hack. But before we get into that, let's go over the basics of what a house hack is. Can you just quickly define that for people that maybe don't know already?

Varun: [1:12] Yeah. House hacking is a strategy where you buy a house either with multiple, uh, units- Mm-hmm or a bigger house with multiple rooms, and you rent out, uh, those other units and rooms to potential tenants. Uh, that lowers your cost of living.

Christian: [1:26] Mm-hmm.

Varun: [1:27] And those could be, uh, short-term rentals, medium-term rentals, long-term rentals, however you like it. Mm-hmm. But yeah, essentially you're renting out part of your house.

Christian: [1:35] Yeah. Uh, basically you're getting rent from part of your structure, and that's decreasing the amount of out-of-pocket expense from you. Right.

Varun: [1:42] Like- Your mortgage payment,

Christian: [1:43] so- Exactly. Yeah. Exactly. Perfect. And if you wanna learn way more about the basics of house hacking, check out episode 88, How to House Hack in Seattle. It's one of our most popular episodes out there. It's been out for a while now, 'cause we're on episode, like, 130-ish or something. So it's a little ways back, but it's still very, very up-to-date on what's going on. So why, in your opinion, is house hacking so relevant in today's kind of economy?

Varun: [2:11] Yeah. So we've seen, uh, interest rates go up significantly. House prices continue to climb- Mm-hmm … especially in a market like Seattle. Yep. And so house hacking provides anyone, uh, the opportunity to own a larger house or a duplex, triplex, or a fourplex while subsidizing cost of living. And it works because, again, as we mentioned, it offsets part of your mortgage payment and lowers- Yeah the cost of living. So you could be living in a larger house or a fourplex for the same cost of renting or buying a condo.

Christian: [2:42] Yeah. And that's what's huge. I mean, that's the beauty of house hacking, is you can live in a nicer area or a better unit-

Varun: [2:50] Mm-hmm … Speaker: than you could afford if you just got a condo or maybe a townhouse or something like that. Yeah. For new investors, how does house hacking s- kinda help people build their portfolio? Yeah. For new investors, it's, it's a great opportunity to buy specifically a multi-unit property. Mm-hmm. A small multi-unit property, right? A two-unit, three-unit, a four-unit property. Those get conventional loans, which is great, so you don't need special financing. And then the second, third, and fourth unit that you don't live in can help you with your debt-to-income ratio. Yeah. Uh, and so that helps contribute income to your regular income as well.

Christian: [3:28] Mm-hmm.

Varun: [3:28] Uh, so it's a great way for them to start off. And then this is a strategy that it's a very rinse and repeat strategy.

Christian: [3:35] Yeah.

Varun: [3:35] You buy your first unit, live in it for 12 months, and after 12 months, buy another unit, again, as your primary.

Christian: [3:42] Mm-hmm.

Varun: [3:42] Live in one of the units, rent the other units, and keep repeating it till you can or you want to.

Christian: [3:48] Mm-hmm.

Varun: [3:48] And every year that goes by, you add four additional doors to your portfolio. Yeah. Quickly, like within a span of three years, you have 12 doors.

Christian: [3:55] Yep.

Varun: [3:55] And now you have 11 tenants and one primary unit. You keep doing it, and you keep adding doors.

Christian: [4:00] The beautiful thing, too, about doing it this way is you're only putting potentially as low as 5% down. Right. So you're keeping that cash in your pocket-

Varun: [4:09] Right

Christian: [4:09] which allows you to buy that second one and that third one and that fourth one, or however many years you wanna do this. The cool thing is when you move out, you do not get rid of that low owner-occupied financing interest rate.

Varun: [4:22] Right.

Christian: [4:22] And a lot of people don't realize this. When I explain this to people, they're like, "Okay, well, once I move out, then I lose that low interest rate that I got for being the owner-occupant."

Varun: [4:31] Yeah.

Christian: [4:31] And the answer is no, you keep that in place. As long as you're there a year, that's kind of the, the bare minimum you can do, you're good. You can buy that next one- Right … and do it again and do it again. So it's a great way to, again, build that portfolio, keep adding and adding and adding. And all along the way, you're, you're minimizing your, your own expenses out of pocket, too.

Varun: [4:53] And you're taking all the appreciation as well on- Yes … those properties. And so-

Christian: [4:56] All the appreciation, all the depreciation- All the taxes … taxes.

Varun: [4:59] Yeah, exactly.

Christian: [5:00] Like y- you're getting benefits both ways. Both ways, yeah. That's the beauty of real estate. Okay, so that's house hacking. Mm-hmm. Let's talk about the live-in flip strategy. What is a live-in flip?

Varun: [5:12] A live-in flip is where an investor … And again, this w- works for new investors as well as seasoned investors. You buy a property that needs some work.

Christian: [5:22] Mm-hmm.

Varun: [5:22] Again, you buy it with maybe 5% down, and you make changes to the house where it adds a lot more value. You force appreciation.

Christian: [5:31] Mm-hmm.

Varun: [5:31] And then when you're done with all of the, uh, work on the house, now you have a house with very little money down that you can refinance into a longer term loan or pull money out potentially, and gives you a way to add equity right off the bat into the house you're living in.

Christian: [5:47] Yeah. So basically you're buying a house that needs some work, you're fixing it up, you're living in it 'cause it's your primary home.

Varun: [5:53] Yep.

Christian: [5:54] And by the time you're done with the remodel, it's now worth a lot more.

Varun: [5:57] Yeah.

Christian: [5:57] That's the goal at least. Right. Right. It's what you should do. Don't overpay for a house up front. You make money in real estate when you buy, not when you sell. So that's a big thing. This

Varun: [6:05] is sweat equity.

Christian: [6:06] Yes.

Varun: [6:06] Yeah. This is exactly what they talk about. Yeah. Like, this is how you generate sweat equity. And, um, uh, the good part in a live-in flip is you are potentially buying a house with a lot of other customers or buyers don't wanna buy.

Christian: [6:17] Yeah.

Varun: [6:17] Not everyone is coming from a mindset of doing the work. Yep. So if you're willing to go that extra mile, that'll pay dividends very quickly.

Christian: [6:25] Yeah. And you get a better deal. Yeah. Because again, most buyers just want something done. Mm-hmm. They just wanna walk in the door and- That's right … not have to do anything. That's right. So if you're willing to put in that little bit of work, that will definitely help. One thing that's really cool about doing this too is the two and five rule.

Varun: [6:41] Right.

Christian: [6:41] You wanna go over that real quick?

Varun: [6:42] Yeah. So real estate has a few different strategies, tax strategies that, uh, investors can deploy.

Christian: [6:48] Mm-hmm.

Varun: [6:49] One is the two out of five rule, which simply states if I live in a house two out of the five years, doesn't have to be the c- continuous five years. Yeah. It can be the first year and the fifth year, but as long as I'm physically there two out of five-

Christian: [7:01] Mm-hmm

Varun: [7:01] it's a primary residence. Yep. And once it's qualified as a primary residence, as per IRS, uh, code, a single person can take up to $250,000 of gain tax-free.

Christian: [7:13] Yeah.

Varun: [7:13] A married couple can take half a million dollars.

Christian: [7:15] It's insane.

Varun: [7:16] Yeah. Yeah. So if you buy a fixer, you force that appreciation. Mm-hmm. And then you live in it for a while, and market goes up, you are taking all of that gain without paying Uncle Sam a single dime. Yeah. Potentially.

Christian: [7:27] Yes, exactly. I have- Loved doing this personally. I have many clients that have done this over the years and you're basically remodeling your own house, and then after two years, you do it again. You buy another one and you get up to, if you're married, up to $500,000 tax-free.

Varun: [7:45] Exactly.

Christian: [7:46] That's insane. Instead of paying almost 40% tax on that gain, you're paying zero.

Varun: [7:50] Zero, yep.

Christian: [7:51] It's massive. It's a huge, huge savings.

Varun: [7:53] Yeah.

Christian: [7:54] If you want to learn more about this, we also have another episode, episode 114. That's where I interviewed Matt Bontrager of True Books. He is the most famous CPA on social media. I did a one-on-one interview with him, and he went over this. There were some cool tax strategies in there. In fact, he explained to me, which I did not know this, that you can actually prorate that. If you're only there for a year and a half, not the full two years or even nine months out of two years, you can prorate that gain.

Varun: [8:26] That's pretty cool, yeah.

Christian: [8:27] It's insane. I had no clue.

Varun: [8:28] Yeah.

Christian: [8:29] No clue. Yeah. So that's where, again, in real estate, there's so many different tax loopholes. You wanna make sure that you have good people on your team to help you take advantage of the rules that are in place to benefit us.

Varun: [8:41] Right. Yeah. Right.

Christian: [8:42] Yeah. All right. So when considering a live-and-flip, what type of property should investors be looking for?

Varun: [8:48] Again, as we talked about it, right, properties that you're looking for are- Houses that need work, but in nicer neighborhoods. Yeah. So you're looking for the worst house on the best block.

Christian: [8:56] Yep.

Varun: [8:57] So identify your neighborhoods, identify your blocks, good school districts, and if there are properties that need work on, in th- these neighborhoods, that is what you wanna target. Yeah. And you wanna go in again. Don't put 20, 25% down. Yeah. Try to put 5% down- Yeah … and make your cash work harder-

Christian: [9:14] Yep … Varun: and stretch that dollar as much as you can so that you can then get a lot more equity at the back end. Yeah. And again, if you don't sell it after two years or five years and you just wanna keep it, that's where you could theoretically do a refinance where you refinance your loan, you pull some cash out. You could actually take all the money that you put into the house, so the down payment and all the rehab funds, take that all out, and you could keep that as a rental if it makes sense for you. Yep. And then use those funds to go do it again. And

Varun: [9:44] again, yeah. And you keep repeating the strategy. Just- Again, these strategies are great because they're not a one and done. Yeah. You can keep repeating them as many times it makes sense for your situation. Mm-hmm. And

Christian: [9:54] you

Varun: [9:54] can mix and match. That's the awesome part about real estate.

Christian: [9:57] Yeah. So let's talk about some of the downfalls, some of the challenges or risks with doing a live-in flip.

Varun: [10:02] What are

Christian: [10:02] those?

Varun: [10:03] The obvious one is you're living in a construction zone for a period- Yeah of time, so there are inconveniences about that. Mm-hmm. You have to make sure that you don't have cost overruns, so you need to have a really good team and a really good handle on your construction cost.

Christian: [10:16] Mm-hmm.

Varun: [10:16] You ne- need to be able to pivot sometimes. You find some unknowns when you're doing these kind of flip flips. Always. Always. Yes.

Christian: [10:23] Every time you do a flip, you find unknowns.

Varun: [10:24] And so there are going to be roadblocks. As long as you can kind of have a plan around it and keep moving forward, I think live-in flips make a lot of sense.

Christian: [10:32] Yeah. And the thing too is you don't actually have to be living in the property while you're doing the rehab. Right. You could buy it- Get all the work done either upfront or on the back end, whenever you want to do it. If, if you have a two-year timeframe, live in it first, and then do the rehab at the end, or do it upfront, be out of the house and rent for a couple months, or live in your current house- Right … for a little while longer, and then do the work, and then move in and enjoy it for those t- almost two years, year and a half, whatever it is. Right, right. Yeah. All right. Let's talk about a way that you can supercharge a live-in flip. Yeah. Like, this is… When you explained this, I was like, "Damn, that's super smart. How, how come I didn't… I'm doing DADUs, and I never even thought about this." Yeah. Um, and you're building DADUs and ADUs as well. Mm-hmm. So I get why you figured this out. So let's, let's explain this.

Varun: [11:21] So, i- in Seattle, and, and some other cities in Washington State, and potentially outside of Washington State, allow any buyer or any homeowner to build another unit, potentially two, in their backyard.

Christian: [11:35] Yep.

Varun: [11:35] So as long as the yard and the lot meet certain requirements, you can build a what's called a detached accessory dwelling unit or a DADU.

Christian: [11:43] Yep.

Varun: [11:44] And now when you combine the live-in flip with the DADU strategy, it really works because you can buy the house with the lot with 5% down.

Christian: [11:52] Mm-hmm.

Varun: [11:52] While you're working on the house, as you said, you're renting, you're working on the house for a year. You can get permits for the DADU done, and then also build a second unit in that backyard.

Christian: [12:03] Yeah.

Varun: [12:03] And then when you move in, you have a rental unit next door-

Christian: [12:06] Mm-hmm … Varun: and you have your primary home right there. Yep.

Varun: [12:08] And so it really adds a lot more equity, and you're essentially making money out of dirt in the true sense- Yeah … because you're building where there's nothing right now.

Christian: [12:19] Yeah. Yeah. So. Yeah. And when you do that, you do decrease the main house value a little bit because you're removing the yard, and now you have a structure back there. But overall- whole property, you're increasing the value of the land- Right … by a lot. A lot. So it's a, everyone's not comfortable doing that, and if you're not, that's fine. Yeah. But if you are, you're, you're increasing your portfolio by quite a bit.

Varun: [12:41] Yeah. A- and again, i- in Seattle it works a lot more because Seattle is one of the cities that allow you to sell it separately- Yep … refinance it separately. Yeah. You're down, you wanna, "Hey, I wanna refinance the house separately from the DADU," you can pull money out of both because it, live and flip has equity. Yep. The DADU has equity. Yep. You pull money out. Now you have potentially tax-free money in your pocket because it's still a loan, it's a refi.

Christian: [13:04] Yeah.

Varun: [13:04] And you can deploy that for the next project. Yeah. Or go on a good vacation.

Christian: [13:09] Yeah, exactly. Exactly. Let's talk about the actual costs involved with the DADU. How much does it cost to build one?

Varun: [13:17] In Seattle, generally it costs around 350 to $400 per square feet. Mm-hmm. You're building about 1,000 square feet, so round numbers, 350,000 to $400,000 to build one. Mm.

Christian: [13:28] Sounds like a lot.

Varun: [13:29] It sounds like a lot, but, uh, my kind of rule of thumb is anything north of downtown Seattle, if you have a DADU that is 1,000 square foot, you are potentially selling that for anywhere between 700, $750,000 all the way up to $900,000 depending on finishes that you pick-

Christian: [13:48] Yep

Varun: [13:48] and the neighborh- neighborhood you're in. So there's a lot more equity gain, uh, if you decide to build.

Christian: [13:54] Yeah.

Varun: [13:55] And that's kind of the, the supercharge factor of the DADU that comes in, into this picture.

Christian: [13:59] Mm-hmm. Yeah, and you're almost doubling your money. Like, often you are.

Varun: [14:03] Yeah.

Christian: [14:03] 350 to build, it's worth 700, 750, something like that. I mean, that, that doesn't suck. Yeah. And it takes- Maybe nine months to a year.

Varun: [14:12] Yeah To do- A year, a year on is the average. On the long side, it's gonna take probably 18 months. On the short side, you could be as quick as nine months.

Christian: [14:20] Yeah.

Varun: [14:21] So again, if have a longer, uh, if you have a longer roadmap in mind, and you kinda look just beyond the immediate-

Christian: [14:28] Mm-hmm

Varun: [14:28] then, uh, five, six months, then there is a lot more money to be made.

Christian: [14:32] Yeah.

Varun: [14:32] Yeah.

Christian: [14:33] Let's go over some actual numbers on this now. Yeah. I know we just kinda did for the DADU part, so 350 to 400 a square foot, so 350,000 to 400,000 to build that. Let's give an example of maybe a house in North Seattle that you could buy that's needs some work and it would work as a live-in flip. Yeah. What are we looking, like, average-ish costs?

Varun: [14:53] Averages on a house that needs work in North Seattle would be, let's say, around $700,000 for round numbers.

Christian: [14:58] Mm-hmm.

Varun: [14:58] It needs, let's say, $100,000 worth of work. After you put in the work, the new value of that house after everything's fixed up is $900,000. Yeah. So you have 100,000 in equity.

Christian: [15:09] Yep.

Varun: [15:09] Sounds great. It's a great starting point.

Christian: [15:11] Mm-hmm.

Varun: [15:11] Now, if you have a backyard where you can actually build a DADU, you've spent another 350 to $400,000 to build that one, and that, let's say, gets appraised for 750, and so you have another $350,000 in that DADU.

Christian: [15:27] Yes.

Varun: [15:27] So overall, now you have close to half a million dollars of equity on your property itself.

Christian: [15:32] Yeah, which is crazy-

Varun: [15:33] Yeah … Speaker: in, like, a year. In

Christian: [15:34] a year.

Varun: [15:35] Yeah.

Christian: [15:35] Yeah. Not a bad way to, uh, to earn some cash.

Varun: [15:38] Not a bad way to start either.

Christian: [15:39] Yeah, no. Yeah. Great way to start, and you're helping people do this now on the team.

Varun: [15:43] Yes.

Christian: [15:44] Yes, so if you are looking to do this, if you are looking to do a live-in flip or build a DADU or both, Varun is the guy to talk to. Yeah. We'll give you his email at the end. All right. So now that we understand the basics on the cost of building a DADU, how the heck do you fund these things? Where do you get the cash 'cause 350 to $400,000, that's a lot of cash that not everyone has just sitting around.

Varun: [16:06] Right. Right. A- and so there are multiple ways to fund your DADU.

Christian: [16:10] Okay.

Varun: [16:10] So one is very straight and clear. You can get a construction loan once you have permits in hand. Mm-hmm. Banks will review it and give you a loan, and then you work with a, a contractor to build it out.

Christian: [16:21] Yep. And- And we have contacts for this, so just let us know.

Varun: [16:24] Yeah. The other way is if you've have a previous pro- residence, you can take a HELOC out on that residence- Mm-hmm which is a home equity line of credit.

Christian: [16:31] Yeah. We actually have an episode all about HELOCs, episode 50. You can learn everything you wanna know about home equity lines of credit.

Varun: [16:37] Yeah, and so on the lines of credit, a lot of people know about the home equity-based line of credit.

Christian: [16:42] Mm-hmm.

Varun: [16:43] A lot of tech workers get stocks as part of their compensation.

Christian: [16:47] Yeah.

Varun: [16:47] And so what they- Probably don't know or some of them do is you can get a line of credit on the stock portfolio without having to actually sell that asset.

Christian: [16:56] Yeah.

Varun: [16:56] It's called a stock-based line of credit, and most of the big banks offer the solution. You just need to ask the question.

Christian: [17:02] Yep.

Varun: [17:02] And you can pull this money out, and it is usually a lower interest rate than a hard money loan, loan or a construction loan. And so it's actually saving you a little bit of money on the holding cost as well.

Christian: [17:15] Yeah.

Varun: [17:15] But it's a great way to fund your DADUs, and you can pay it back when the DADU is built out, and you refinance into a 30-year loan.

Christian: [17:22] Yeah. That's awesome. The other thing you could do as well is in order to sell a DADU, you actually have to condo it off. Mm-hmm. I know that sounds weird 'cause you think of condo, you're thinking like a big building that looks like an apartment building- That is technically a condo. These DADUs are technically a condo too. We actually have an episode all about that. I know we refer to a lot of these episodes, but episode 122, it's all about condoization. We interviewed basically probably the expert, the leading expert in the state, Katie Sweden with Dimension Law. She's the one that creates thousands of these and has done just about more than anyone, if not the most- Yeah … of these in the state. So we interviewed her for a long time, and we went over the ins and outs and pros and cons of doing this. So once you do condoize your DADU and your house, you can actually then get a loan on each property.

Varun: [18:19] Yep.

Christian: [18:19] Which is huge, 'cause then you could refi it into either a longterm loan once the DADU's built, or you could potentially get a construction loan just on the DADU build.

Varun: [18:28] Yeah. And once the DADU is built, you can also get a DSCR loan, which is-

Christian: [18:33] Yeah

Varun: [18:34] just based on the DADU without having to provide your financials.

Christian: [18:37] Yep.

Varun: [18:38] Right? So those are, again, different strategies of how to make DADUs work because, yes, the numbers are big, but the payout is big as well. Yeah. And so you wanna make sure you have the right strategies in place- Mm-hmm … so that you can execute on your live-in plus DADU flip.

Christian: [18:51] Yeah. And this, again, this is a lot we're going over. Going over very high-level thinking right here, very high-level strategies. You need to make sure that you have a good team to help you in these situations. We are here to help you. Varun and I, we can help assist with all this. We have all the contacts that you need to make these decisions- Yeah and see which s- scenario works best for you. If you are in tech and you wanna do that, whatever you called it-

Varun: [19:17] Stock baseline of credit … Speaker: stock baseline of credit. See, he came from the tech world. I did not. He knows these things. Then you can do that, and we have people that you can talk to in all these different departments, so. Yeah. And we'll run numbers, right? Yes. We'll make sure the numbers work. Yeah. Like, let, we'll not make an emotional decision. We wanna make a number-based decision- Exactly … that there is- Yeah … a positive outcome at the end. Yep. Right? Yep. Yeah.

Christian: [19:37] And we don't care which way you go. Right. Like, we don't get anything more or less depending on which route you go. We just want you to have the information so you can make that informed decision. That's right. That's what we're always looking to do.

Varun: [19:48] That's right.

Christian: [19:48] So when people are looking for potential DADU lots, what should they be looking for? What are some of the… What are the, kind of the red flags or things to stay away from?

Varun: [19:57] Yeah, so, uh, just logically, when you're trying to build something, you need access. Yep. So look at lots that have a alley in the back or are corner lots so you can actually get your equipment, your materials in the backyard. If you don't have access to the backyard, uh, it really is not buildable at that point. Uh, so access is important. The other things that you need to look for is it's a flatter lot, not steep slopes. Steep slopes are difficult to build on.

Christian: [20:23] Mm-hmm.

Varun: [20:23] So watch out for those. Make sure your utilities are all on the lot or present, where you can connect both the units to the utilities fairly easily. And lastly, trees or other obstructions. Yeah. Like, you wanna make sure you don't have a large tree in the backyard, because again, in Seattle and many other neighborhoods, you potentially would not be able to take down that tree.

Christian: [20:43] Mm-hmm.

Varun: [20:43] And that would just not allow you to build that DADU. Yep. So you wanna make sure if there are trees, they're on the side of the lot where they don't impede construction or the footing of the new building.

Christian: [20:54] Yep, yep. And so there are definitely ways that we can assist you in figuring all these things out- Yep … in understanding is this a good DADU lot or not? Is this a good live and flip property or not? That's why Varun's on the team now to help us figure that out. Because there's been a lot of people over the years that have asked me to help them, and I try to help everyone, but I can't do it all myself, 'cause I'm also doing these things, and it's, I just, I'm only one, one person. I can't do everything. So that's why we brought on Varun. Varun's also doing these, and so he knows what he's doing. He's not just theorizing how to do it. Yeah. He's actually doing it, and that's huge. So Varun, thank you so much for coming on today. I hope, and have a very strong feeling there's a lot of people that are gonna get a lot out of this. If you have questions, if you want to reach out to Varun, his email is just varun@awesomenossum.com. That's V-A-R-U-N at awesomenossum.com. That's it for today's episode of the Awesome in Seattle podcast. Thank you so much. We'll be back in another couple weeks with some more information to help you succeed in real estate. See ya.

Varun: [22:00] See ya.