In this episode, Emily and her guest, Sam Hogan, explain how house hacking can benefit graduate students and early-career PhDs. House hacking is when you purchase a property, live in it, and rent out part of it. While not possible in every housing market, house hacking is within reach for many graduate students and certainly postdocs and PhD with Real Jobs. In the first part of the episode, Emily teaches some of the most salient concepts from The House Hacking Strategy by Craig Curelop. She also presents some real numbers from potential house hacks in college towns. In the second part of the episode, Emily interviews Sam Hogan, a senior loan officer at Prime Lending (Note: Sam now works at Movement Mortgage) who specializes in writing mortgages for graduate students and PhDs, especially those with fellowship income. Sam gives additional details about how an early-career PhD can qualify for a mortgage for a house hack.

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Links Mentioned in This Episode

• The House Hacking Strategy by Craig Curelop (affiliate link—thanks for using!)
• Email Emily for Book Giveaway Contest
• PF for PhDs Podcast Hub (Giveaway Instructions)
• This Grad Student Defrayed His Housing Costs By Renting Rooms to His Peers (Money Story with Dr. Matt Hotze)
• PF for PhDs: The Wealthy PhD
• Purchasing a Home as a Graduate Student with Fellowship Income (Money Story with Jonathan Sun)
• How to Qualify for a Mortgage as a Graduate Student or PhD, Even with Non-W-2 Fellowship Income (Expert Interview with Sam Hogan)
• PF for PhDs: Community
• Here is the IRS link that I mention in the Q&A
• Sam’s Email: [email protected]
• PF for PhDs: Tax Workshop
• PF for PhDs: Subscribe to Mailing List

Teaser

00:00 Sam: The best example, which has happened I would say many times over, is in North Carolina. One student purchasing that, you know, the regular stipend amount of around $32,000 a year, he bought it at $200,000, put $10,000 down was still within his debt-income ratio. And when he started off the process, he did say he was going to house hack.

Introduction

00:28 Emily: Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. I’m your host, Dr. Emily Roberts. This is Season 8, Episode 4, and I have a different episode structure for you today. The entire episode is devoted to exploring house hacking, which is when you purchase a property, live in it, and rent out part of it. We’re going to focus on how house hacking can benefit graduate students and early-career PhDs, and how it is possible for more people than you might expect. In the first part of the episode, I teach some of the most salient concepts from The House Hacking Strategy by Craig Curelop. I also point to a few real examples of potential profitable house hacks that I looked up this week. In the second part of the episode, I interview Sam Hogan, a senior loan officer at Prime Lending (Note: Sam now works at Movement Mortgage) who specializes in writing mortgages for graduate students and PhDs, especially those with fellowship income.

01:26 Emily: Sam gives additional details about how an early-career PhD can qualify for a mortgage for a house hack. Sam has been featured on two previous episodes and is now an advertiser with Personal Finance for PhDs. Reading this book came at a great time for me, actually, as my husband and I are taking steps to buy our first home within the next few months. It’s given me a different perspective on real estate investing for sure and the value of your primary residence. I’m very excited to share this material with you. Our giveaway contest is actually for the book Sam and I read for this episode! In January 2021, I’m giving away one copy of The House Hacking Strategy by Craig Curelop (affiliate link—thanks for using!), which is the Personal Finance for PhDs Community Book Club selection for March 2021. Everyone who enters the contest during January will have a chance to win a copy of this book.

02:18 Emily: If you would like to enter the giveaway contest, please rate AND REVIEW this podcast on Apple Podcasts, take a screenshot of your review, and email it to me at emily at PFforPhDs dot com. I’ll choose a winner at the end of January from all the entries. You can find full instructions at PFforPhDs.com/podcast. The podcast received a review this week from Emily B. The review reads: “This podcast has been so helpful to me as I apply to graduate school!! So many of these things aren’t talked about but Emily is great at explaining all of these concepts and interviewing people who have great advice.” Thank you to Emily B for this lovely review, and best of luck to you this spring! Without further ado, here’s my review of the concepts in The House Hacking Strategy.

Review of The House Hacking Strategy

03:08 Emily: The House Hacking Strategy by Craig Curelop (affiliate link—thanks for using) was published in 2019 through Bigger Pockets Publishing. Bigger Pockets is a popular online real estate investment community. House hacking, which I’ll define momentarily, is popular among this community, and Curelop presents a very enthusiastic and rosy picture of the strategy. For the duration of this episode, I want you to allow yourself to dream a little. I know and you know that house hacking is not possible or desirable for many graduate students and PhDs for a variety of reasons. But just for the next few minutes, I want you to suspend your doubts. We’ll come back to reality in a little bit and talk over some numbers. For the moment, instead of confirming for yourself all the reasons that you can’t house hack, ask yourself, “How and when might I be able to make this strategy work for me?” If you are convinced that you want to house hack, you may just find that a fire is lit underneath you and you can make it happen sooner than later.

04:07 Emily: In fact, I did some searching on Redfin and Craigslist and found three properties near three R1 universities that I think might be profitable house hacks for single graduate students. I’ll present those numbers after I go through some of the material from The House Hacking Strategy. I’m going to start my teaching in the same place that Curelop starts his book. I’ll read some quotes and summarize some paragraphs from pages 23 and 24, the start of Chapter 1. Quote “What is your largest expense? The majority of the United States population would not hesitate to reply with “housing.” Whether you are paying rent or paying down a mortgage alongside with taxes, insurance, maintenance, and all the other expenses associated with owning a home, your house is likely what you spend most of your money on each month.” End quote.

Definitions: Asset and Liability

04:54 Emily: Curelop then shares the definitions that Robert Kiyosaki uses in his books, which is that an asset is anything that puts money into your pocket every month, and a liability is anything that takes money from you every month. Under this definition, your home is a liability, whether you own or rent. Quote “Arguably, the biggest misconception that most Americans have is that their home is their largest asset. When, in fact, it is their largest liability. However, there are some exceptions. A few of them are exemplified at the conclusion of each chapter. You will read fellow house hackers’ stories in this book who have used strategies outlined here to turn what could be their largest liability into their largest asset. “They strategically designed their lifestyle so housing is not their largest expense. As a matter of fact, through the strategies I talk about in this book, they have completely eliminated housing as an expense and they make money from their living situations every single month. And yes, their lives look just like yours. From the outside, you would not think that they are any different because they have days jobs, errands to run, and families to care for.” End quote.

Turning Your Largest Liability Into Your Largest Asset

06:03 Emily: Turning your largest liability into your largest asset—that is an incredibly powerful idea. How do they do that? Let’s define house hacking. House hacking is when you buy a home, live in it, and rent out part of it. The classic house hack, according to this book, is buying a multifamily property (a duplex, triplex, or four-plex), living in one unit, and renting out the others. In that case, your tenants are your neighbors. Another variation of house hacking is to buy a single-family home and rent out the bedrooms that you do not occupy. In that case, your tenants are your roommates. There are all kinds of reasons that house hacking is powerful from a real estate investment standpoint, which The House Hacking Strategy covers very well. I’m taking a different approach, which is speaking to people who are not necessarily enamored with real estate investing, but rather want to find a way to reduce or eliminate their largest monthly expense: their rent or their mortgage payment.

07:01 Emily: Whenever I speak about frugality and reducing expenses, I ask that people first consider how they can reduce their housing expenses, even though accomplishing that can be difficult and expensive upfront. I’ve published through this podcast and highlighted in my seminars creative strategies such as serving as a resident advisor, living in subsidized or low-income housing, renting your home on AirBnB, and house hacking, although I haven’t used that term before. I published two full interviews with grad students who rent out rooms in their homes, which I’ve linked from the show notes, and some of my other guests have mentioned in passing that they use the strategy.

Benefits of a Successful House Hack

07:37 Emily: If you set up a profitable house hack, you will either: 1) Bring in enough rent to completely cover your mortgage and reserves, which is the money you need to put aside monthly for future home maintenance and vacancies, or 2) Bring in enough rent that your personal housing expense is less than what you would have paid in rent had you not house hacked. If you were to move out and rent your room, the total rent from the property would be more than the mortgage and reserves. A minimally successful house hack reduces your personal housing expense. A very successful house hack puts money in your pocket on a monthly basis. I believe house hacking is a hugely powerful strategy for PhD students and a great one for postdocs and other early-career PhDs. It’s accessible to many more early-career PhDs than those who currently pursue it.

08:26 Emily: I’m going to focus in this episode on single PhD students and their numbers since they are the most difficult case. If you have a postdoc income or Real Job income, getting into a house hack will be easier, and likewise if you have two incomes to work with instead of one. I want to throw in a word of caution that this episode is just a short summary of part of a book that is not super in-depth either. So while I want to encourage you to look into this strategy, you must do your due diligence in your local market before taking the step to actually buy a home.

Why is House Hacking a Great Fit for Grad Students?

08:59 Emily: So why is house hacking a great fit for graduate students? First, a traditional grad student fits perfectly into the ideal demographic of house hackers: people without children who are willing to live with other people. That’s not to say that you can’t house hack if you do have children, but it might look different for you. Second, a grad student basically by definition lives near a university, which boasts a large pool of potential tenants. I think it would be straightforward to set up a house hack where all your tenants are fellow grad students, the way Dr. Matt Hotze from Season 3 Episode 3 did. Third, grad students have limited avenues for increasing their incomes. Yes, it is possible and you should do what you can within the rules of your visa, department, funding, etc. House hacking is a way to increase your income without violating the letter or spirit of any of the restrictions placed on you and will almost certainly take less time than a side hustle for what you earn.

Curelop’s Five House Hacking Strategies

09:56 Emily: Curelop presents five house hacking strategies. On one side of the spectrum, you have the strategy that necessitates the smallest lifestyle change but is also the least profitable. On the other side of the spectrum, you have the strategy that is the most profitable, but that also necessitates the largest lifestyle change. From least profitable to most profitable, the strategies are: 1. Rent out an accessory dwelling unit on your property 2. Purchase a multi-unit property and renting out the units you do not occupy 3. Purchase a home and rent out the rooms you do not occupy 4. Rent out your own bedroom and sleep in your living room 5. Rent out your whole residence and live in a trailer or RV in your driveway If you’re like me, strategies 4 and 5 do not sound very appealing! I’m going to focus on strategy 3 in this episode, but it’s perfectly fine if another strategy is the best fit for you.

House Hacking: Ongoing Costs

10:56 Emily: Let’s talk more about both sides of the house hacking ledger now, first your ongoing costs and then how you make money. On the costs side, every month you need to make your mortgage payment, which consists of principal paydown of your loan, interest, property tax, homeowner’s insurance, and probably private mortgage insurance or PMI. You might also have a homeowner’s association payment. Another cost, which is irregular, is the cost of maintenance and repairs on the home and also renovation if you choose to do that. Curelop recommends putting aside every month a few hundred dollars—what he calls reserves—for home repairs and also to help you make your mortgage payment when you are between tenants. He also says you should have $10,000 at a minimum in your reserves to start with. If you don’t have $10,000 yet, he suggests securing access to a line of credit in case something comes up that you can’t cover with your existing reserves.

House Hacking: Net Worth Increases

11:41 Emily: That covers the ongoing costs of operating your house hack. I’ll get to the up-front costs a little later. Now for the exciting part: how your net worth increases while you house hack. First and most importantly, you will collect rent from your tenants. As I said earlier, this rent should either completely cover your mortgage payment and reserves or at least reduce your personal housing expense. Second, each month as you make your mortgage payments, you will pay down the principal balance of your loan. Now, in the first few years after you take out the loan, only a very small fraction of your payment goes to principal due to the amortization schedule; the great majority goes to interest, tax, insurance, etc. So principal paydown is a relatively small factor early on in the mortgage. Third, your home is likely to appreciate in value over time. When you sell, it will probably be worth more than what you bought it for. Appreciation comes in two forms, natural and forced.

Natural and Forced Appreciation

12:48 Emily: Natural appreciation is the general increase in real estate prices over time. According to Curelop, historically real estate has appreciated 6% per year on average across the US. Now, as we all remember from the housing crisis, different real estate markets do appreciate at different rates, and depreciation is also possible if you get really unlucky with your timing. So while natural appreciation is likely to be in effect over the long term, you can’t count on it over the short term. Forced appreciation is when you do something to a property to increase its value, such as finishing a basement to add bedrooms and a bathroom. You of course have much more control over forced appreciation than natural appreciation. If you choose your renovation judiciously, you can increase the value of your property by more than what you spent. Appreciation can rival rent collection as the most positive factor in increasing your net worth through house hacking, but it’s only realized when you sell the home. Fourth, there are tax benefits to rental real estate. Curelop doesn’t go into much detail on this in the book and I’m not familiar with them so I won’t elaborate either, but this is another way that your house hack is less costly to you than owning a home that you don’t rent out.

Seven Common Objections to House Hacking

14:00 Emily: I hope the financial advantages of house hacking have sufficiently excited you about the idea. Curelop also presents and then counters seven common objections to house hacking. I’ll list all seven, but only go into the arguments against a few of them. Just know that if the others are hurdles for you, he does address them in the book. 1. House hacking is more work than renting. 2. When you house hack, you will share space with other people. 3. You need to keep a professional relationship with your tenants. 4. You have to live in an investment property, which might not be as nice of a location as you could afford. 5. The housing market could tank. 6. You have to put more money down to house hack than your up-front rental costs. 7. Your tenants might fail to pay you. My overall observation of this list is that these objections are all valid. They all have at least a kernel of truth or a possibility of occurring. I think it would be really helpful to identify every adverse event that could occur and come up with a plan for how you would respond. Going through that exercise might make you feel better about moving forward with house hacking instead of just being generally nervous about the downside risk.

Counterpoints to Some Common Objections to House Hacking

15:11 Emily: I want to add some thoughts to a few of the aforementioned objections. 2. “When you house hack, you will share space with other people.” Having roommates is pretty standard in graduate school for single people. Even if you could afford to rent a place on your own, it wouldn’t be strange to choose to have roommates instead. I’ve also known plenty of PhDs who continue to live with roommates even after they couple up or get married. I think this is less of an objection for our population than others, at least up until the point that you have children. 3. “You need to keep a professional relationship with your tenants.” and 7. “Your tenants might fail to pay you.” My fantasy house hack for a graduate student is to rent to other grad student peers and to be friends or at least friendly with your tenants. It is important to maintain professionalism at least within the bounds of your landlord-tenant relationship. You should be a great landlord, responsive and fair. I hope your tenants will respond in kind and not try to take advantage of your personal relationship. Curelop devotes a whole chapter to screening tenants, which as a new landlord I think you should follow to the letter. Of course, this book was published prior to 2020. The possibility of tenants not paying and not being able to evict them probably didn’t occur to many landlords, but now it’s on everyone’s radar. As a house hacker, you should make sure that you are financially capable of paying the mortgage even if your tenants are unable to pay rent for an extended period of time. If your university offers funding guarantees, I think that’s worth asking about on a rental application. You can’t prevent a tenant from misusing their money to the extent that they are unable to pay rent, but you can make sure that their income is reliable.

Four Considerations to Purchasing a House Hack

16:56 Emily: What does it take, financially, to purchase a house hack? Is it feasible where you live now? Let’s consider four elements. 1. The cost of properties appropriate for house hacking 2. The price to rent a room 3. Your stipend or salary 4. Your savings First, how expensive of a home could you buy on your income or your household’s income? Interest rates are so low now that rules of thumb like “Your mortgage shouldn’t exceed three times your income” have become outdated. Really, I’m asking two different questions here: 1) How large of a mortgage will you qualify for? and 2) How much of a mortgage would you feel comfortable taking out? Some house hackers will take out the largest mortgage they qualify for because they are counting on rental income to help pay it, but you might be more conservative, as I discussed before.

17:48 Emily: I’m going to talk this over with Sam Hogan a bit more in the second half of this episode. According to what he told us in our last interview, Season 5 Episode 17, if an applicant has no debt and excellent credit, they could qualify for a mortgage of four to five times their yearly income. If you have debt or merely good credit, the multiple will be smaller. Now, whether taking out that much debt is prudent is up to you. If you weren’t house hacking, I would say no, but if you are, it depends on your risk tolerance. Now you have a ballpark idea of the size of mortgage you could take out. You of course need to work with a mortgage originator like Sam to calculate your exact number. But going forward with the ballpark number, are homes available for less than or around that mortgage amount? Or is it way too low to buy anything? You can use a site like Redfin or Zillow to figure out what a house hack would cost you. If you’re looking for a townhouse or single-family home to house hack, perhaps you would look for a 2 bedroom place at a minimum. Broadly speaking, the more bedrooms you can purchase, the more rental income you’ll be able to generate.

Consider Cost-of-Living

18:56 Emily: If you live in a high cost of living area and you’re trying to purchase a home with one grad student income, you are likely to find that everything is out of reach. It’s disappointing, but don’t give up on the idea of house hacking for later in life. If you find that you can maybe afford to buy something, the next question is whether a house hack, in particular, is viable. Can you rent out the bedrooms that you won’t occupy for enough to at least reduce if not eliminate your housing cost? The answer is not an automatic yes for the type of home you can afford. If you’re not familiar with rental prices by the room in your area, check Craigslist and Facebook Marketplace. Having verified that house hacking is viable on your income and in your rental market, we come to the last piece of the puzzle, which is the down payment and closing costs. In the interview with Sam coming up next, we discuss the down payment requirements of various mortgage programs. If you’re not a veteran, you’re looking at 3% at minimum, but Sam suggests up to 10% in some cases. So for a low-cost property, the down payment could be as little as a few thousand dollars.

Five-Year Rule of Thumb

20:02 Emily: Curelop states in the book that closing costs are typically paid by the seller, not the buyer, so the money the buyer has to come to the table with above the down payment is rather minimal, perhaps a few hundred or a thousand dollars. Even if you don’t have the savings required to fund a home purchase in your bank account right now, how quickly could you come up with the money if a fire were lit underneath you? Over the course of a year, a vigorous side hustle, a higher-paying fellowship, or a summer internship could do the trick. Since I mentioned a year, I want to address the five-year rule of thumb. I know that many grad students and postdocs feel a ticking clock when it comes to considering real estate purchases. Many of us expect to move with every new career stage we attain. The five-year rule of thumb implies that you may not even break even if you buy a home instead of renting during grad school or your postdoc because of the high transaction costs that come with buying and selling and that you can’t count on natural appreciation over short time frames.

21:00 Emily: What I found interesting about The House Hacking Strategy is that it concentrates on the return on investment that can be achieved within one year. The reason for the focus on that timeline is that owner-occupancy mortgage loans require you to live in the property for one year. An aggressive house hacker might move every year to a new house hack, collecting rental real estate along the way instead of selling. The point that I want you to take from this is that you don’t have to listen to rules of thumb or rely on appreciation to overcome the transaction costs of real estate. Instead, you can use the rental income from your tenants. A house hack might be viable for you even if you plan to remain in your current city for only a couple of years—you just have to look at the numbers. Also, it’s important to plan your exit before you purchase your house hack. Are you open to turning it into a fully rented property after you move? Do the numbers still work if you have to hire a property management company? Or if you are sure that you will sell, you need to account for the high closing costs in your calculations.

Thought Exercise: Three Example House Hacks

22:02 Emily: Now let’s get into those numbers I mentioned earlier! As a quick exercise, I looked at the list of universities I’ve given or am scheduled to give webinars for in the 2020-2021 academic year to see whether house hacking was viable in those cities and what the numbers might be. Here was my process: 1) I searched Redfin for the university’s city with a max asking price of $150,000. I typically set a 3 bedroom search minimum, but sometimes adjusted up to four or down to two. I picked a house within a few miles of the university, something that looked move-in ready and not the cheapest available. 2) I searched craigslist for the area the house was in to get an idea of rental prices by the room and picked a price in the middle to low end of what I saw. 3) I went back to Redfin to look at the estimated mortgage payment. I set that the buyer would put 5% down and get a 3% interest rate.

23:03 Emily: I’m now going to share with you the properties and numbers I found in three of the cities I looked at. Of course, this was a cursory search, so my selections and numbers might be off due to a lack of local insight. Just consider this a ballpark estimate. Also, please note that I’m doing this exercise in January 2021, and both the renting and buying markets are really weird right now due to the pandemic and it being outside of the high home buying season. If you do this search even just a couple of months from now, it might look totally different, let alone a couple of years.

23:39 Emily: Example #1 is in East Lansing, Michigan, near Michigan State University. The property I picked is a 3 bedroom, 2 bath, 1500 square foot single family home, and the asking price is $89,900. A 5% down payment is $4,495, and the monthly mortgage payment would be $752. I picked $400 per month as the rental price per room. That means that renting out two of the bedrooms covers the mortgage payment while you live in the third. After setting aside a couple hundred dollars per month for reserves, you have reduced your own housing cost by about $200 per month. Over the course of one year, assuming that your irregular expenses did not exceed your reserves, you would have reduced your own housing expense by $2,400. Over five years, that turns into reducing your own housing expense by $12,000, and that’s without taking into account possible rent increases.

24:43 Emily: Example #2 is in Louisville, Kentucky, near the University of Louisville. The property I picked is a 4 bedroom, 2 bath, 1300 square foot single-family home, and the asking price is $134,000. A 5% down payment is $6,700, and the monthly mortgage payment would be $777. I picked $500 per month as the rental price per room. That means that renting out two of the bedrooms covers the mortgage payment and perhaps all of the reserves. You would live for free in the third bedroom and pocket the $500/month rent from the fourth bedroom. Over the course of one year, assuming that your irregular expenses did not exceed your reserves, you would have taken in $6,000 in rent above your mortgage payment and reduced your own housing expense by $6,000. Over five years, that turns into $30,000 in rent collected and reducing your own housing expense by $30,000, and that’s without taking into account possible rent increases.

25:48 Emily: Example #3 is just outside St. Louis, Missouri, near the Washington University in St. Louis. The property I picked is a 4 bedroom, 2 bath, 1800 square foot single-family home, and the asking price is $150,000. A 5% down payment is $7,500, and the monthly mortgage payment would be $925. I picked $600 per month as the rental price per room. That means that renting out two of the bedrooms covers the mortgage payment and perhaps all of the reserves. You would live for free in the third bedroom and pocket the $600/month rent from the fourth bedroom. Over the course of one year, assuming that your irregular expenses did not exceed your reserves, you would have taken in $7,200 in rent above your mortgage payment and reduced your own housing expense by $7,200. Over five years, that turns into $36,000 in rent collected and reducing your own housing expense by $36,000, and that’s without taking into account possible rent increases.

26:53 Emily: Now, if those numbers don’t motivate some of you in low- to medium-cost of living areas, I don’t know what will! You can literally buy an income stream that will benefit you to the tune of thousands or over ten thousand dollars per year for a few thousand dollars, an extra hour here or there, and the willingness to take a risk. And that’s not even counting the principal paydown, tax benefits, and potential appreciation! Keep in mind that all of my examples are completely made up. I’m just trying to ballpark some numbers and show that this is possible in some places on one grad student’s income. Curelop publishes the numbers of a real house hacker at the end of each chapter. For transparency, I didn’t examine every city on my list of candidates. I skipped the California ones, I only briefly glanced at Austin, Texas and Boston, Massachusetts to verify that $150,000 won’t buy you anything near the universities right now. I went down a road a bit in Providence, Rhode Island before crossing it off my list. But I thought these three examples were good ones. Purchasing may very well be possible in those other markets if you have more than a single grad student stipend to work with, or perhaps at a time of year when there is higher volume on the market. After the commercial break, I’ll be back with my interview with Sam Hogan.

Commercial

28:15 Emily: Emily here for a brief interlude. If you know that you want support in accomplishing a big financial goal this spring, I recommend my group coaching program, The Wealthy PhD. You and I will meet one-on-one to identify and plot a course toward your big financial goal. Past participants have opened IRAs, set up systems of targeted savings, started budgeting, systematically implemented frugal tactics, and more. Every week for eight weeks, you’ll participate in a small accountability group that I facilitate. The group will help keep you on track to meet small weekly goals that add up to your big goal. Prospective grad students, this would be a perfect cycle to join as I and the other participants can give you a ton of support and financial insight as you interview and ultimately choose your PhD program. The deadline for discounted early bird registration for The Wealthy PhD is Saturday, January 30th, 2021. Visit pfforphds.com/wealthyPhD to learn more and register today. Now, back to our interview.

Welcome Back, Sam! How Can People Find You?

29:26 Emily: I am delighted to have joining me on the podcast today my brother, Sam Hogan. Sam is a Senior Loan Officer at Prime Lending (Note: Sam now works at Movement Mortgage), and we’ve been having conversations over the last several years about how grad students and postdocs, especially, can get mortgages when their income is maybe it’s fellowship instead of employee. Maybe it’s temporary instead of a long-term thing. We’ve had these conversations before. So if you’re, you know, liking what you hear today from Sam, please go back and listen to season two, episode five, that’s a two-part interview. The first part is with a person who actually house hacked, Jonathan Sun. And then the second part of the interview is with Sam. And then Sam was also back in season five, episode 17, where we talked a lot more about this issue of fellowships and being able to qualify for a mortgage with fellowship income. So Sam’s back today to talk about house hacking. I gave him an assignment. I told him to read The House Hacking Strategy by Craig Curelop along with me so that we could have a conversation about it and get his perspective as a loan officer. So Sam, welcome back to the podcast.

30:32 Sam: Thank you for having me happy to be here.

30:34 Emily: Can you upfront say your contact information, everything for the audience?

30:38 Sam: Yep. My cell phone is (540) 478-5803. And then my email is [email protected].

What Did You Think About the Book?

30:48 Emily: Yeah. And you’ve been getting a lot of referrals. A lot of people have been finding you through the podcast episodes you’ve done before. Graduate students and post-docs and early-career PhDs. So we’ll talk about a few of those sort of case studies in a little bit, but first I just wanted to get your general impressions about the book on house hacking. I know that you are not a house hacker, although you are a landlord, but yeah, just what did you think about this book and this idea generally?

31:16 Sam: Very motivational. Definitely on the aggressive side of house hacking, giving suggestions, like living in a trailer in your driveway. Not something I would do personally, but it’s a step in the right direction. I mean, people need to know that it’s okay to live in a house for just one year and then buy another property the following year. So I liked it a lot. There were some accuracy things that I would’ve changed just regarding loan approval, but the loan guidelines and laws we have to stay within, they change annually. So there are always little tweaks and adjustments, especially 2020 was a funky year. So they made some higher credit score requirements and things like that. Generally speaking.

Did it Make You Want to Try House Hacking?

32:01 Emily: I think that’s a really good way of approaching this book. I do see it more of like a motivational book and like an overview, but maybe not once you drill down into the specifics, like, yeah, it might not be accurate year to year because things do change. The book was published in 2019, but as you said, 2020 kind of upended, a lot of things we’re recording this interview in January, 2021. So yeah, I totally agree about the book. And did it make you want to try house hacking?

32:27 Sam: It did. And then they also made me reflect on what I had when I was still living in a one-bedroom, one bathroom, how I actually rented out the common area to a buddy who needed a place to live.

32:39 Emily: Oh yeah, because you were house hacking for a little while. I forgot about that. Because your place was only a one-bedroom, but you did have a tenant.

32:46 Sam: Yeah, he was just switching jobs. He’s also in finance. And yeah, he ended up just bunking with me. And I think it was only like $4,000 for the year, but Hey, I mean that’s $4,000 I didn’t have to start out with.

Real Example of Potential for House Hacking

33:03 Emily: Yeah, definitely. And before this point in the interview, I’ll have told the listeners a lot of the principles from the book. So we don’t have to go through all of those in detail, but I wanted to really get from your unique perspective, some ideas about how a graduate student or how someone on a lower income can actually make this house hacking strategy work. Of course it will not work in every housing market. We know that. The incomes for graduate students and postdocs are too low to make it work in high cost-of-living areas. But there is a chance of it working in lower cost-of-living areas even on one income. But especially if you did have two incomes or if maybe instead of a graduate student or a post-doc, you know, there are some different situations where this does work out. So I wanted to get from you, you know, from all the clients that you’ve worked with a few examples of people who either were planning on house hacking, and you knew that at the time you were making the loan or who bought a large enough place that they could house hack if they wanted to. So can you talk us through a couple of those examples?

34:03 Sam: Yeah. So I mean the best example which has happened, I would say many times over, is in North Carolina. One student purchasing that, you know, the regular stipend amount of around $32,000 a year. I actually just looked up the property it had appreciated. He bought it at 200,000, put 10,000 down, was still within his debt-income ratio. He closed in April last year, and when he started off the process, he did say he was going to house hack. When I followed up with him a few months after closing, he didn’t end up renting out any rooms. He enjoyed having those extra spaces. So I’ll probably check up with him in the spring and see if he had changed his mind. But, I mean, it was a four-bedroom place, so he definitely had the ability to do it, but then just didn’t execute after closing because I guess he was comfortable with the payment enough.

35:02 Emily: I do want to emphasize that whenever you’re planning a house hack, it’s really vital to be confident that you could make the mortgage payment without any rent coming in. Maybe in the case like this person, you just decided not to rent out the rooms, ultimately your life circumstances change, or you want your privacy or whatever. Or it could be that, Hey, maybe you have a tenant, but that tenant is not paying you. And that’s happened a lot in 2020. It’s really a difficult situation to resolve for everyone. And so you need to be sure that, you know, if you scrimp and save and you reduce your other expenses, you would be able to make that mortgage payment still. So the example that you just spoke about and you said this has happened multiple times in North Carolina. I know that you’ve been working with a lot of graduate students in the Triangle, at UNC and at Duke, NC State, to make these loans happen in that area.

Loan Qualifications for a ~$32K/year Stipend

35:49 Emily: So let’s just take that market for example. So what size of a mortgage could a graduate student, let’s say, possibly take out? Like, I guess what I’m asking is, you know, they’re looking at their stipend, someone who isn’t ready to approach someone like you, a loan officer yet, but they’re looking at their stipend, they’re making 30 or $32,000. Like you said if everything were ideal in the rest of their finances, like let’s say they’re debt-free and they have a great credit score. How large of a loan could that person qualify for? Because that’s really kind of the question here is, are you going to be able to qualify for a large enough loan to make house hacking a possibility in your housing market?

36:27 Sam: So the highest I’ve been able to approve without a co-signer is 220,000. That was also in the Research Triangle.

36:37 Emily: So $220,000 on about a 30, $32,000 kind of stipend.

36:41 Sam: $32,000, this student did not have any student loans that were deferred. She was pretty much debt-free except for a few credit cards.

36:51 Emily: Okay. So pretty, really, really good solid portfolio otherwise. So just for the listeners, like house hacking could still be possible if you have those other kinds of debt, you’re just going to qualify for a little less. So it just has to work in your housing market.

37:04 Sam: Right. I mean, it’s important to understand that, like, even though you might have a similar situation to somebody else, it’s never exactly the same. So you want to have someone pull your credit, look at your entire financial picture in order to give you the results catered to your ability to purchase. You don’t want to just assume you’re going to fall into a bucket and everything will be okay. Because there are some very important details that go into this approval and those have to be evaluated by an expert. There’s just some things you can evaluate on your own, especially things like mortgage insurance, what will be allowable for your down payment, you know, in order to make your ratios work and make sure you’re within the guidelines.

37:49 Emily: So I think what I would encourage the listeners to do, if they are enthusiastic about this idea of house hacking but they’re not sure if they’re going to make it work is look really high level at what is your income and then what are houses, at least probably a two-bedroom home of some kind, selling for in your area. And if you’re within like striking distance of like, maybe I could get a loan, possibly, I’m not sure, for enough to make this work. That’s the time to approach someone like you that is to say, to approach you because you’re the expert in this subject and ask, well, how much can I be approved for? And then figure out whether or not there are houses in your area that would help you make this strategy work.

Different Types of Loans Available in the Marketplace

38:27 Emily: So let’s talk about the down payment for a moment because you just brought that up and we’d actually, didn’t talk about this much in our last episode. And it’s an important factor to consider. I would the two big hurdles for especially graduate students to buy homes are: one, qualifying for a big enough mortgage on their low income, and two, having enough of a down payment. So would you just really quickly run through the different types of loans that there are available in the marketplace and how much of a down payment is required for each of them?

Sam (38:55): Yeah. So some of your most popular loans, FHA loans and conventional loans. FHA a classic first-time home buyer basically program. It’s insured by the Federal Housing Administration, and the down-payment is three and a half percent. So they make it very achievable. There’s some employment and income that’s not accepted for FHA. So you want to check with your lender. And then when we get over to the good stuff, the conventional loans, taken out, allow you to go as little as 3% down and that can come from a gift from a family member or a friend. It doesn’t have to be your own verified funds. More commonly, Epic FHA loans are not a good fit for fellowship income, but if you have regular W2 income or some other employment, maybe a second job you’ve had for a year or two, this is also a good option.

39:45 Sam: Now if you have excellent credit, you’re going to want to get into the conventional loan bucket because it’s going to have lower mortgage insurance. It allows as little as 3% down. When we’re thinking about stipend income at $32,000 a year, you going to want to lean towards 5%–or 10%–down to make your ratios work. This is all going to depend on working with, you know, someone you trust so they can evaluate your personal qualifications. Okay. But outside of those two popular loan products, we have VA loans. So if you’re a veteran and you’re back in school, VA loans are a piece of cake. They require no down payment. There’s no mortgage insurance. There are a lot of good other good benefits. Like the VA loan can be assumed by another person and take over that low rate that you’ve already established.

40:39 Emily: Yeah. Thank you for explaining that. So we’re talking about 3% down, as little as 3% down for conventional, although you’re recommending five or 10% as maybe a better fit, depending on the person. FHA loans, three and a half percent down. VA loans, 0% down. So the kind of range of downpayment costs that we’re talking about are, it sounds like, okay, let’s say on a $150,000 property, that would be like four and a half thousand dollars at 3%, up to $15,000, if you were putting down 10%. So kind of somewhere in that range is what we’re talking about as a minimum down payment. I don’t know, in one sense, it’s a lot of money for a graduate student to come up with that. That’s a pretty, you know, it’s a good chunk of a year’s salary. However, if the outcome is getting you into a house that cashflows you every month, or at least reduces your housing expense every month, in the long-term, it’s a small amount of money. It can be a larger amount of money to come up with in the moment. And you just mentioned for conventional loans, it is acceptable for someone like a parent, perhaps, to gift you the down payment.

41:44 Sam: This is very common.

41:48 Emily: And I was of course, very impressed by, you know, the case studies that were in the house hacking strategy of people making back their entire initial investment and more, you know, within the first year of owning their house hack, that is the down payment money. Plus maybe they put in some renovation funds. It was some really, really inspiring case studies. And of course you have to take everything with a grain of salt because the author is going to be picking the absolute best to include in the book, run the numbers in your own situation. But I mean, as you just said, compared to renting, which is a pure drain on your net worth, you have a really good chance of, you know, actually coming out ahead with house hacking–with buying, but like house hacking makes it even more sure. You know, that you’re going to come out ahead when you have that rental income coming in.

42:33 Sam: Yeah. And I do want to say the examples he gives in this book, they are very good examples. I also feel like he’s kind of, double-dipping on some of the numbers sometimes because I mean, you’re not paying $8,000 down on your loan amount in your first year of ownership. You’re paying mostly interest. So I just felt like he was kind of double-dipping with, Oh, if I have this extra rental income and I have that, plus I’m using that to pay down my loan, you know, and then he’s making it motivational, I’ll say. But is that realistic at all markets? Definitely not.

Examples Outside of the Research Triangle

43:13 Emily: I wanted to get an idea of you of a few other housing markets that you’ve worked with grad students in. Maybe not specifically for house hacking, but just grad students who have been able to buy homes around other universities. Can you give us a few examples outside of the Research Triangle?

43:28 Sam: Yeah. I mean, I’ve had success in outside of Boston, Massachusetts, where you think it’s a high-cost area and then someone on a fellowship wouldn’t afford it. That has been successful. Outside of Denver, Colorado. We’ve also had some purchases there with a post-doc. Gosh, Miami, Florida, we even had someone purchase who was going to University of Miami. Atlanta, Georgia is popular. Emory University has a good funding letter, which I’ve helped a few students out down there. It’s really all over. I mean, we have from Texas to Rhode Island to Tennessee and Ohio.

44:11 Emily: Yeah. That gives us a good idea. Thank you. So I was actually surprised to hear some really big markets in that list where you’ve made this work. So yeah, I would say for a grad student or postdoc, whoever who’s listening who is wondering about this strategy, just run some really high level numbers in your area. According to like what’s in the market right now and what your stipend is, and then yeah, if you think you’re within striking distance, like reach out to Sam, reach out to a few lenders and see if they can make the numbers work for you.

44:38 Sam: Yeah. I just want to put the emphasis on like, if you feel like you’re well-qualified, like you know you don’t have $200,000 in student loans. You know income’s going to continue for years plus, just reach out to myself or someone on my team because there’s very often a personal touch that we have for this community. I work with some students that have been denied by two other lenders. But they’re already in contract and you know, I’m two weeks late on working with them. So just in respect to your own time and maybe these other lenders that aren’t familiar, you know, we work a lot with the PhD community. I mean, we’re doing at least five plus deals a month right now, all over the country.

Correcting the Record: Credit Scores

45:27 Emily: Was there anything else about the book that you wanted to kind of correct the record on?

45:33 Sam: Yeah. I mean, there are a few things regarding credit score that changed in 2020, after this book was written. So last spring, when everything with COVID-19 was restricting some lenders, they upped credit score requirements. So a lot of FHA loans, you can’t really apply for them unless you’re over 640. And for conventional loans, no lenders typically go down to 620. There’s a breaking point. It’s at 660. So if your FICO score, if your middle FICO score is above 660, it’s going to be cheaper for you to go conventional monthly. The mortgage insurance is lower. Now, if your middle FICO score is below 660, it’s going to be cheaper for you to go FHA. That’s just a rule of thumb that all lenders use. When we price out everything and when we compare monthly payments, that’s the breaking point.

46:27 Sam: So if you’re at 661, I’m going to put you in a conventional loan. You’re at 660 or 659, FHA is for you. It does mention in the book, how, if you’re in an FHA loan, you will have to refinance into a conventional loan. This is a very common thing. Everybody does it. It reduces your mortgage insurance and also allows your mortgage insurance to drop off at 78% of equity. Okay. But everything else was looking really good. He had some very clear things to say for these first-time home buyers or house hackers. I would just suggest everyone to get better results. You should work with a loan officer, either myself or someone who’s also a senior loan officer who has a few years experience, so they can make something cater to your needs. But generally speaking, it was a great read. Very aggressive when he starts talking about, you know, living in a tent in the backyard and renting out every room in your three bedroom.

47:29 Emily: That strategy also was a little too much for me. And I think, you know, when I’m presenting this to my audience, it’s more about what can you make work over the course of five years? Not necessarily over the course of like one year. The book is very focused on one year and you know, there’s reasons for that from a real estate investing strategy, why that’s the case. But I think for the people who are listening to me, they’re more likely to want to stay in a place for a few years and have their own bedroom during that time.

47:58 Sam: Exactly, exactly.

Would You Please Give Your Contact Info Again?

47:58 Emily: Okay. Sam, thank you so much for this interview. Great information. I really hope we’ve gotten some people excited about house hacking, about buying homes, making it seem like a possibility earlier, even during graduate school. I know that I wish that I had seriously considered this or known about this concept when I was in graduate school. So as we close out, will you please give your contact information again?

48:19 Sam: Yeah. Thank you for having me again. The best way to reach me is by phone. It’s (540) 478-5803. My best e-mail is my work e-mail. It’s [email protected].

48:34 Emily: Wonderful. Sam, thank you so much for joining me.

48:37 Sam: Of course. Thank you for having me.

Concluding Thoughts About House Hacking

48:39 Emily: I’m back with a few concluding thoughts. I fervently wish I had learned about the power of house hacking earlier in my life. I did my PhD at Duke between 2008 and 2014. I knew several fellow grad students who were house hacking, though I didn’t know the term at the time. So it was possible to make the numbers work. My husband and I together definitely could have purchased a home in 2010, the year we got married, based on our two stipends and our existing savings. However, I was still psychologically scarred from watching the housing market crash and there was a lot of talk about rigorous lending standards. We thought that we would leave Durham in 2013 perhaps, so following the five-year rule we did not pursue homeownership. We didn’t end up moving away from Durham until 2015. So in retrospect, house hacking was possible and almost certainly highly profitable, and we lived there long enough that either selling or keeping the home as a rental would have been viable options.

49:38 Emily: All that is water under the bridge for me, of course. What I can do now that I have learned about this strategy is two things: 1) I can consider how I can house hack in my present life. My husband and I are planning to buy our first home in the near future. We do want a detached single-family home but could consider adding an accessory dwelling unit. If that turns out to be impractical, perhaps we could house hack during a sabbatical year in another area of the country or once our kids are grown. 2) I can share this strategy as widely as possible, as I’m doing in this episode, and support anyone in my audience who wants to investigate or pursue house hacking. A perfect place to talk over these ideas as you pursue them is inside the Personal Finance for PhDs Community. In fact, we have one member already who is planning a house hack in the next few months! The House Hacking Strategy by Craig Curelop is our monthly Book Club selection for March 2021. So jump into the Community at PFforPhDs.community and we will discuss house hacking!

50:39 Emily: I want to continue this conversation not just in the Community but also on this podcast. If you are a grad student or PhD who is currently house hacking or has done so in the past, please get in touch with me. I’d love to publish a compilation podcast episode with several real case studies. If you’d like to volunteer, even anonymously, you can reach me at [email protected].

Listener Q&A: Do I Report My Stimulus Checks?

51:07 Emily: Now, on to the other one of our two new segments, the listener question and answer. Today’s question comes from a grad student in my annual tax return workshop, How to Complete Your Grad Student Tax Return and Understand It Too. Here’s the question: Do I report my stimulus checks as part of my gross income? This question has a really short answer, which is no. Your stimulus checks, or your economic impact payments as the IRS calls them, do not have any effect on your tax return unless you did not receive one when you were supposed to. I’m going to read from an IRS newsroom release from last spring titled, What People Really Want to Know About Economic Impact Payments. And I’ll link to this page from the show notes. Quote, “Is this payment considered taxable income? No, the payment is not income and taxpayers will not owe tax on it. The payment will not reduce a taxpayer’s refund or increase the amount they owe when they file their 2020 tax return next year. A payment will also not affect income for purposes of determining eligibility for federal government assistance or benefit programs.” End quote. So there you have it. Super straightforward.

53:18 Emily: The stimulus checks, the economic impact payments, are not taxable. Really the only catch, like I just mentioned, is if you were in fact eligible for these payments in 2020, but the IRS didn’t know that you were eligible and you didn’t receive the payments, then you will claim what’s called a recovery rebate credit on your tax return. So on form 1040 in line 30, you’re going to have a number in that line. It’s going to be an additional credit to you, which means you’ll get more of a refund than you were expecting essentially. Now, if you’re not sure if you’re eligible for the recovery rebate credit, there is a worksheet in the instructions for form 1040 called the recovery rebate credit worksheet. And you can fill out that worksheet and it’ll tell you exactly, you know, whether or not you were eligible and whether or not you can claim the recovery rebate credit. So thank you Aanonymous for that question.

53:18 Emily: By the way, if you’re interested in learning more about my tax workshop, How to Complete Your Grad Student Tax Return and Understand It Too, and potentially join it like this questioner did, you can go to PFforPhDs.com/taxworkshop to find more information. If you would like to submit a question to be answered in a future episode, please go to PFforPhDs.com/podcast and follow the instructions you find there. I love answering questions, so please submit yours.

Outtro

53:48 Emily: Listeners, thank you for joining me for this episode. PFforPhDs.com/podcast is the hub for the Personal Finance for PhDs podcast. On that page are links to all the episode show notes, which include full transcripts and videos of the interviews. There is also a form to volunteer to be interviewed on the podcast and instructions for entering the book giveaway contest and submitting a question for the Q and A segment. I’d love for you to check it out and get more involved. If you’ve been enjoying the podcast, here are four ways you can help it grow. One, subscribe to the podcast and rate and review it on Apple podcasts, Stitcher, or whatever platform you use. If you leave a review, be sure to send it to me. Two, share an episode you found particularly valuable on social media with an email listserv or as a link from your website. Three, recommend me as a speaker to your university or association. My seminars cover the personal finance topics PhDs are most interested in like investing, debt repayment, and taxes. Four, subscribe to my mailing list at PFforPhDs.com/subscribe. Through that list, you’ll keep up with all the new content and special opportunities for Personal Finance for PhDs. See you in the next episode! And remember, you don’t have to have a PhD to succeed with personal finance, but it helps. The music is Stages of Awakening by Podington Bear from the free music archive and is shared under CC by NC. Podcast editing and show notes creation by Meryem Ok.