House Hacking in the Bay with FHA – Anthony Barbato

House Hacking in the Bay with FHA – Anthony Barbato

[00:00:00] This is the everything real estate investing show with Sean Pan. We interview local real estate investors and professionals to go over tips, tricks and investing strategies to help you learn about the business and to enable you to achieve your financial goals, and now welcome to the show. Hey everyone, and welcome to another episode of the everything real estate investing show with Sean Pan. Today, we have Anthony Barbato.  Anthony is an agent at Keller Williams. On this episode, he’s going to share the strategy of house hacking in the Bay Area using an FHA loan. With this strategy, we basically purchased 4 plexes with an FHA loan allowing us to purchase it with low down payment and getting a higher DTI ratio to qualify for the loan. It’s a great strategy for anyone looking to purchase their own property here in the Bay Area. If you enjoyed this episode, subscribe to the show and leave a review. We release episodes every Wednesday and Sunday and release the shownotes with the full transcription on our site, everythingrei.com. Enjoy!

Sean: [00:01:02] Thank you so much for being on the show today. Go ahead and introduce yourself and let us know who you are and how did you get into real estate?

Anthony: [00:01:08] Yes, my name is Anthony Barbato. I work as a real estate agent here with Keller Williams in Danville. It all started in Southern Illinois in the midwest. I started wholesaling houses. Though I sold 17 in the midwest, but it wasn’t enough to cover my tuition for that semester in college so I figured you needed to go where there might be more opportunity, more excitement. So I look to see where it was that all the opportunity was. They say two-thirds of all the venture capital in America is spent in Silicon Valley, which is what made me make the leap as soon as I graduated and here we are in beautiful, California.

Sean: [00:01:46] Awesome. Well, so you are wholesaling homes?

Anthony: [00:01:49] This is true. I sent out the handwritten letters till my hand cramped. 300 at a time there. It is interesting to be able to see just how it is that people that are in situations where they have knots that need to be untangled and it’s rewarding to be able to be in the position to where you can help alleviate them from their issues. Some people, you know, they have a situation to where they want to move, however, they’re in a bind whereas the conventional real estate agent isn’t the opportune route so we’ll go to the wholesaling route, be able to work with investors and then everybody makes out in the end.

Sean: [00:02:28] Perfect and how long ago since then did you move to the Bay Area?

Anthony: [00:02:33] So far I’ve been here for 5 months in total. Since then, I’ve talked to you 3,300 people and as a result of talking to all those people, I’ve made $3,300 in real estate commissions. So I figured just by the odds of going out networking ,talking to people, asking if they’re interested in buying or selling, by default if you take that $33,000 / $3,300, $10 for every point of contact I make. So my goal is to make $150,000 by January 1st of 2020 and I’ll do that by talking to 17,000 more people. By default if I hit that number, communicate with enough people by volume, I will achieve my goal.

Sean: [00:03:16] That’s awesome. I kind of like go over that. How did you even track that you talked to 3,300 people?

Anthony: [00:03:22] Oh absolutely. It just door knocking window at a time. I’ll go out from 8 a.m. to 8 p.m. Go out and talk to people in the community. They say that in certain neighborhoods, you can look up on the title company what the average turnover rate is so there’s specific neighborhoods where there might be a 10% turnover rate. You can check just buy the houses that have sold in the last year. So by default for every 10 people you talk to, one person is going to be selling whether the next year. So if you are in real estate, you know that it’s a prime opportunity, a prime place to not only send letters but go physically in person to be able to talk to these people, mingle, be able to make yourself a part of the community. So then whenever it comes time to sell, they know who it is that has the local knowledge will be a local resource.

Sean: [00:04:09] That’s crazy. So you door knock from 8 to 8 every single day, maybe not weekends.

Anthony: [00:04:14] Tuesday, Thursday, Saturday and Sunday and then it seems like going downtown is also a viable. For instance, it was in front of the safeway in Concord and I was talking to somebody. 8:00 at night, I had to make my goal of talking to 100 people and this person they say, Anthony as a matter of fact, I have been thinking about moving and selling the house. So sure enough we went to go look at it. Oh, it was a wreck and foundation issues andiIt was down to the studs in some areas. He was do it yourself but couldn’t do it himself. So he really needed to get out of a bind and sell it. So we were able to help him and be able to get the ball rolling. So you never know where you’re going to find people who are interested in real estate. So I’m just a matter of talking to as many people as possible.

Sean: [00:04:57] That’s crazy. So you say yeah go over 100. Is that like a 100 per day that you go door knocking?

Anthony: [00:05:01] Oh, it’s fun. It seems like the world reflects how it is that you are. So if you’re positive, if you have an upbeat attitude when dealing with other people, you have you had any thoughts on moving buying or investing, people, they typically behave in like kind to where they’re also in high spirits as well. Oh, actually I do know my brother-in-law he’s looking to find a new house in the area. Sure enough just by default. So it seems like it’s something that is worth the effort.

Sean: [00:05:33] That’s an amazing story. And again, the reason why I actually want to contact you in the first place is because I saw your Facebook post about how you now have a Meetup Group over in Danville and you were promoting a certain strategy which is to buy 4 plexes using an FHA loan.

Anthony: [00:05:49] So go ahead and talk about that. This house hacking in the bay using the FHA. Just by talking to a high amount of people, a high-volume, I realized that there’s a common situation that emerges. I talk to people and I say are you interested in moving? Are you interested in finding a new place to live having a place of your own? And the general consensus is that everybody wants to own their own property, however, they don’t believe that it’s affordable just because they don’t have that 20% down payment. So it’s a matter of affordability. I got to looking at the different strategies that people use in order to invest in the real estate and there are alternatives to having to put down that 20% down. You have a $1,000,000 property, $200,000 is a significant amount especially the Bay Area where price is prohibitive for a majority of people. In San Francisco, they say that 70% of people rent and 30% of people own their own house whereas I’m sure if the finances allowed it would be a 100% owning. So the idea of being able to allow anybody to be able to have a place to call their own, granted, you have to take the baby steps as far as the low down payment at the beginning. So the way that you can get your foot in the door, owning your own home regardless of your financial situation is by house hacking using low money down financing especially on off-market deals.

So the way is that you can buy a four-plex, live in one of the units, rent out  the other 3 so that the tenants will supplement your monthly mortgage payment because your monthly mortgage payment will be less, you’re able to qualify for a higher property so that you can afford more house at a smaller payments. That makes it more affordable for the majority of people in the Bay Area and in other markets to be able to get their foot in the door and start making property work for them instead of the other way around.

Sean: [00:07:50] It’s amazing. Have you actually helped any clients so far with that strategy?

Anthony: [00:07:54] In Southern Illinois, it’s interesting to see how the different markets are. There is a college town, Carbondale, Illinois in the midwest where the market is completely different than it is here in the Bay Area. There are duplexes that are $200,000 they’ll rent every month. You’re able to bring in at the end of the year $40,000 on this $200,000 property. So the cash on cash return is significantly higher than it would be in the Bay Area. However the prices in the midwest, they’ve stayed the same for the past 20 years. So 1997 the same duplex for $200,000 what it would sell for today, it would sell for the same amount 20-30 years ago. So it’s consistent cash flow. That’s where a model like FHA house hacking can really gain momentum because it’s easier to be able to cash flow as opposed to just having that rent supplement the monthly payment that you would otherwise have to pay. The idea is where I got it from Southern Illinois, where I’ve helped people I before I figured, why can’t we help people in this market. Now in the Bay Area, the prices relative to rent have outran the amount of rent that you can bring it from this property.

So similar rent of $40,000, a property here in the Bay Area, my cost $400,000 or $500,000 as opposed to the 200 price point in the midwest. Because the price point is so much higher here, it’s prohibited for a lot of people, however, they can facilitate buying their own property by using that FHA loan. Now, it might not cover the entire monthly payment whereas it would on a $200,000 property, however, it will make it so that the monthly payment they do have to come out of pocket at is less than they would have had to pay on rent on a similar property. So it just makes it to where they can get their foot in the door. They can live in this home until they can refinance once they hit that 22% equity point and then they’re able to reduce their monthly payment significantly and then ideally they can use that equity to be able to leverage it to a new property and then expand their real estate portfolio, achieve long-term financial benefit from the short-term sacrifice investing in the 4 plex today.

Sean: [00:10:14] Yeah, because I mean it’s like living in an apartment except now you own the property so you get all the benefits of owning a property like appreciation that pay down tax benefits like there’s so much good that you have from it and by using an FHA loan now, you have a low down payment requirement to get your foot in the door.

Anthony: [00:10:34] I think that house hacking is something that common place to where many people if they’re in the investing space understand the concept and they’ve heard of it before, however using the FHA loan to get your foot in the door, it is something I haven’t heard about so I wanted to touch on it especially. Using the FHA loan has several advantages over using 20% conventional financing. The first being is that you can leverage your money much more than with that 20% down. You only have to have 3 and a half % down. So $35,000 to leverage an asset that’s worth a million dollars. So it’s much more leveraged as far as the potential gains and appreciation that you’re able to achieve. It’s also easier to qualify for a majority of first time buyers, which is why 46% of first-time home buyers use the FHA loan. All they need is a credit score of 620 and above and they’re able to qualify for 3 and a half % down. If their credit is less than 620 which is the situation with some first-time homebuyers, then there are still able to qualify for an FHA, however, they have to put 10% down.

Sean: [00:11:44] Yeah.

Anthony: [00:11:45] The most fundamental difference by far is how your DTI is calculated, your debt to income ratio. With a conventional home, whenever the underwriter looks to see if they’ll approve or disapprove you for a loan, they look at your debt to income ratio. So anytime that the amount of debt that you have coming in over your gross income is above 43%, it will not fly with a conventional loan. However, it’s more lenient with an FHA all the way up to 55%. So it’s more lenient, accessible for a majority of buyers. And also it’s even more leveraged to the hilt because you’re able to use the income coming in from those tenants as part of that monthly income that you have coming in. So it helps bolster the amount of money that you’re bringing in and helps make your DTI a more favorable whenever getting approved.

Sean: [00:12:42] And for that income, do they use a 100% of the income of current rents, or is it only like 75% of current income?

Anthony: [00:12:48] That was an excellent question. They will take the amount of income coming in from the remaining units that you’re not currently occupying and then they’ll take a factor of three quarters. So they’ll take the rent from the other 3 units if in a fourplex and then based on 75% of that income, they will be able to find the conservative estimate of how much money you can expect to bring in on that property minus a factor of vacancy and any other expenses that are the cost of doing business.

Sean: [00:13:23] And what are the FHA loan limits? Because if you look at a single-family house, I’ve seen it be like $700,000 or so. In the Bay Area is hard to find a fourplex for 700,000. So how do you get around that issue?

Anthony: [00:13:35] That’s the most beautiful part of all especially in the Bay Area because the prices are so high. The limits of using an FHA loan is that depending on the amount of units. The price acceptability goes up significantly whereas a single unit in Contra Costa or Alameda County for the Bay Area residents here, you can buy a single unit for $726,000. However, as you increase to the duplex, the triplex, the fourplex, at the fourplex level, you can get approved for a property just under 1.4 million dollars. So you’re able to leverage your money significantly. You can buy a lot of property with 1.4 million. So it makes it just that much better to be able to live in a neighborhood that you’d otherwise like to live in and feel safe and whenever you’re resigning then.

Sean: [00:14:25] Where are the great locations to buy a fourplex? Because even if I want to do the strategy in say Sunnyvale, it’s still impossible because four-plex in Sunnyvale are like $2,000,000 or $2,500,000.

Anthony: [00:14:38] That might be further down the line of the Bay Area real estate investors trajectory. Whereas they might have to start in a lower more cost effective area such as San Jose or Hayward or ideally where there’s no rent control, Concord is the prime opportunity. The price point in Concord is much more affordable. The further you go out from San Francisco, it seems like property is less appreciation driven in value and more cash flow driven instead. Whereas you go towards Pittsburgh Vallejo, the price point is very much affordable compared to if you were in Sunnyvale or in Palo Alto Redwood City, those areas.

Sean: [00:15:26] Can you give us a case study of a property that you may have helped a client buy? How big was the unit? Where was location? How much would it cost? And how much are the rent?

Anthony: [00:15:36] Absolutely, recently met an individual at an open house and they express interest in getting their foot in the door being a real estate investor. They said in total they had enough money for a $45,000 down payment and they brought in a $150,000 a year. So this individual we went around and we found a property as soon as they came on the market this four-plex. Was priced at 1.3 million dollars underneath that 1.4 million dollar threshold it brought in. Two thousand six hundred dollars every month in rent from the other three units. So all factors considered whenever the loan officer looked at his debt to income ratio.

It came in at 48 percent which means that he was able to apply for the FHA loan. Whereas otherwise he wouldn’t have been able to with conventional 20% down whenever looking at the total income from the property. [00:16:39] $2,600 in those three units coming in every month compared to the expenses pity principal interest taxes and insurance of a combined $8,800 from the FHA loan and then a conservative estimate on repairs and capital expenditures of eleven hundred dollars a piece and then a vacancy rate of.

Seven hundred eighty dollars a month on this property all in we saw that based on the total income compared to the total expenses. He would have to be out of pockets slightly under $4,000 a month. Whereas if he were to take out a conventional mortgage on the same property, it would be prohibitive to be able to get his foot in the door because he didn’t have the down payment

Sean: [00:17:28] and his Piti would be high like he’d have to pay more on a monthly basis. Now you have other tenants helping you supplement your own living.

Anthony: [00:17:36] For the time being it was the better way to be able to give a foot in the door. So as time goes on once he accumulates equity in the property and he’s able to pay off the payments. Once he reaches that 22 percent equity rate. Then he’s able to refinance into a conventional loan. And then he no longer has to pay the mortgage insurance premium that he had to pay with that FHA loan. So before hands it was about ten percent of the monthly payment $888. On a total pity of 8800 yikes. So whenever he was able to refinance it significantly reduced the pity down to six thousand dollars.

So at that point his he was able to cash flow much more significantly to wear. Because that rental income State exactly the same from those three units, he was able to bring in the same amount of money while reducing the monthly payment significantly the end result was is that he was able to own this property only having to pay a thousand one hundred fifty dollars every month as opposed to the attack straight that it was before because he had less equity in the property.

Sean: [00:18:44] Does this guy still live in the property or did he move out and rent out that fourth year?

Anthony: [00:18:48] You only have to live in the FHA property if you use that financing for 12 months, so the strategy was is that he was able to move out and rent the fourth unit for $2,600 so that he was able to move into an apartment for two thousand dollars a month in rent a net cash flow of six hundred dollars coming in because he made that decision.

Sean: [00:19:10] Wow, great. I mean if you do house hacking the right way basically you to live for free.

Anthony: [00:19:16] This is true. You have all the benefits of owning real estate and partaking in the appreciation, which is something that the majority of Bay Area investors have seen increased. I’m over time at a rate of five percent over the course of the last 20 years. So owning the property. You have the benefits that you wouldn’t otherwise have with renting whereas the tax benefits of paying the interest on a mortgage is something that’s taken out of your total income. So it is something that is deductible from your taxes. So for every 10,000 dollars you pay an interest to the bank on that mortgage depending on what tax bracket you’re in.

If you’re in the twenty percent tax bracket, you’re basically able to save two thousand dollars in taxes for every $10,000. You have to pay in that interest on the mortgage. So that’s something that you don’t have whenever you’re paying rent just because that money is just hemorrhaging out of your pockets instead of being able to hold on to and enjoy the benefits. Tax-wise of being able to deduct some of that necessary expense. Yeah. And do you know where he bought this property? You said? It’s cost one point three million dollars. Mmm. So it is in Oakland area. It is something to wear the properties in this area. Sometimes land in Opportunity zones, which is another essentially a double whammy that makes this strategy even more effective. So depending on what area you’re investing in they’ve recently developed opportunity zones where the poverty rate is 20% over which also correlates were typically the best cash flow deals are aka the hood so you invest in areas that are in Decline. Economically and by investing in these areas and by rejuvenating them you have tax incentives as a result.

So for instance if you were to buy a property for a million dollars and one of these opportunities owns and then reinvest another million dollars in it over the course of 10 years you’re able to sell that property capital gains tax free at the end nice. So. Instead of the 1031 exchange which a lot of investors use which is essentially just kicking the can down the road because inevitably they will have to pay those capital gains tax on the property. It makes it so that it is more. Excellent, as far as the numbers the way are calculated just because it makes it so much better. They don’t have to reinvest the money into another property in the future because they can clear out all the money that they put into that property and don’t drip any capital gains tax on it.

Sean: [00:22:05] Yeah, so thanks a lot for that comprehensive guide on using the on buying four-plex with the FHA strategy. Do you have anything else you have to say about that topic

Anthony: [00:22:14] as far as buying properties on the MLS compared to buying them off Market? There’s a significant difference in the amount of return the feasibility of being able to use this strategy. going and meeting with other local investors at meetups and talking with individuals who are in tune with a local market real estate agents and people who you’ll be able to find wholesalers perhaps. And investors at these meetups so that you’re able to understand what the deals are in a local market by investing in those you will have a better chance of finding a property that is undervalued something where the numbers will work a better in your favor and then as a result. Be able to make this strategy work better in your favor. So before going and buying retail property, I’d say that it would be worthwhile to network with other Professionals in your area other investors who are already doing the strategy house hacking or owning multi-unit properties so that you might be able to get in Insider scoop on Local Deals. That would be in your benefit.

Sean: [00:23:36] So just to summarize if you looking to do the strategy. Go to meetups meet other investors meet other agents find out what properties are kind of floating around there off market. And then when you bite off Market, you can hopefully get it at a substantial discount so that we can do the strategy. All your returns are boosted because you got it such a low price

Anthony: [00:23:54] exactly. You have all the factors working your favorite to help lead to Financial Freedom that quicker

Sean: [00:24:01] nice. So I also noticed that you have your Meetup over in Danville. I was wondering what topics do you cover? And what is the purpose of you hosting those meetups

Anthony: [00:24:09] the primary person who would be able to benefit from this Meetup is a new investor that is interested in being able to get their foot in the door with investing by using low money down financing on off market and Deals this type of person who might be looking for. The other foot in the door with real estate investing by using low money down financing on off-market Deals. They would be able to learn more about investing strategy while also networking with investors in the area and be able to learn more about the financing to where they won’t have to put as much money down be able to find an off-market property to be able to use this strategy on nice.

Sean: [00:24:57] And are you currently just working as agent or you’re also doing investing as well?

Anthony: [00:25:02] The goal is by January 30th of 2022 use this strategy in motion to be able to buy my own for Place property and this way by establishing long-term relations with other investors being able to include them on making deals happen in the Meetup atmosphere. I will hopefully be able to establish. Credibility with local investors in this area to where when the time comes when I’m ready to pull the trigger on an investment. I’ll already be a familiar face and hopefully be able to get some Insider tips on the best deals in the are

Sean: [00:25:41] awesome. And so what advice can you give for listeners?

Anthony: [00:25:45] I’m saying for somebody who is just starting out and interested in investing in real estate. Using the FHA loan in order to house hack is something that is a viable strategy for the right kind of individual to be honest. There are certain lifestyle decisions that you have to go in with both eyes open investing in real estate, especially how sagging there are certain responsibilities that you have when otherwise if you were to just rent or. Own your own single-family home you otherwise wouldn’t have for instance living in the same four-plex as three of your tenants. You have to be the landlord and have to deal with those responsibilities. So if one of your neighbors knocks on your door in the middle of the night saying they have a leaky pipe or. Water coming in from the roof. Then that’s something that you’d have to deal with them and have to maintain as your responsibility is the landlord. Whereas if you otherwise weren’t investing in real estate that wouldn’t be an issue. It’s the concept of delayed gratification. So if you’re willing to live the lifestyle of being a real estate investor, especially living so close to the tenants that you’re working with. For the short term you’re able to reap significant long-term Financial gains that will be able to benefit you in the long run and make you better off and if you otherwise would have decided to rent.

Sean: [00:27:11] Nice, you know, I totally forgot to ask you you talked about all the pros. What are the cons of using the strategy?

Anthony: [00:27:17] Mmm. I’d say the short term standard of living that you have to expect with being a landlord depending on what neighborhood you’re buying this property in. It might be a neighborhood that otherwise you wouldn’t be interested in some people they invest in neighborhoods to where the best cash flows are. However, it might not be the best school districts. It might not be the best area to live in as far as crime and so on. So there’s a certain sacrifice of short-term standard of life just because you have to live in an area where the property prices are lower in relation. So. If you’re willing to have short-term sacrifice and be able to go through with delayed gratification, then in the long run, you’re able to read the financial rewards of real estate investing.

Sean: [00:28:09] That’s right. I would say also PMI is a killer to $800 a month is pretty crazy. But you’re getting your talents to help you pay for that. So I guess it’s a wash at the end of the day.

Anthony: [00:28:21] It would be much more desirable to just get your foot in the door with that 20 percent financing. However, the majority of people I talk to in the Bay Area. They just don’t have two hundred thousand dollars even $100,000 to be able to get started. Right? So just having that three and a half percent down being able to leverage their money that much more this is the. The short-term step to be able to make it to the next level where they’re able to get that 22 percent equity in the property. And then once they refinance it is smooth sailing from there

Sean: [00:28:53] And I’ve heard also that that 3.5% down doesn’t necessarily have to come from the borrower per se it can come from a family member this something to do with FHA. I’m not sure if that’s true or not.

Anthony: [00:29:04] The beauty of going to these networking and real estate investing meetups is that you’re able to find other people who are in this space who might be willing to do creative financing. For instance. If you establish rapport with another investor and they have a four-plex that are thinking about selling. They might be able to cover that three and a half percent down for you in the closing. So they might be more willing to work with you to make it more affordable so that you might be able to get in for as little as zero down just because the seller is covering all those closing costs and a three and a half percent.

Sean: [00:29:38] Right and speaking of 0% down. I’ve heard that since you know FHA and VA loans are pretty much the same thing. You can actually use a strategy with a VA loan and then basically get it for 0% down. If you are a veteran and qualify.

Anthony: [00:29:50] If there are veterans that are listening that is absolutely a viable strategy. Being able to put zero money down is even easier to be able to get your foot in the door. So I highly recommend that strategy as well.

Sean: [00:30:04] Nice. Say I want to thank you so much for your time, and they just know everything about this strategy. How can people contact you?

Anthony: [00:30:10] If they’re interested in by all means you can find us on meet up with the Financial Freedom Real Estate Investors. My name is Anthony Barbato and I work as a real estate agent here with Keller Williams and Danville. My phone number is 9 to 5 to 9 for 0383. I’d be happy to talk about real estate investing any day of the week.

Sean: [00:30:31] Awesome before I go I want to ask another question. You kept mentioning 22% to refi out. I thought it was only 20% Where did the extra 2% come?

Anthony: [00:30:40] What the bank will look at is the make that sure you’re just over the hurdle to where you be able to have at least twenty two percent equity. So, where’s the typical loan of 20% if you look at the FHA loan you have to be able to clear that hurdle and then the additional 2% in order to refinance just so it shows the bank that you’re clear over there.

Sean: [00:31:02] Gotcha. Well Anthony, thank you so much for being on the show today. I really appreciate all the information you talk today. Looking for you. See you around next time.

Anthony: [00:31:09] Thank you so much.

Sean: [00:31:10] All right. Thanks.

Here are some of the key takeaways I got from speaking to Anthony FHA Loans allow you to purchase a residential property for only 3.5% down. It needs to be an owner occupied property, but you’re allowed to buy a four-plex with it and live in one unit and rent out the other three. An FHA loan allows you to a larger load and with an FHA loan. Your debt to income ratio is increased from 40 percent to 55 percent. And you’re also able to use 75% of the rents from the other three units as part of your income towards that ratio. So if you’re looking to purchase your own property in the Bay Area, this is definitely a very viable strategy and one that everyone should be looking into. If you have more questions about this. Feel free to contact me or Anthony and will give you as much information as you need. You can find the show notes and the full transcription on everything re i.com. Hope you learned a lot. Thanks and have a great day. This was another episode of the everything real estate investing show who Sean. Can you enjoy the show? Leave us a five star rating? I’ll take less than a second and will help a lot. You can contact me as Sean Penn Realty at gmail.com. That’s s EA n PA n re a lty i gmail.com. Thanks and have a great day.