Investing in Crazy Expensive Markets – How Lucas Hall Invests in Washington DC Rental Properties

In today's podcast, Lucas Hall has been investing in Washington DC real estate for a while now and has figured out how to do it successfully.

Table of Contents Show

What got you started investing in real estate and rental properties?

  • Lucas liked a girl and thought she was cute, and he saw her once a week at a church function. She bought a house when she was 23 years old, and he didn’t know what to make of it.
  • Lucas decided to hire a realtor to find a house in her neighborhood to buy. He decided to house hack and get some roommates to pay for his mortgage. That’s what she was doing and he thought this would impress her.
  • He did it and bought a house about seven blocks from her. That’s how he got started with his first rental property. They started dating shortly after that and he married her about three years later.

NOTE: House hacking is a way to buy a house with the idea to eventually have it as a rental property, or get people to move in with you and pay your mortgage. Listen to podcast episode #016, How to House Hack to Start Your Rental Business, to find out more about house hacking.

What was your next property? What were the next steps?

  • Lucas and his wife each had their own property, but eventually living with roommates goes sour. Lucas’s house was on Capitol Hill in Washington, D.C., and it was a six-bedroom row house that was about 100 years old.
  • Lucas had a lot of rooms that he filled with roommates, and they were paying about $600 or $700 a piece to have their own room and share common areas. It really did cash flow better than a single-family home.
  • Eventually, he got tired of living with five other guys. He took the equity from the house and bought a studio right next to the Metro stop. It was two blocks from the Congress and Senate buildings and he knew he could fill it with interns and Capitol Hill employees.
  • Lucas put a small down payment on a studio he lived in as his primary residence and then lived there until he got married. He had two properties before he got married and she had one.
  • Lucas grew up thinking that you buy one house and live in that one house for the rest of your life. It wasn’t until he met his wife that he learned about rental properties.

This was Washington, D.C., right?

  • Yes, and the average price of single-family homes is $600,000 to $700,000.

Let’s talk a little bit about your business model and how you found the property, how you bought it, the size, rents, etc.

  • The six-bedroom house is in a great area for renters. A lot of people right out of college want to live in community with others and want to offload some of the cost by having roommates.
  • Lucas knew he could command a decent dollar amount for it. Commonly there is the one percent rule: If the house is $100,000, you need to get about $1,000 in rent and that would make it profitable and a good investment. In D.C., the property is $600,000 and you need to get $6,000 a month in rent. Generally speaking, you cannot get that amount if you rent it to one family.
  • In high rent, high density cities, it isn’t necessarily a percentage game, it is a bedroom game. The house won’t cater to a single-income or dual-income family, because they aren’t going to want to pay $6,000, they will want to pay $3,500.
  • He could legally convert his basement into two extra bedrooms and he could rent it out to roommates who want to live together and they each pay about $800 or $900. They are all under one lease, they all pay Lucas electronically, and they can all see each other’s rent amount.
  • Lucas is able to get about $5,400 per month for that property and his mortgage is about $4,000 per month. After saving for expenses, he is profiting between $800 to $1,000 per month. This is almost unheard of with a typical single-family home.

Are taxes really high in Washington, D.C., and is that calculated in your numbers?

  • Taxes are incredibly high, but that cost is built into the numbers.
  • The $4,000 mortgage includes principal, interest, taxes, and insurance.

When you have multiple people in one property, the worry is how to coordinate all of it. Is it complicated? When the property turns over, how do you fill it?

  • Lucas treats the six-bedroom home as if he is renting to one family, under one lease. The lease is under joint and several liability, which means it is all for one and one for all — they are considered one unit. If one roommate leaves, the other roommates are still responsible for the monthly rent.
  • Lucas doesn’t worry about the bedrooms. His wife has a five-bedroom home that has been leased over and over again, and what happens is a few roommates that stick around fill the bedrooms with other people they know. Lucas will either modify the lease with the new names at renewal time or at the point when they move in.
  • It is not his responsibility to fill the rooms, it is the roommates’ responsibility to keep the rooms filled and pay the rent.
  • Lucas usually rents to people who are right out of college who have moved to D.C. and are looking for their first job. They typically try to keep the house nice.
  • There are not usually problems, but when there is a group that leaves in full, they typically don’t clean as well as they should. Lucas has to spend about double on cleaning and usually needs to replace things like toilets and fix holes in walls. It is all easily done with the amount of rent he is collecting, and he has a group of contractors he works with who know what to do.

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Is that something you would look for — to keep replicating that model in the D.C. area?

  • Lucas liked that business model and it was good for a time, as it was profitable, but that property will always be a group house property. It will never convert to a single family property. As a result, he will need to find new tenants every one to two years.
  • His single-family properties sometimes will have the same tenants for five years. That is the lifestyle he is trying to build now. He wants something that is more hands-off, so he doesn’t need to worry about it every year.

What was going through your head as you were buying your first property? Was it really hard to do?

  • It was 2005, when Lucas bought his first property. Around that time, lenders were passing out money left and right. It was not hard to find a loan that was 100 percent financing and that is how he bought his first property.
  • That is not possible in today’s world. The closest you can get is about 3.5 percent down with an FHA loan. This is a great alternative, because you can live there first and then turn it into a rental property. Anybody can save 3.5 percent — you just need to save.

Was it hard to get past that initial thought, buying your first property? Did you have concerns about getting it rented?

  • It was scary. Lucas had watched his wife buy her house, fill it with roommates, and live there for free, but there was still a mental barrier. The purchase price was high.
  • There were all these voices in the back of his head, but it was a math equation. You have to put the emotions aside and decide that you are going to be an investor and trust in your ability to learn and do it right. You just need to take the leap. The hardest thing is taking action. If you don’t take action, you will never do it. Take baby steps — research, look at properties, talk to mortgage brokers, etc.
  • The process is simple. It all about getting the guts to pull the trigger and actually do it.

Are you investing now and where do you see your real estate business in the future?

  • Lucas just moved to Colorado and he has a mental block that he likes to invest in the cities he lives in. He likes to be close and to be able to drive by the properties to scope them out. It is good but it isn’t necessary.
  • He wants to invest in Denver, but he wants to get into a bigger asset class. Instead of investing in single-family homes, he wants to explore multi-family and large multi-family homes. He has been looking into apartment syndication.
  • Lucas is considering a passive investment in an apartment purchase with another investor, by putting in $25,000. This complex is located in Fort Worth, Texas.
  • Lucas will probably buy a single-family home or a duplex in Denver in the next couple of years, because once you start doing it, it is hard to stop. It is kind of an addiction.

What are your favorite things about rental properties?

  • Lucas hasn’t found another investment that gives back as much as rental properties. He likes them because they cash flow, if you purchase them correctly.
  • Over the course of the life of the mortgage your tenants will be paying you rental income and they will be paying your mortgage. Hopefully that income will cover the mortgage and then some, so you can keep the profit but they will eventually pay off the mortgage. At the end of the mortgage, you get to keep or sell a paid-off property. It almost pays for itself three times over.
  • By the time you pay the mortgage off, it will be worth double or triple what you paid for it.
  • Stocks and mutual funds are great, but they aren’t quite that good or quite that fun.
  • Rental properties take care of you and the tenants who live there.

Have you had any failures? Can you give us one failure that sticks in your mind and something we can learn from?

  • Lucas used to buy condos in D.C., because they were cheaper and he could get them for about $200,000 to $300,000, rather than a house for $600,000 to $700,000. They were more affordable when he was strapped for cash.
  • Lucas learned that condos are not often the best rental properties, because they are burdened with heavy condo fees and HOAs that control what you can and cannot do.
  • If you are using a condo as as rental property, the HOA can change the rules overnight about allowing rentals or the percentage of rentals. All that can change on a dime and you can’t do anything about it.
  • Condos don’t appreciate as well as houses. Lucas had a condo he purchased for $330,000, and after 12 years he sold it for $370,000. On that amount of cash $40,000 isn’t much appreciation, and it wasn’t a good investment. While renting it out, he was barely breaking even.
  • Lucas will probably never invest in condos again, because they don’t have the growth potential that a single-family home or a duplex might have.
  • In podcast episode #024, Michael purchased a condo and found out after the purchase that the HOA barred him from renting the property. Watch out — HOAs can be rough!

Before you started investing and met your now wife, what would you tell your pre-investing self what to watch out for and what to do?

  • Lucas would tell himself that real estate is the primary means to make money and to focus on it.
  • He would tell himself to diversify his portfolio outside of real estate. If he were 22, he would tell himself to take $2,000 per month and put it in a mutual fund until he was 30 and then stop. Then he would tell himself to focus completely on real estate and buy properties that make sense based on the numbers and hold those properties as long as he can.
  • You would have two huge nest eggs you can rely on. If one of them fails you have another one to fall back on.

If you were to start over from scratch and you had $1,000 to your name and no properties, but you had experience, what would you do to get back on your feet?

  • Lucas would save the $1,000 and use it as an emergency fund. He wouldn’t invest it, in case something happened.
  • He would get as many part-time jobs as he could, if he didn’t have a really good full-time job. He would work hard until he had about three to six months of expenses, and then he would consider investing. You have to hustle!

What non-real estate book would you recommend to everyone that they should read?

  • Everyone says Rich Dad Poor Dad.
  • The book that changed Lucas’s mind about real estate and personal finance is Total Money Makeover, by Dave Ramsey. It teaches you basic personal finance at a level your grandmother would teach you — don’t spend money if you don’t have it and save up that emergency fund.

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