When Danaus Chang's parents immigrated to Texas from China decades ago, they started investing in real estate as a means to build the kind of wealth their teaching jobs couldn't provide.
So the asset class has always had a presence in Chang's life. His parents encouraged him to buy a property as early as he could, and that's exactly what he did. In his early 20s in 2003, after graduating with a degree in finance from the University of Texas, Chang bought 4-bedroom property in Austin, Texas with a primary residence loan, which are typically available at lower interest rates than investment loans.
But after he made the down payment, Chang never paid another dime on the property. That's because he moved into one of the rooms and rented the other three out to friends — with whom he was upfront about the arrangement — whose combined rents paid the entirety of the mortgage payment, and more. Chang, who is now 42, said it was a win-win because he was able to offer them relatively cheap rent.
It was Chang's first experience with "house hacking" — having multiple parties live in a rental property — a strategy that would inform the rest of his path in real estate investing, and help him scale his portfolio.
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House hacking
After a few years of living in his first property in Austin, Chang started working a job in the tech sector in San Francisco. After buying his first property, he started diligently saving money to sink into other properties.
With his W-2 income, as well as the income he was getting from his four-unit property in Austin, he was able to buy two more properties in the Austin area (one of which has four units), as well as one in Fort Worth. In addition to the properties appreciating in value, rent prices have also increased throughout the years, growing Chang's free cash flow.
Fast forward to 2019, Chang and his wife were looking to buy a property in San Francisco to live in. Instead of buying a one-unit condo, they were able to buy a large multimillion-dollar house in the city's famous Alamo Square area because they hacked the house into four different units. This allowed them to live in their unit for free as the other tenants covered the mortgage payment.
"I was kind of looking at it, and I was like, 'oh man it would be so cool to be able to afford something like this.' And I started doing the math and then talked to a mortgage person, and he basically was saying, 'If you rent out some of these properties, you can use that income against your W-2 money, add them all together and pool it, and you can afford to get this multi-million-dollar property," Chang told Insider on Monday.
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"And that was a huge surprise to me," Chang continued. "It's something I don't think everyone knows about. You can hack your way even in large properties and multi-million-dollar properties."
In other words, Chang was able to qualify for such a large mortgage because he was able to show his plans to divide the house into units.
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Chang and his wife have since moved out of the property and renting out their unit, further adding to their excess cash flow.
Chang's portfolio of 11 units now brings in over $160,000 in free cash flow per year, according to internal records viewed by Insider.
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Why you shouldn't be scared of leverage — and how to use it
Some caution against building up too large of a portfolio of properties. If an economic downturn comes, you could lose tenants and rents could fall, and you will be stuck with the bill for the mortgage payments, the argument goes.
But Chang, who recently co-founded a real estate company called Awning.com, doesn't see it this way. While he said there are some bad investment properties on the market right now with prices having soared, investors should be well-positioned as long as the properties are in areas with growing populations and good supply/demand metrics.
He cited Austin as an example.
"Even if you lead up to this craziness [in terms of soaring home prices] that's going on in Austin, there was a reason for that. It's not just that Austin's a cool city...but there was major job growth," Chang said. "Tesla was in there before Elon [Musk] even said he was going to move there. Apple had already built this amazing campus."
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He also said not to focus on cash flow at first, but instead on building equity and scaling.
For example, Chang advised prospective investors who have a chunk of money saved up not to put as much as they can into a down payment so they can maximize cash flow. Instead, they should spread it across multiple down payments for different properties, he said.
"Rather than putting as much cash down as you can, it's ok to be able to take debt on," he said. "As long as the rents can come close to or cover the mortgage, it's basically a free house after that. And then rental income will increase, and that's where your positive cash flow will start to happen."
Once this cash flow increases, it will allow the investor to further scale as their income will be higher. The built up equity also allows for options like cash-out refinancing to buy other homes, also known as the BRRRR strategy (buy, rehab, rent, refinance, repeat).
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Having more assets also allows for better deals down the line in terms of insurance rates, contractors, and property management fees, he said.
"At the end of the day, if you're able to leverage your portfolio, your assets, that's how you start to see even more exponential growth," he said. "But that all can't happen unless you start to leverage your time and resources and money as well."
