“Our love and passion for real estate is fueled by one word: freedom.” Scott and Drew Hoefler are twin brothers who invest in the Twin Cities. They didn’t start out with a goal of becoming real estate investors – in fact, they started as commodities traders for Land O’Lakes.
After falling into real investing by accident, today they run a thriving real estate business and have reached financial independence.
Here’s exactly how they did it, mistakes and all.
The House Hunt, The House Hack
As single millennials looking to buy a home back in 2013, Scott and Drew decided to pool their resources together. Neither made a massive salary, and their plan was simple: buy a single-family home with plenty of bedrooms, so they could rent out rooms to their friends and lower their mortgage costs.
But their parents had an even better suggestion. “When we told our parents of our great idea, they said, ‘Why don’t you buy a two-flat?’” (That’s the local lingo for “duplex”.)
If your teenage years are defined by the certainty that your parents don’t know anything, your twenties are when you realize that maybe Mom and Dad do know a thing or two after all.
“We quickly realized that we could live in one side, rent out the other side, and cover our mortgage… we were all-in.”
They set out to find the perfect duplex to house hack.
The Hoefler Twins’ First Duplex
“The price was $208,000, in the up and coming ‘Arts District’ in northeast Minneapolis.
“This was 2013, and the beer scene was just taking flight in Minneapolis, and before we knew it, we were in the center of all the action.” (If you’re curious, check out the Arts District and other Minneapolis neighborhood data here.)
But in their haste to buy a duplex in this newly-trendy part of town, the Hoeflers ran into their first obstacle.
“At first look, Drew and I had trouble seeing the lower unit because of issues with the renters. We put our offer in based upon seeing the upstairs unit only. Once we finally got into the property, we noticed that the lower unit needed some work.”
Uh oh.
Fortunately, the unit only needed cosmetic repairs, which didn’t prove budget-killing. They non-renewed the downstairs renters and set to work updating the unit.
“We got rid of the drop-down ceiling, adding eight inches throughout the unit, and repainted the whole thing.”
And financing? How did they pay for it?
“Our financing was an ‘American Dream’ program that was an owner-occupied conventional loan financed by U.S. Bank. Great program. We rented the upstairs unit out for $1,300 from Day 1.”
It was enough to cover their mortgage, allowing them to “live for free.”
Of course, that was a few years ago. It turns out the brothers were right about the Arts District rising in popularity: today that unit rents for $1,700.
Rinse, Repeat: The Next Few Investment Properties
Scott and Drew quickly realized there was nothing stopping them from repeating this process to buy another duplex. They were now living with almost no housing costs, so they started setting aside their extra money to buy more investment properties.
When you buy a property with owner-occupied financing, loan regulations require that you live in it for at least one year before moving out and leasing it.
Which is exactly what the twins did, for the next several years.
They repeatedly bought small multi-family properties with owner-occupied financing, moved in for a year, and leased out the other unit(s). But this strategy comes with several drawbacks.
First, it imposes a speed limit of one property per year.
Second, you have to actually live in the property. That means moving every year, which gets tiresome, and fast. It also means you can only invest in neighborhoods and properties where you wouldn’t mind living for a year.
Finally, there are credit and financing implications. Conventional lenders become wary of borrowers with four or more mortgages on their credit report, and in many cases refuse further loans.
And what if you want to get married? Have children?
Which is exactly what happened: Scott married Jennifer, who shares his enthusiasm for real estate investing… but not for hopscotching from duplex to duplex every year.
It was time for a shift in strategy.
First True Investment Properties
Jennifer became the third leg of the Hoefler investing team. The three of them had been stashing cash, and were ready to start buying properties without the crutch of owner-occupied financing.
They hit the ground running, buying two single-family properties in rapid succession. The first “was a two-bed one-bath single-family on the edge of North Minneapolis/Theo Wirth Parkway with a ton of charm and character. Purchase price was $107,000, and rent is $1,350.”
But the second brought a twist: “The owner was tired of his 535 square foot one-bedroom single-family home right off the St. Croix River, so instead of him selling it to those ‘We Buy Ugly Houses’ people, we bought it for $65,000.
“Initially, we planned to rent it conventionally at around $900, but while we were turning the place over (light cosmetic updates), we listened to a podcast episode about Airbnb.” Halfway through the episode, Scott was sold.
Some units just make better short-term rentals, depending on the rental market data and numbers!
Investment Property Strategy
“Most of our purchases required what we call ‘heavy cosmetic work.’ Paint, cabinets, floors, bathrooms, light fixtures… we do most of it ourselves.”
They’ve also tried complete renovations, which haven’t always gone according to plan (more on that momentarily). But the strategy is a classic one: buy and renovate using hard money, rent the property, refinance it to a 30-year fixed loan, rinse and repeat.
“Our business model is to find properties that are undervalued from a rental perspective, and do heavy cosmetic work to push market value up. Or find complete remodels where we can capitalize on the potential ARV (after-repair value).”
And despite a few setbacks, it’s worked. “Our properties net cash flow about $350-$400 per door.”
Misfires, Mistakes, and Misadventures
What hasn’t gone according to plan?
“Our first complete remodel was a bust. We had issues with contractors, blew our budget, and eventually ended up with a not-completed home that was overpriced.
“Our saving grace is that we went into the project with plenty of backdoor options. We knew we purchased in a fantastic neighborhood that is seeing solid growth and that the rental market would be strong enough to break even or make a return.
“We have a thousand lessons learned from this project. The main one is ‘Do not make decisions based out of need.’ Once we realized we were in over our heads, we made many decisions emotionally based off our current need and failed to think through our options and the long-term effects of our decisions.”
So what happened? How did that property’s story end?
When the renovations were all completed, the Hoeflers had spent more than the property’s ARV. Rather than selling it for a loss, they decided to keep it as a rental and let it appreciate.
“We still own the home and rent it out for a small return.”
At least their cash flow is positive! But it illustrates one advantage of real estate investments over other asset classes: your options don’t end with “buy” and “sell”. They can still earn rental income, and sit back while rents and values rise. And if they wanted to, they could implement a creative exit strategy such as a lease-option.
What’s Next for the Hoeflers?
“Because of real estate, Drew and I have been free to live the life we choose.
“The stability that real estate investing has brought to our lives meant we have been free to change careers, build businesses, travel, and ultimately give back in ways we never thought possible.”
The Hoeflers now run a business called The Duplex Doctors, selling small multi-family properties to other real estate investors in the Twin Cities.
They could retire, but they’re having too much fun running a real estate investing business. “The only thing stopping us from living a life of unabandoned freedom is ourselves!”
And their investment property portfolio?
“Altogether, along with my wife Jenny and my brother Drew, we own eight total properties with fourteen doors. We are about to close on another four properties with seven doors.”
Any final pieces of advice for other real estate investors?
“Sit down and think through your ‘Why’ for purchasing real estate. Money is everyone’s first answer. It’s an obvious reason. But in order to be successful in this business, you need a deeper reason than the desire for money.
“For me, my time is my most valuable resource. My hope is that real estate will allow me the capacity to give back to this world in ways a standard 9-5 job can’t.”
How many doors would it take to cover your expenses and reach financial independence? How long do you anticipate it taking? Share your goals below!
To make your dream of financial independence come true through real estate investing, start your 14-day free trial with Mashvisor here.