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Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
Well I’ll be darned. What’s old is new again.
Case in point - I saw an article online recently that talked about “house hacking.”
I like to keep up on real estate investing trends, so when I saw that I thought – Cool! A new investing strategy! So I jumped in to take a look.
Boy was I disappointed.
It turns out that “house hacking” is simply guru speak for buying a property with two, three or four units, and living in one of the units and renting the rest.
Not exactly something new. Or innovative. Or even prudent for a lot of people.
To begin with, if you’ve owned a rental property for, oh, more than 30 seconds, you know in your gut that it’s a far cry from being all rainbows and lollipops. Especially if you manage the units yourself, as this “hacking strategy” presupposes.
It’s work. Sometimes a LOT of work. And it can be very expensive.
Yet these folks claim that it’s an excellent strategy for “the young and single with open minds and lifestyle flexibility.”
Seriously? I’m shaking my head so hard on this one that I have a headache. I’ve owned rentals since 2004, and the terms “landlord” and “lifestyle flexibility” are about as opposite as any two terms could be.
Why? Because having even one rental that you manage yourself can be like having a boat anchor leashed to your ankle.
And guess what? One “house hacker” they quoted said exactly that….
"Now that I'm doing it I realize there's a little more work to it. You really have to develop that mindset and commit."
Imagine figuring that out AFTER you’ve already bought the property.
The author of the article went on to say that although the house hacker “had to spend $8,000 on repairs and upgrades to make the property tenant-ready, he hasn't minded living next to his renters. Their rent, plus the money from a housemate in his side of the duplex, allows him to live rent-free plus collect an extra $250 a month.”
So let’s get this straight. He bought a duplex, put $8k into it, rented out one side AND took on a roommate in his half, all to make $250 per month?
That’s barely enough to put into a reserve fund for ONE unit. The fact that there are probably two furnaces, air conditioners, and hot water heaters makes it even worse.
Doesn’t sound like such a great deal to me. Especially for someone who’s “young and single with an open mind and lifestyle flexibility.”
To make matters even worse, the author stated that the house hacker bought the place for $240k, and only put 5% down, meaning he’s hugely leveraged. It’s not going to be fun for him when he has a vacancy on the other unit and he has to come out of pocket to cover his mortgage payment. One month of vacancy will eat up four of five months of his puny $250 per month cash flow.
CNBC Logic
Since it’s CNBC, they had to throw in some meaningless statistics to make this sound attractive.
Their biggest reason to be a house hacker?
Well – they stated that:
“Owners can benefit from as much as a 7 percent annual appreciation rate, which is the same rate at which rents are rising nationwide.”
I don’t know of a single rental property owner who: a) buys solely on appreciation or b) uses “nationwide” rent numbers to price their units. It’s just not done in most places because of what happened in the crash.
The second reason they use to bolster their case is that:
“Sales of owner-occupied properties with two, three or four independent units — were up 24 percent in 2015 over 2014.”
And that:
“The values of multiplexes are up 21 percent — also slightly more than single-family homes. The fastest growth is among four-unit properties, where sales increased 52 percent in 2015 compared to 2014.”
So looking at this from the opposite perspective, they’re suggesting that you buy assets that have gone up in value over 20% in the past year.
I don’t know about you, but I don’t think that chasing an overheated market is a good thing.
Listen – buying rental properties is a good thing. It can even be a great thing. But it’s not something that you jump into without doing your homework. Especially when you’re young and single.
Speak Up
What’s your take on this house hacking? Share in the comments section below.
Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.