
House Hacking: It’s Never Been About the Cash Flow
House Hacking: It’s Never Been About the Cash Flow
By Patrick Allen
As investors, we live in pretty challenging times. Renters and would-be Home Buyers alike are still trying to find their feet (not to mention finding some Affordability…) after a surge in home prices and rental rates brought on during the Pandemic, followed by a historic hike in interest rates in 2022 which sent mortgage rates from around 3% to over 7% in a 10-month period. The result: 30-year lows in homeowner affordability, extended weakness (if not outright declines) in Median Home Prices and among the lowest transaction volume relative to population; on par with the depths of Great Financial Crisis of the early 2010s and the Savings and Loan Crisis of the 1970s & 80s.
We all know to be “greedy when others are fearful, and fearful when others are greedy”, and a pragmatic buyer can see the advantages in today’s market dynamics: more homes for sale means more motivated sellers, more buyer leverage in negotiations and more time to dedicate to proper underwriting. It gives us the ability to “buy deep”, to be more meticulous in finding good deals with intrinsic value, and to build up our reputation as among the few who are actually still making the calls, analyzing deals & showing up to local investor meetups to share recent experiences.
And yet there is still a lot of ink being spilled over how to pivot one’s entire business model to match the challenges of the market. Said a different way: what is the new loophole, strategy or “magic formula” that will actually produce positive cash flow? In an environment with high mortgage pricing (high prices + >6% rates), stagnant rents and more expenses bleeding out in the form of vacancy and increased costs to make basic repairs, many find themselves asking HOW do I find the deal with strong cash-flow despite all of these challenges?
To be sure, answers are out there. Arizona is very friendly to alternative holding strategies which produce greater yearly revenue in exchange for a more business-like operation: short-term rentals, the co-living model, redevelopment opportunities, notes/money lending and RAL facilities are all on the table for those looking for that sweet, sweet cash flow to balance out their portfolios and provide needed liquidity. But those strategies all skew towards the more Advanced side of things, leaving newer investors and the capital-limited looking elsewhere: surely a Beginner-Friendly strategy like House Hacking or Wholesaling is a better solution?
In truth, House Hacking has never been a way to generate high amounts of cash flow: its power lies in your ability to get started investing in real estate with as little money out of pocket as possible, and while taking on less risk on your next acquisition.
By combining an investment-minded real estate purchase with a low-down, owner-occupant home loan, the House Hacker is well positioned to take advantage of a slower market. By only having to come to the table with 3-5% for the down payment, the House Hacker retains more of their own capital: to be used as cash reserves to cover urgent repairs, or to weather the occasional stretch of vacancy. This also tends to lend itself to a better ROI over time: whatever profit is generated yields a higher ROI if we leave less of our own money in the deal as trapped equity.
But as a means of creating large amounts of cash flow in the short term? No, it’s not really set up well to do that. Despite borrowing at more favorable interest rates than our 80% LTV investor counterparts, the HH-er borrows more money relative to the property’s current value, and so it follows that their monthly PITI will still be higher. The HH-er must also live in the property for a period of time; physically occupying the space decreases (eliminates?) the deal’s ability to produce incoming rental revenue until you’ve moved out. It could be said that it’s a way of securing future cash flow: that you can get into a deal today, which perhaps provides a bit of incoming rent to subsidize your own personal housing expense, & allows you to model out future cash flow projections once the owner’s unit/room is vacated.
House Hacking can be an incredibly flexible tool for the small-time investor, offering tax benefits, long-term upside and hands-on experience in property-management. It significantly lowers the capital cost to doing your next deal, while ensuring you will get the most favorable financing terms available to you. It’s a fantastic means of boosting your equity over a long term horizon, and along that journey cash flow will come as rents increase and the opportunity to refinance into lower rates in the future present themselves. But as a means of generating stable & reliable cash flow to use immediately, trading equity (or cash) for that cash flow (or yield) is assuredly the wiser financial decision: get into the deal however you can, hold it for 10 years or more, and THEN you can trade that equity for the cash flow you need to realize stable financial independence.
And let’s not forget: nothing lasts forever, especially challenging real estate markets.