There is a Short Window Left for House Hackers
In Real Terms, Interest Rates Are Still Cheap (For Now)
Interest rates have been rapidly rising over the past few months and many seem to think that the party is over. The age of low rates has passed and the housing market is about to collapse.
Regarding the second point, that thought is almost certainly wrong as I discuss here. The first point is relative. Yes, the Fed raised rates for the first time since Covid arrived and has announced plans to raise the discount rate up to 1.9 percent by the end of the year and 2.8 percent by the end of 2023. And yes, the average rate on 30-year fixed loans has crossed five percent for the first time since 2011.
But rates are still low in real terms. And thereby, house hacking in particular is still a great strategy to get started in real estate. (At least, for now.)
Real vs. Nominal
We have been blessed to live in a low interest rate environment for many years. For me personally, it’s been my entire life. The last time inflation was really high was two years before I was born.
In a low inflation environment, you can pretty much just ignore inflation in your analysis. A four percent return is a four percent return, more or less.
But in a high inflation environment, you need to differentiate between real and nominal values. If you make a five percent return but inflation is 10 percent, you have really lost five percent.
Just for reference’s sake, the latest inflation numbers come in at 8.5 percent, the highest its been in some 40 years.
And no, it’s not caused by the war in Ukraine or temporary supply shortages. Inflation is a monetary phenomenon and they have been printing money like crazy.
In other words, inflation ain’t gonna be “transitory.”
Thus, when compared to the inflation rate, interest rates are still really, really cheap. (In fact, interest rates are still quite low by historical standards regardless of inflation.)
Indeed, interest rates are below inflation by quite a bit. That really doesn’t make sense as you effectively make money merely by borrowing it. So yes, it’s still a good time to borrow if you’re using that money to buy the right asset.
Why House Hacking
House hacking is just buying a home to live in that you plan to renovate and then either hold or sell before moving on to the next one. I would combine this concept with another strategy, namely keeping the home you are currently living in as a rental when you move out instead of selling it.
For simplicity’s sake, I will refer to both strategies as house hacking.
Either way, this will require you to live below your means. But that’s a critical thing to do, especially in the early going. Indeed, the ability to defer gratification is probably the most important skill investor’s can master.
The reason this is (still) such a good time to house hack is because the biggest advantage of the current market is the interest rates available. While they used to be even better, when thinking in terms of real vs nominal, the rates are still very good.
And they are much better for homeowners than investors.
With house hacking, you can lock in those great terms for a long time, in many cases the whole term of the loan. Yes, you need to live in the property for at least a year (with most loans) but you have to live somewhere regardless. So why not live in a property you plan to make an investment property down the road?
And you can even do better than that. For example, with FHA loans you can get 96.5 percent of the price financed. But you can also buy up to a fourplex. So live in one unit and rent out the other three. Right off the bat you’re a real estate investor.
But this opportunity probably won’t last much longer. Rates are going to continue to rise as the Fed will be under more and more pressure to cool inflation. I doubt we’ll see a return to the interest rates of the early 1980s (10 percent plus) but I wouldn’t be shocked either.
So for a little while longer at least, house hacking is something you should definitely consider.
For those interested in more on how to house hack, check out my friend Craig Curelop’s book The House Hacking Strategy.