All Forum Posts by: Leo R.

@Marcos Carbi yes, it is possible to house hack a STR. For instance, if you find a duplex that's in a good STR area, you could live in one unit while STR'ing the other unit (this would make your management of the STR much easier, as well--since you would be living right next door).

If you wanted to really max out your cashflow, get a duplex that has 3-4 bedrooms in one unit (where you'll live and rent out the rooms to long term tenants), and the other unit is a STR...doing that approach might really help your numbers pencil out. ...you could do similar strategies with a triplex, fourplex, etc...

If you're highly motivated and have the time and energy to do something like that, it would not only give you all the benefits of househacking that I described in my previous post, but it would also give you an education in STR (which is a different beast).

However, I personally would not try this strategy if I didn't know for sure that the STR unit could also cashflow as a MTR or LTR if needed. Always consider the possible exit strategies before you buy a property--I try to avoid buying properties that only have only one exit strategy or one use, because that's too much risk for me. ...If you found yourself in over your head with the management of the STR (which is much more time intensive to manage than a LTR), or if the STR market stalls and you have too much vacancy, you could pull the rip cord and turn it into a LTR (which would lower your cashflow, but would also free up a lot of your time, and lower your exposure to the numerous risks of STRs)...but if your STR only works as a STR, then you could easily find yourself between a rock and a hard place...know your exit strategies, and have sufficiently safe exit strategies to protect yourself from worst-case scenarios before you buy a property.

Having said all that, the househack/STR strategies I described above would usually be significantly riskier, and significantly more challenging that just buying a normal house and house hacking it...

Consider these two scenarios:

1. You buy a duplex and do the househack/STR strategy I described above. The STR eats up a ton of your time and money: buying furniture, staging it, getting professional photos for AirBNB, managing the AirBNB inquiries and reservations, responding to guest complaints and reviews, cleaning and re-stocking the unit after each stay (or managing and paying for a cleaner/re-stocker), switching lock codes after every stay, etc., etc. Because you have different strangers staying in your STR every few nights, you are exposed to an enormous amount of risk (e.g., property damage, an incompetent guest leaves the stove on or the property unlocked, a guest brings a child to the property who hurts themselves and the guest files a lawsuit, etc., etc.). The economy tanks, and now nobody is vacationing, so you have tons of vacancy and you're bleeding cash. The city bans STRs, and now you're operating illegally. etc., etc. Also, on top of all these potential headaches, you're also managing your house hack in the neighboring unit--which is a whole other set of headaches. ....I'm not saying you can't run a successful househack / STR, I'm saying that the STR will typically involve much more time intensive management, and much more risk than a well-executed LTR or househack. All things being equal, the chances of failure and/or burnout are higher with a STR than a LTR or LTR house hack. If you fail, or if you burn yourself out, it's very likely that you will abandon real estate all together (and I'm not singling you out--most people who have a really bad experience in real estate understandably abandon real estate and move on to more traditional W2 jobs, which can be far less stressful).

2. OR, you buy a typical house and house hack it. You get all the benefits that I described in my previous post. Because house hacking is a fairly straightforward strategy with relatively few moving pieces, you actually succeed: the property cashflows well and appreciates, and you don't find yourself in over your head with time intensive management, and all the aforementioned headaches of STRS. Because you succeed with the househack, you are well-positioned, and also highly motivated to go after another property...rinse and repeat, and in 5-6 years, you have 5-6 cashflowing, (hopefully) appreciating, relatively easy to manage LTR single family homes.  ...or, perhaps you go into STRs after you househack--in which case, you will be much better-positioned and much more well-prepared to succeed with the STR (because you'll have the invaluable experiences gained from your previous househack).

In skiing, we don't take beginners down double black diamond trails--doing that would endanger them and other people in the area. Also, there's virtually no chance that a beginner will succeed on a double black diamond (and it's very likely they'll hurt or even kill themselves). We start beginners off on easy terrain where they actually have a chance of learning, succeeding, and becoming motivated to learn and succeed even more (and with time, they may succeed enough to be ready for that double black diamond). We should operate in real estate the same way.  

I *cringe* when I see folks with zero real estate experience talk about trying to wholesale syndicate rehab flip a 500 unit portfolio in 10 different cities. Do the thing that's appropriate for your level of experience, do the thing that you're likely to succeed at first, and then gradually move up to slightly more and more advanced techniques... but, to quote South Park: if you try to ski a double black diamond without first mastering the green circles, then the blue squares, and then the black diamonds, "you're gunna have a bad tiiiiime". 

Good luck out there!

@Jordan Sachs  I've personally been wrestling with similar questions.

I've run a lot of financial models over the last couple months, and most of my models end up making me decide to hold on to cash flowing properties. It usually comes down to the fact that all my properties are locked in at around 3-3.5%, and if I sold, I'd either have to 1031 into other properties at higher rates (probably 6.5%) and with less cashflow, or I'd have to keep the cash and get hit with large capital gains taxes...and for me, this makes selling unappealing. All other things being equal, why would I sell a cashflow rockstar with 3% locked interest (during 8% inflation) just to buy a mediocre cashflower at double the interest?   ...on the other hand, if you think you can sell and use that money to get a property that's an even better cashflower, and which also has better potential appreciation, then that might be worthwhile (but, personally, I haven't seen that type of opportunity lately).

Other considerations: what grade is the current property, and what grade would the new properties be? How easy is the current property to manage, and how easy would the new properties be to manage? Is the current property likely to appreciate more/less (or is it more, or less, protected from a market downturn) than the new properties? How confident are you that you can complete the 1031 to the new property/properties? What types of looming capex do you anticipate for the current property vs. the new property? (e.g.; will the current property need a new roof in 3 years?)  ...discussing these types of questions with your partner may give you a better idea of which course of action is best for you...

Good luck out there!

@Brandon P. it takes real confidence to share your mistakes with other people--thanks for helping us avoid these issues!

Since your initial post was a while back, I'm curious about how that property is doing now? (if you still have it).

As you mentioned; having the right team behind your is critical for success in real estate--having experienced and honest agents, mentors, mortgage brokers, inspectors, contractors, plumbers, electricians, etc., etc., etc. can save you large sums of money, and help you avoid big headaches. It always blows me away how often people who say they want to be "investors" will go with an agent who knows virtually nothing about real estate investing or property management. Folks: find team members who have experience doing the thing that you want to do! (if you want to flip, only work with agents/brokers/etc. with experience in flipping...if you want to buy and hold rentals, only work with team members who have experience with that niche, etc., etc.)

@Brandon P. are there any additional lessons learned from the property that you've realized now with a couple years of hindsight?

Cheers!

Thanks @David Malik   :)

@Marcos Carbi  timing the market is notoriously difficult (and research generally shows that even experts who try to time the market usually get it wrong).

My philosophy is:  If the property pencils out right now, and fits within your goals, then waiting for future market changes seems silly.  For instance, if you know you can get $1000/month cashflow on a property right now, it seems ill-advised to wait in hopes that the market will tank at some point in the future and you'll be able to get $2000/mo cashflow on some other property..."a bird in the hand is worth two in the bush", as they say.

It is possible to know whether a property will cashflow right now (within a reasonable margin of error), but Nobody knows what the market will do in 6 months, 12 months, 2 years, etc.

Also, you mentioned house hacking. In my experience, house hacking is the  best way for a new investor to get started. 

With a house hack, you get the best mortgage terms with an owner/occupant mortgage. You get the experience of buying a property, staging a property, screening tenants, managing a property, and being a landlord (the lessons you'll learn here will be invaluable). Because you'll be living in the property, you'll be able to quickly identify and respond to maintenance tasks/repairs (plus, living at the property will teach you about the property's various quirks and patterns that will help you manage it more effectively in the future when you move out...experts know that properties are almost like living entities, in the sense that they have patterns of problems, decay, etc.--and living in the property is the best way to learn about those patterns). As you learn these patterns of problems and deterioration in your property, it will teach you what to look out for, and what to avoid/mitigate when you begin searching for your next property. If you buy the right property, you will get cashflow and (hopefully) appreciation. If you manage the property correctly, you'll be building a network of tenants who like you, and who will want to rent other properties from you again in the future. You get the tax benefits of owning a property. You'll learn about how to interact with your community as a landlord (interacting with your neighbors, the local municipality, local businesses that can help you manage the property, etc.)--and these connections will be very valuable as you grow your portfolio (when you hit the big leagues, you'll need a contact list of armies of contractors, electricians, plumbers, neighbors, city officials, zoning officials, inspectors, landscapers, PM's, agents, mortgage brokers, etc., etc. --who are all assisting you in growing and managing your portfolio) . So, you get all these advantages, but, you avoid the numerous and significant risks of more advanced and complicated strategies like BRRRR'ing, flipping, wholesaling, etc.  

In a nutshell, house hacking a very excellent risk/reward ratio when done correctly, and it's a relatively low-risk way for a new investor to learn many of the invaluable lessons that they need to successfully buy and manage more properties in the future...For these reasons, I view house hacking as one of life's "cheat codes" for laying the foundation of what will hopefully become a successful real estate portfolio.

Plus, as the Great Warren Miller said about becoming a ski bum: "every year you wait to do it, makes you one year older when you do do it"  ...so jump in while you're young!

Good luck out there!

@Heather Yates  sorry to hear about your troubles (plumbing issues are the absolute worst--I've had plenty).

Obviously, the toys in the sink traps and the HVAC discharge pipe are the tenant's responsibility.

As for the water heater: this depends on whether it was obvious that the heater was leaking, and how long it was leaking for... if it was not obvious to a casual observer that the heater was leaking, then you probably can't hold the tenant responsible for that. Likewise, if the heater just began leaking the day that your plumber found it leaking, you probably can't hold the tenant liable for that.  However, if it was obvious that the heater was leaking, and it had been leaking for more than a day or two (enough time that the tenant should have seen it and notified you), then you may be able to hold them liable for not notifying you about the leak (even if the tenant didn't cause the leak, and the leak was just a result of old equipment).  A good lease will have terms that require the tenant to notify the landlord immediately when any leaks or hazards are observed, and it will hold the tenant liable for damages that occur as a result of the tenant not notifying the landlord (for instance, if a toilet were leaking and flooding the bathroom, and the tenant didn't notify you for 5 days, and all that water seeped into the subfloor and caused rot and mold, you could potentially hold the tenant liable for their negligence--and have them pay not just to fix the toilet, but also to fix all the damage that could have been prevented if they had notified you quickly).

As for your question about renewing their lease...This partly depends on whether you feel like they were negligent...for instance, if the water heater leak was easily observable, and you think they were negligent in not notifying you quickly, then that suggests they'll continue to be negligent and incompetent in the future--which puts you and your property at risk (a tenant who is so negligent that they don't report an obvious water leak is probably also negligent enough to leave the stove on, leave the doors unlocked, ignore fire hazards, etc., not replace smoke alarm batteries, etc.).   On the flip side, if you don't think that the tenant was negligent (for instance, if the water heater were in a crawl space where it would have been impossible for the tenant to see the leak), and if the tenant has an otherwise positive track record of paying on time, keeping the property in good shape, communicating professionally with you, etc.--then you may consider renewing their lease.  ...At the end of the day, it comes down to whether you think this tenant will cause more problems in the future...

Good luck out there!

@Drew Sygit I wouldn't necessarily agree with your last statement--real estate does not always ultimately increase in value on a long enough time horizon. Real estate can become less valuable over time (even over a long period of time).

Economies evolve, cities change, local employers come and go, management of municipalities changes, and populations can increase or decrease for a wide variety of reasons. There is no guarantee that a real estate market that is appreciating today will continue to appreciate in 10 years, 50 years, etc.--because ultimately, nobody knows what will occur in the future.

Detroit was one of the strongest economies in the world, and one of the most vibrant cities in the world for several generations, and property values increased during those times...but, eventually, it mostly imploded and property values decreased significantly over the last ~25 years.

@Andy Okamoto is asking about appreciation in Salt Lake City (which has had massive appreciation the last few years).  However, there are significant issues in SLC that could cause depreciation in Salt Lake City over the next 10, 20, 50 years. Specifically, we are at risk of a major earth quake in the near future that experts believe could cause 85%+ total loss rates in the most desirable neighborhoods of the city.  We have serious air pollution problems from wildfires, atmospheric inversions, and now the drying Great Salt Lake--which has a salt bed contaminated with lead, arsenic, and numerous other pollutants that get carried into the air by our frequent wind storms.  We also have significant problems with our water supply, and it's clear that our water supply will soon run out if significant changes are not made to our water management.  What will these things do to property appreciation?  again--ultimately, nobody knows what will happen in the future. The point is: property appreciation is not guaranteed, because there are a myriad of economic, social, cultural, political and environmental factors that can affect property value--and it is very difficult to predict how these factors will interact and affect property value over the next 10, 20, 30, 40 years.

I'm always surprised by how often I have to say it on the forums, but again:  if your plan hinges on future appreciation (i.e.; appreciation is a necessary requirement for your plan to work), you are not investing, you are speculating.

@Andy Okamoto as you know, Salt Lake City has had incredible appreciation the past few years.  

Although potential future appreciation should be a consideration, your financial model should not hinge on future appreciation. 

In other words, if future appreciation is a "do or die" thing that is absolutely necessary for your financial success, then do not buy the property (unless the property is a tiny fraction of you overall net worth...Warren Buffet can afford to take a big 50% loss on a 500k house, but unless you have a huge stack of cash lying around, most beginning investors cannot afford to take a loss on a  property).  

Assuming that you're not Warren Buffet (or that you don't have a huge net worth that dwarfs the cost of the property you're buying), then you must have adequate cashflow at the property to protect yourself from a market downturn, and the countless other unanticipated expenses that come with owning a property.

The moment you begin buying property that requires future appreciation to pencil out, you are no longer investing, you are speculating.  ...and again--unless your speculation is just a tiny portion of your net worth, real estate speculation can get you into hot water very fast (particularly given the uncertainty of the current market).

There is a good chance the Salt Lake area will continue to appreciate, but there's also very strong evidence that it will flatten or even depreciate. At the end of the day, nobody knows what will happen in the future--which is why a new investor should never make speculative buys.

Good luck out there!

@Account Closed I think that the metrics they use to determine which markets are "overvalued" are pretty blunt, and often miss the nuances of local markets.

For instance, within a particular city that is rated as "overvalued", there can be neighborhoods that are highly prone to a market downturn, and neighborhoods that may not be affected at all by a market downturn. 

In my city, there are natural barriers (rugged mountain ranges and public land) that prevent development in certain directions, and neighborhoods near those natural barriers where everyone wants to live (i.e.; very high demand, very low supply). These neighborhoods are the highest income areas in the city, and most properties are A grade. It's conceivable that these neighborhoods might not be affected at all in a downturn that does affect other (less desirable) neighborhoods within the city.

In fact, I think that historical data shows that this occurred in the '08 downturn --generally speaking, a lot of the higher income A grade neighborhoods were minimally affected or not affected, while the lower income neighborhoods got hit hard (another example of the "Matthew Effect" where the rich get richer, and the poor get poorer).

As they say, "real estate is local", and "location, location, location!"

Good luck out there!

@Hunter Gibson what @Teri Feeney Styers and what @Mindy Jensen said is 10000% correct--you'd be well advised read their feedback very carefully.

As @Mindy Jensen mentioned, the market is in the midst of a pretty significant change, and personally, I would NOT want to be in the house flipping business right now (especially if I didn't have any experience with house flipping).  

Why?  Well, it is completely possible that you buy a house today at $500k, the inflation numbers for the next quarter come back bad (pretty likely), causing the fed to clamp down and raise rates again (pretty likely), causing demand in the market to dry up significantly (already happening; look at days on market and price reductions, or talk to any agent), causing the market to dip 15%.  Now you're stuck with a property that's only worth $425k (but you owe $500k)...if you want to flip, your financial models need to include worst-case scenarios (even worse than the one I just laid out), otherwise you can get yourself into a serious problem. 

If you want to flip, you also need multiple exit strategies to protect yourself if the market tanks--for instance, if the property cannot be cashflow positive as a rental before you spend the money on your rehab, you are putting yourself in a very dangerous position (the market could tank, and you end up upside down on a property that's costing you money every month...that would be a serious problem).

I'm not saying it's impossible to successfully flip houses right now, but I am saying that you want to be very, very conservative with your financial models before you pull the trigger on a property...and, quite frankly, if you don't already have extensive experience flipping, I would say that right now is not a good time to start.  There are much lower risk, easier-to-navigate, and lower work effort ways for a beginner to get started in real estate (for instance, house hacking).

Good luck out there!