Wednesdays were my shortest days at school, so I booked an appointment after work with a mortgage agent at my bank. I’m sure Dylan would’ve been willing to come with me, but I decided to do this step alone. He didn’t even know I was going. I told myself that I kept it a secret to surprise him later, but deep down, I knew I wanted to verify his claims.
The loan agent, Gregory, entered data into his computer for a full five minutes before leaning back in his chair. “Based on your current income and credit score, I should be able to pre-qualify you for an FHA loan of up to $125,000.”
I scowled. Just when I was starting to think Dylan wasn’t full of crap.
“Miss, there’s no reason to get upset. Many people come in here and hope to be pre-qualified for higher amounts, but I have to tell you that $125,000 is not so bad. There are plenty of properties in town that go for even less.”
I sank into my chair. “Well, my boyfriend seemed to think I’d be able to afford more than that.”
Gregory held his hands together on his desk, all proper-like. “Look, the Federal Housing Authority program is remarkable. Through it, the government greatly reduces the down payment you need to purchase a primary residence. But even though you can buy a home with as little as 3.5% down, you still need enough income to make the monthly mortgage payments. It’s all a question of risk.” Then he gave me that kind of pedantic grin I offered the kid in my class who thought it’d be a good idea to bring his pet snake to school. “We’re not going to loan you the money to buy yourself a mansion and then sweat each month over whether we’re going to get our payment.”
“That makes sense.” I swallowed my pride. “I’d just been led to believe I could get more, that’s all.”
“How much did you hope to borrow?”
I squinted my eyes, embarrassed to even say it. “Enough to buy four apartments?”
“Four?” A wide grin grew over the mortgage agent’s face.
“Pretty funny, eh? My boyfriend called it a house hack.”
“Ah, you should have mentioned.” Gregory swiveled back to the computer and punched in a few numbers. “That changes our calculation, doesn’t it?”
“It does?” I shot up.
“I’ll have to see the exact rental values on whatever property you find to give you a final number.” He faced me again. “But if that’s your plan, I ought to be able to lend you $300,000 or more.”
“Wait.” My jaw literally fell. “What?”
“It’s very simple, Miss.”
Miss? Was he getting pedantic again? “Call me Amber.”
He nodded and continued. “As I said, getting a mortgage is all about risk.”
“But why should buying four units change the equation?”
“Because, unless I misunderstand your plans, three of those units will be income-producing. The more income you make, the more you can pay back, so the more we’ll lend.”
Part of me was excited at the prospect of such a big loan, but another part growled. Why did Dylan have to be right all the time? “I thought this FHA thingy was just for primary residences?”
“Precisely, so we won’t be able to lend you enough money to buy apartments in four different buildings. But the government allows for one property to have up to four living units and still be considered your primary residence.”
My head tilted in confusion. “But how can it be both a primary residence and income-producing?”
Gregory shook his head. “That’s what we call a legal fiction.”
“Legal fiction?”
“Yes, that’s when the law defines something to be different than we all know it to be. The most famous is a corporation, which the law treats as a person, even though it’s not. In your case, Miss, the law allows us to consider a building of up to four units as a primary residence, even though we all see it for what it is, a legitimate commercial income source.”
“That’s idiotic.”
“I don’t make the policies, Miss.”
“Maybe not, but the government doesn’t force your bank to write these mortgages, does it?”
“No, but we’re in the business of lending money. The more we can safely lend out, the happier we are. As I said, it’s all about the risk. If the government is willing to absorb more risk on a property of up to four units, we’re happy to let them do so. There’s a strong rental market in town. Based on the numbers I see before me, I’d say that having three decent sized rental units could more than double your income.”
“But I’ll also be paying a lot in interest, won’t I?”
“Yes, especially in the beginning. But much of that is tax-deductible.”
This was getting complicated. “So how am I supposed to know if I’m even making money?”
“I’m not an expert in real estate accounting, but I’m happy to connect you with a specialist in this area if you’d like to know more.”
“Sounds like you guys are all in cahoots.”
“We are. There are too many moving parts for any of us to go it alone, so real estate folk network like crazy.”
“In that case, I should introduce you to my boyfriend, Dylan.”
Gregory slapped the desk, and his face lit up. “Dylan’s your boyfriend?”
I leaned in. “You know him?”
“We belong to the same real estate club. No wonder you’re looking to house hack. That’s his favorite tactic. I’ve written him three mortgages over the years.”
“All for house hacks?”
“Yes.”
“I thought the house hack only works if it’s your primary residence?”
“It does.” Gregory’s whole energy had changed. He now leaned back and laughed. I half expected him to light up a cigar. “Still, that doesn’t mean we force you to stay there for life.”
“But Dylan said that the terms are better on a primary mortgage loan than on a commercial one.”
“That’s true. For instance, if you wanted to buy a five-unit building rather than four, we could no longer consider it a primary residence. Not only would you pay a higher interest rate, but you’d need a downpayment of at least 25% that we expect for commercial loans rather than the 3.5% we’re discussing today.”
“But once he moves out, the property becomes commercial, doesn’t it?”
“We don’t renegotiate just because your circumstances change. Once a mortgage is written for a primary residence, it stays that way for the duration of the loan, which can be up to 30 years.”
“You can have multiple homes on primary mortgage loans?”
“Indeed. I have clients who come in for a new one every year. Dylan himself has mortgages through us for three homes and a total of 11 units.”
“You wrote him mortgages on 11 units, all classified as his primary residence, even though he can only live in one?”
“You got it, Amber.”
What happened to Miss? “You have no problem with this?”
“Why should I? The numbers for each mortgage worked out. All Dylan’s properties cash flow. The risk was minimal.”
“What do you mean they cash flow?”
“Cash flow is the amount of money left in your pocket after paying all your expenses. So not only are Dylan’s apartments paying themselves back, they also put money into his pocket each month.” Gregory’s grin disappeared as he caught my eye. “Is something bothering you?”
I crossed my arms. “It just seems so unfair.”
“What’s unfair, Amber?”
“That you’ve got all these loopholes. Why should Dylan own 11 primary residences, when most people can’t afford even one? Isn’t this just another example of how the rich get richer?”
“Not this time. I’ll give you that it’s a loophole, but primary residence policies, and especially the Federal Housing Authority program, don’t exist for the rich. The amount you can borrow under the FHA program is capped, so you can’t buy mansions with it, and you have to live there, so the rich can’t just use it for investments alone. Besides, the real benefit of the FHA program wouldn’t help them anyway.”
“What’s that?”
“The ability for those who don’t have standard down payment money to buy a home with almost no money down. The flip side of doing this is that the government requires mortgage insurance for such loans, which is an extra expense. The rich can put down a larger downpayment and spare themselves this cost. Sorry to burst your rich-get-richer bubble, but this particular loophole exists solely for the poor and working class. Like Dylan.” Gregory lifted his eyebrows. “You don’t consider him rich, do you?”
“Dylan?” I couldn’t help but giggle. “Who doesn’t own a car and won’t even go out to eat? No, I don’t think of him as rich.”
“There you go. In my experience, there are financial regulations that benefit the rich and others that benefit the poor. The only ones that consistently lose out are the ignorant. In this case, the law benefits the poor. That’s fortunate for you, for based on the numbers I see, you’re anything but rich yourself, so there’s no reason you can’t use this program to buy yourself a nice home and a significant source of side income at the same time.”
“Can I go out and buy four apartments with $300,000?”
“Oh, yes. It might not be in the exact location you want,” he leaned back in his chair again, “and it might need some work, but there are quite a few properties available at that price.”
“Come on, Gregory. If it needs work, I’m right back where I started. I need my money for the downpayment and closing costs.”
“The FHA program allows you up to a 6% seller assist, meaning that the seller can absorb closing costs of up to 6% of the property’s value. So with the right seller, you can avoid most or all of those fees.”
“That’s still not going to free up enough cash to renovate four apartments.”
“No, but if you can come up with 3.5% of the money for the rehab, we can finance the rest and add it into your mortgage.”
My jaw went slack again. “You’re kidding.”
“No, Amber. It’s called a 203(k) loan. It’s a subset of the FHA program.”
“And I can use the 203(k) money to fix up all four apartments?”
“Yep. As we said, all four are still classified as your primary residence.”
I shook my head. “Unbelievable.”
“I think we’ve covered all we need for now. Your next step is to find a property. When you do, come back, and I’ll be happy to arrange financing.”
“Another glass?” Dylan asked me.
“Only if you’re willing to drive me home.” When I left the bank, I made two stops. The first was to a liquor store to pick up a bottle of my favorite muscato. The second was to grab Dylan after work. I told him to bring his guitar and then drove us straight to the beach.
My head was still spinning from all I’d heard from the mortgage agent; the wine only sank me further down the rabbit hole. “I feel like I’ve entered this bizarre alternate universe. It’s not about reality anymore; it’s about legal fictions and loopholes.” I gulped down what was left in my glass.
“Believe me, you’ve just begun to scratch the surface of the loopholes.” Dylan filled my glass with the last from the bottle.
“None of this bothers you?”
“It used to.” Dylan picked up his guitar and strummed quietly. “I used to expect everything to harmonize, as if one hand created all.”
“You do realize I’m Catholic, right? I actually believe that one hand created all.”
“I’m not talking about the creation of the world. I’m talking about our economic system. I expected the disparate parts to dovetail, but it was a pipe dream. Our laws are compromises, made by different lawmakers, in different eras. Some of them I like, some I don’t. I could either spend my energy fighting against it or figure out how to thrive in the system we have.”
“You don’t think all this just helps the rich get richer?”
“It’s not about rich vs. poor; it’s about the savvy vs. the non-savvy.”
Gregory had said much the same thing. And though Dylan himself was anything but rich, and he seemed to thrive with these loopholes, I still couldn’t shake the idea that this whole system was a scheme of the wealthy. “Don’t you think that the rich should contribute their fair share?”
Dylan laughed. “Try listening to the political discourse in this country sometime. The Democrats scream that the rich should pay their fair share. The Republicans scream that the rich should only pay their fair share. See the problem?”
“So everyone agrees that the rich should pay their fair amount, but everyone disagrees on what fair means.” I wanted to be as cool about this as Dylan, but my insides wouldn’t stop squirming. “You don’t think the rich take advantage of the poor?”
“Of course they do. But the poor also take advantage of the rich. Many of those who scream the loudest that the rich screw the poor pay nothing themselves, even while collecting free housing, education, and health care. Where do you think the money to provide for that comes from? The rich bear the cost not only of providing for themselves but for the poor as well.”
I suddenly felt like my student, Lisa, who whined anytime someone got a cupcake with more frosting than she did. I could even hear the squeal in my voice but was powerless to stop it. “But aren’t most loopholes there for the rich?”
“No, it’s just that the rich are usually the only ones sophisticated enough to know how to use them.” Dylan played a riff that sounded like the opening of a gameshow.
“Where do you fit in?”
“I’m in the most powerful category of all.” Dylan ran his fingers up the scale. “I’m one of the so-phis-ti-ca-ted poor.”
“If you guys are so powerful, how come I’ve never heard of the sophisticated poor?” I tapped his guitar. “Let me guess, you’re like a modern-day Illuminati, this ultra-powerful underground society, and you use your influence in the media to wipe out all mention of your existence?”
Dylan laughed. “The reason you never hear of the sophisticated poor is that we don’t stay poor for long. You always hear the pundits on TV and talk radio clamoring about the top 1%, as if this is some static group. The fact is, people move in and out of the top 1% all the time. Many of the wealthiest people in our nation’s history started dirt poor and pulled themselves up by their bootstraps.”
An evening breeze rustled the water and chilled my skin. I cuddled up beside Dylan and wrapped a blanket around my shoulders. “How’d you get to be so wise?”
His lips softly landed on my forehead, and he whispered, “I listen a lot more than I talk.”
Warmth tingled my skin. I could have sat there, enjoying that moment for hours, but curiosity got the best of me. “Listen to whom?”
“I’m listening all day long. Even while I’m working, you can usually find me listening to one podcast or another, trying to learn skills that will help me build my Cash Machine.” He put down his guitar, pulled out his phone, and scrolled through hundreds of episodes he’d downloaded on his podcast app.
“So that’s where you get it from? Podcasts?”
“Not only. About the only time I ever spend significant money on myself is when I buy a course or a seminar.”
“Like what?”
“Like my first year back, I attended a seminar on buying distressed houses. I used what I learned there to buy my first house out of foreclosure. But really, it dates back to Luther in Mexico.”
“Ah, yes, my old friend, Luther.”
“Sorry for mentioning Luther. I know you don’t want to hear about him.”
“Actually, I do.” This time, I felt no anger at the mention of Luther, only curiosity. “I know he was the one who first told you about building your Cash Machine, but I never got the full story.”
“It’s a long one. Might call for stargazing.” Dylan leaned back onto the sand and gestured for me to join him.
“Go on.” I nestled my head into the nook between his shoulder and chest. “Spin me your tale.”
