House hack before BRRR?

Question

Hi everyone! As someone graduating college in December and wanting to get into real estate investing asap, what would be the best way to start? I love the the BRRRR method, however it would take a couple of years to save up the capital to buy a property in cash considering my estimated salary post graduation (60,000 ballpark). Would it be smarter to get an FHA loan and house hack those first couple years while I save up the money?

I would love to hear any advice you guys got! Thanks so much!

I would love to hear any advice you guys got!  Thanks so much!

Bonnie Low · Answer

You don't need to buy a property with all cash in order to do a BRRRR. You just need the down payment and rehab costs (typically). There ARE lenders who will fund the rehab costs, but they typically won't do that for an inexperienced investor so it's best to plan for the rehab costs coming out of your pocket. It's very common for hard money lenders to want 20-25% down, plus construction costs. Or you may find a private lender who will offer you more advantageous terms. Or a partner who will bring some portion of the financing or possibly even all of the financing while you provide the sweat equity. With today's interest rates, it's more important than ever to look hard into creative financing options. House hacking is always a great strategy for starting out. I love it for its simplicity and because you need a place to live anyway. If you can find a small multi-family where the numbers work, you also have a solid investment property once the time comes to move up. Good luck to you!

Corey Conklin · Answer

House hacking is a great way to get started. It allows you to buy a property with a low down payment and provides a place to live while you continue to improve your financial situation.

The only piece of advice I would offer from my experience is to make sure you detach yourself from the house. The house is no more than an investment that will eventually be a rental property. Don't treat the updates to the home like you would if you planned on living there for the next 30 years. I don't mean skimp on quality work, what I mean is don't go overboard with crazy design changes or high end finishes. Keep it simple.

It's also smart to consider staying away from things that don't work well in rental properties like pools, hot tubs, extensive landscaping, etc. when you look to purchase.

Daniel McDonald · Answer

No right or wrong answer here but I do like the House Hacking option. In my opinion I think house hacking is the most forgiving strategy especially these days. You don’t necessarily need a home run to make it worth it. In fact, you likely won’t hit a Homerun on your first deal, but that is totally fine, I also like the learning experience that comes with house hacking when you’re living there. You’re learning the ins and outs of what it’s like to own a property, what it’s like to start a business, and how to fine-tune all of that. I think it will create a lot of valuable lessons, but like I said, I don’t think you’re necessarily wrong either way, the only thing that would be wrong is to never get started.

Jaron Walling · Answer

@David Tiefenthaler There are pros and cons to both strategies but more importantly is that you START. Time is out most valuable asset. Take advantage of long horizons and create some 5 year goals. Personally, financial, etc. Once you have stable income and good credit (maybe you have that piece) look for opportunities that met your criteria. If the market is good (define good) nothing is stopping you from buying. Probably need a 6 months emergency fund but again that's common sense. Can't say the same for the average American with <$1000 to there name. It's no different than reserves for a rental. The savings, emergency fund, reserves, it's all part the sport. Without these funds investors get knocked out of the game. Don't buy a place you can't afford on your own.

The #1 goal for house-hacking is reducing the living expense. I said reduce because in this market there's a strong chance it won't everything, but think about the money could save during that 5 year period. It's massive amount of cash. Add the monthly savings with any appreciation (unpredictable) and you can see why everyone wants to buy houses. You could take that cash and dump into the next deal. Until more houses get built people will keep complaining. They will then complain about something else. People complain or take action. The people making sacrifices like house-hacking, live-in flips, or living with family and paying off debt are fighting the current and winning.

Griffin Malcolm · Answer

Generally I would second the above advice; many lenders wouldn't give me a hard money loan below 30% down payment. However, all would fund 100% of the rehab, and I eventually managed to find one that would do 10% down, 100% of the rehab. Even still, I'm not sure I can afford a BRRRR quite yet, as I'm still recovering from my down payment in May on my house hack, I've done some out-of-pocket improvements to the house, and my student loans have unpaused this month.

All this is to say the BRRRR would be a viable option for you as your first property. However I would still recommend a house hack as your first property since it's a nice way to get your foot in the door. You'll learn about repairs, finding contractors, collecting rent, etc., without the stress of a 10% hard money loan over your head, and with more money in your pocket up front.

To that last point, use seller concessions in your first deal. Jack up your purchase price by 5 grand and have the sellers pay the closing costs. You'll keep even more money in your pocket and be able to get your next property faster when the opportunity presents itself.

Yu Liu · Answer

house hacking is one of the best strategies out there as every one else has mentioned. @Corey Conklin has great advice on making sure that this is strictly an investment decision because ideally you can do it again in an another year and rinse and repeat

Jessie Dillon · Answer

HUGE fan of house hacking to get the ball rolling! put 3.5% down on a 3- or 4-unit property, rinse and repeat annually 'til you're financially free. this is the easiest way, and it's so much more feasible when you're young! 4-units are best if you can swing the down payment, and don't be afraid of something that needs a little love. also keep in mind that you could turn around and STR or MTR one of the units after closing, if you want to up your monthly gross revenue & your area has demand! last tip: househacking isn't meant to cashflow. it's meant to drastically reduce your personal cost of living so that you can invest your income elsewhere. if you happen to cashflow, awesome, but if you break even and are getting debt paydown, appreciation, and tax breaks each year, that's the real win.

Benjamin Sulka · Answer

@David Tiefenthaler

Fannie Mae just rolled out a program (to start on November 18th) for 5% down conventional on owner occupant 2,3, and 4 units. This would be a better alternative to putting 3.5% for FHA because conventional loans drop of their PMI after a certain LTV (I believe 70% LTV) whereas FHA has PMI for the life of the loan unless you refi.

This program also doesn't need to pass the self-sufficiency test for 3 and 4 unit multifamilies like FHA does. Could help you get into a bigger property.

Look up "Fannie Mae 5% Down" and you'll be able to find some articles talking about it

Keep saving up your money so that you have enough for down payment, closing costs, and sufficient reserves. While you live in the property, you will be able to save up even more money and prepare for your next investment. I'm in this "saving up" process right now and looking to buy my first house hack next year.

Jaron Walling · Answer

And when you start looking at properties come back to the forums and ask questions! You'll know enough to be dangerous before making offers. Real estate agents will love you. Lenders will work with you.

House hack before BRRR?

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