FHA vs Conventional for House Hacking then Renting Out After 1 yr

[Nicholas Martinez]

I am looking to do my first deal in the next year to start my REI career. I am planning to purchase a single-family home to house hack for a year then move into a 2nd property while renting out the 1st. My questions surround the type of financing that would be best to get into the property initially, my ability to refinance at some point for long-term cash flow, and the legal limitations of intending only to occupy the property for 1 year.

I know that whichever route I take, I will be moving out after one year and will obviously want a cash flowing property left behind, but need to consider the long-term costs and legal repercussions associated.

What I know:

- Whether I choose FHA vs. Conventional, I would be putting down the minimum (3.5% vs 5%) to have the smallest initial investment leaving the most room for loan pay down, but this would have an effect on my monthly payment and ability to eventually cash flow.

- I know that FHA would bear a permanent mortgage insurance premium (bad for cash flow) as well as an up-front premium, whereas Conventional, though requiring an additional 1.5% down at a minimum, does not require an up-front premium and the monthly PMI could be lower (good for cash flow) and dissolves after I hit 20% equity (even better for cash flow).

- I also know that if I choose FHA for the lower down payment, I would want to refinance out of FHA to Conventional at some point to get rid of the permanent MIP to improve my cash flow. But if I do not plan on occupying the property, any bank would require at least 80% LTV, which may take some time to achieve after moving out, getting crushed by the permanent MIP until then. I would also need to have closing costs factored into the analysis.

I therefore am assuming that if I just start off with Conventional, though requiring more money down and decreasing my cash on cash return, I wouldn't necessarily need to refinance as I could maintain a consistent payment and low interest rate, which would benefit the long term cash flow and PMI drop off. .

My question for experienced investors are:

1. I know it's usually on a case by case basis based on the numbers, but in general for one's first deal, is the additional 1.5% down payment for Conventional worth the money saved from not having to refinance out of FHA (and it's permanent MIP) down the line?

2. Is it legal to apply for a mortgage, FHA or Conventional, with the intention to move out after a year and turn it into a rental and maintain the same payment and rate initially agreed upon?

3. Is it illegal to refinance to Conventional at lower than 80% LTV if I do not plan on living in the property? For example would I go to jail if I go FHA for 12 months, then refinance to Conventional with sub 80% LTV, with the intention of moving out in a month?

Any and all feedback/responses/general tips are appreciated.

[Erich Beyer]

Hey guys (and gals reading), I hope I can shed some light. I did this when I graduated college. I bought a single family with an FHA loan, lived in it and rented out the other two rooms, then just this year (4 years later) refinanced it. If I had to do it again I would use a 203k loan and buy a 2-4 unit property. Use this loan. Use this loan. Use this loan. This loan is an FHA loan but gives you the ability to wrap renovation costs into your mortgage, so if you buy a deal you should have no problem getting the forced appreciation you need so you can refinance in a year with no PMI. To answer your questions....1. It depends on how much money you have, but if you use the 203k loan and buy a good deal you'll be in good shape.2. I believe the verbiage is for the loan you must plan on living there for at least one year (you'll be fine)(talk to a lawyer ;) 3. That's not a government rule that's a bank rule, and it depends on your bank. Usually if you're not living in the property the bank will want at least 20% equity in the property for a refinance, which again shouldn't be a problem if you've totally renovated something. Again, if you buy a multifamily your cash flow will likely be better AND for that year you won't have to share your space with randos from Craigslist....like I did. Let me know if you have any questions and best of luck.