Non-FHA house hacking benefits?

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Non-FHA house hacking benefits?

Andre Crabb
Investor · Tampa, FL · Member since 2017 · 205 posts · 92 votes

Hey all,

As we all know house hacking is a great way to get started in real estate.

I've been wondering though, if you don't use an FHA, what are the benefits? For example, let's assume I live in an area where rents re $1000 / month:

If I buy a duplex that rents for $1000 per unit per month:

  • With the house hack, my rent goes to $0/month, I'll get $1000/month for the other unit, and I'll have to pay expenses involved in owning/managing the duplex. Net before expenses is $1000/month.
  • If I don't house hack, but stay renting elsewhere: my rent stays $1000/month, I'll get $2000/month for the duplex, and I'll have to pay expenses. Net before expenses is still $1000/month.

This is very simplistic, I know. But I've been trying to justify house hacking, and without using an FHA loan (I'd rather not pay the extra insurance) I'm finding it hard to see the benefits. Any ideas?

Cheers,

André

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Eric NeithPro Member
Real Estate Agent · Hellertown, PA · Member since 2016 · 35 posts · 14 votes
8y
To get in with little money, the FHA is a 3.5% down loan... but it does carry the PMI for the full length of the loan. Not a bad jump into investing option with the intent of a refi a short time later.
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  • Eric NeithPro Member
    Real Estate Agent · Hellertown, PA · Member since 2016 · 35 posts · 14 votes
    8y
    To get in with little money, the FHA is a 3.5% down loan... but it does carry the PMI for the full length of the loan. Not a bad jump into investing option with the intent of a refi a short time later.
    2Reply
  • Harjeet BhattiPro Member
    Lender · Glenview IL- CDLP NMLS#230554 · Member since 2015 · 2k+ posts · 747 votes
    8y

    @Andre Crabb If you do not own any property try to get Home Possible loan with 5% down payment.  Home Possible is for Primary residence.  

    0Reply
  • Andrew B.
    Rockaway, NJ · Member since 2016 · 2k+ posts · 2k+ votes
    8y
    Originally posted by @Andre Crabb:

    Hey all,

    As we all know house hacking is a great way to get started in real estate.

    I've been wondering though, if you don't use an FHA, what are the benefits? For example, let's assume I live in an area where rents re $1000 / month:

    If I buy a duplex that rents for $1000 per unit per month:

    • With the house hack, my rent goes to $0/month, I'll get $1000/month for the other unit, and I'll have to pay expenses involved in owning/managing the duplex. Net before expenses is $1000/month.
    • If I don't house hack, but stay renting elsewhere: my rent stays $1000/month, I'll get $2000/month for the duplex, and I'll have to pay expenses. Net before expenses is still $1000/month.

    This is very simplistic, I know. But I've been trying to justify house hacking, and without using an FHA loan (I'd rather not pay the extra insurance) I'm finding it hard to see the benefits. Any ideas?

    Cheers,

    André

     Truth be told, I don't understand what you don't see. You move in, and rent the other side. Now instead of paying $1000 to rent somewhere, you are being paid to live there, or you are paying very little while paying down the loan. You can then move out in a year and rent out the other half. Boom...instant investment property.

     Is there something else you aren't understanding?

    0Reply
  • Brian Medansky
    Chicago, IL · Member since 2018 · 24 posts · 14 votes
    8y

    I actually have a place under contract right now that I'll be house hacking, but I'm actually putting 20% down. *full disclosure, one of my parents is helping me with the down payment*. This is allowing me to live in a much nicer area than had I been doing an FHA loan myself. For me, a big part of REI is the lifestyle benefits, and I'll be able to live in a great area. Plus, once I move out, the property will cashflow whereas if I did FHA it wouldn't. Plus, with it being in a nicer area, I'm more likely to get the appreciation benefits.

    This was the first deal to get me into the game. I actually plan to live here for a while and look into doing either turnkey or local BRRRR investing depending on the deals I'm able to do to get the supplemental cash flow for future deals.

    0Reply
  • Andre Crabb
    OP
    Investor · Tampa, FL · Member since 2017 · 205 posts · 92 votes
    8y

    @Andrew B. Because I could still rent somewhere else for $1000 and get paid the $1000 from the unit which essentially cancel each other out. So buy buying without FHA I could skip living in it for a year and going straight to "Boom...instant investment property."

    Right?

    The other comments are about low down payments. Clearly one big benefit is FHA allows MFH properties which allows people to get into investing with low money down. But if that's not what I'm looking for then house-hacking doesn't necessarily seem like the best move.

    0Reply
  • Account Closed
    Member since 2018 · 162 posts · 73 votes
    8y
    Originally posted by @Andre Crabb:

    @Andrew B. Because I could still rent somewhere else for $1000 and get paid the $1000 from the unit which essentially cancel each other out. So buy buying without FHA I could skip living in it for a year and going straight to "Boom...instant investment property."

    Right?

    The other comments are about low down payments. Clearly one big benefit is FHA allows MFH properties which allows people to get into investing with low money down. But if that's not what I'm looking for then house-hacking doesn't necessarily seem like the best move.

    I'm not sure I am following....but the point of house hacking is low down payments through primary residence loans (3.5% FHA, 5% Home Possible).

    Otherwise you have to put down 20%-25%.  It's about cash on cash returns/more capital to invest in next investment

    0Reply
  • Brian Medansky
    Chicago, IL · Member since 2018 · 24 posts · 14 votes
    8y

    @Account Closed I wouldn't necessarily agree with that. Everyone is going to have a different strategy and a different "why" for investing. Yes, if you're able to buy a property you want in an area you want to house hack with that low down payment, that's great. That isn't always possible for every person. 

    That is a great strategy, but it doesn't jive with everyone's strategy/long term goal. 

    0Reply
  • Zachary LaJoye
    Rental Property Investor · Cincinnati, OH · Member since 2017 · 58 posts · 48 votes
    8y
    Agreed with what Erik S. is saying. Getting into to a property for less money can equate to a higher cash on cash return. The amount of PMI you will have to pay is negligible when you look at it from a point of view of what else that extra 16.5% of downpayment could be doing for you.
    1Reply
  • Andrew B.
    Rockaway, NJ · Member since 2016 · 2k+ posts · 2k+ votes
    8y
    Originally posted by @Andre Crabb:

    @Andrew B. Because I could still rent somewhere else for $1000 and get paid the $1000 from the unit which essentially cancel each other out. So buy buying without FHA I could skip living in it for a year and going straight to "Boom...instant investment property."

    Right?

    The other comments are about low down payments. Clearly one big benefit is FHA allows MFH properties which allows people to get into investing with low money down. But if that's not what I'm looking for then house-hacking doesn't necessarily seem like the best move.

    If you are not looking for low down payments, the benefits to house hacking are still lower down (20% for owner occupants to avoid PMI vs 25% required by many lenders). This increases your cash on cash return. Next is better rates as owners get more favorable rates that save you money over the life of the loan. Next benefit is you now have a place to live, as opposed to renting. This saves you money as a beginner. Next benefit, is it is easier for the beginner to "test the waters."

    If you have $100k to invest, and are already in a primary home that you don't want to leave, then house hacking may not be for you. I look at it as a beginners strategy to get started on a path to real estate investing.

    1Reply
  • Account Closed
    Member since 2018 · 162 posts · 73 votes
    8y
    Originally posted by @Brian Medansky:

    @Account Closed I wouldn't necessarily agree with that. Everyone is going to have a different strategy and a different "why" for investing. Yes, if you're able to buy a property you want in an area you want to house hack with that low down payment, that's great. That isn't always possible for every person. 

    That is a great strategy, but it doesn't jive with everyone's strategy/long term goal. 

     Yeah, I really should have been more clear. Many people do it because of the low down requirement/use other money to get another deal. Many don't have that DP assistance. 

    0Reply
  • Account Closed
    Member since 2018 · 162 posts · 73 votes
    8y

    @Andre Crabb In the end, like everything, it comes down to the math and personal investment goals. You can refinance out of the FHA loan to remove PMI later also.

    2Reply
  • Andre Crabb
    OP
    Investor · Tampa, FL · Member since 2017 · 205 posts · 92 votes
    8y

    Thanks for all the comments guys.

    The main reason I'm asking is because I may not want to live where there are MFHs with numbers that make sense. I don't need the low down payment, but it would be nice for reasons you mentioned @Zachary LaJoye. So for now maybe it makes more sense to just start with investment properties and rent in a place I'd enjoy living.

    0Reply
  • Robert W Foos
    Lender · North Falmouth, MA · Member since 2018 · 5 posts · 8 votes
    8y

    Great points made all around, but one of the primary factors to house hacking is to get "primary residence" rates on a house that eventually becomes an investment property after you occupy it.

    In order to make an informed decision for your scenario, ask your lender to run the actual numbers... taking into account your credit, down payment, property type, primary vs. investment property, etc. Not only will you find this exercise informative and enlightening, you'll also get an opportunity to understand if that lender is someone you want to work with.

    2Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    8y
    Originally posted by @Andre Crabb:

    Thanks for all the comments guys.

    The main reason I'm asking is because I may not want to live where there are MFHs with numbers that make sense. I don't need the low down payment, but it would be nice for reasons you mentioned @Zachary LaJoye. So for now maybe it makes more sense to just start with investment properties and rent in a place I'd enjoy living.

    The only other advantage beyond low down payment is lower interest rate. Investment properties are a half to full point higher. Otherwise you are right, really there is no advantage. I would not want to live next door to my tenant, but to each their own. For people who have very little cash, house hacking is a great way to get started.

    0Reply
  • Account Closed
    Rental Property Investor · Belgium, WI · Member since 2015 · 53 posts · 54 votes
    8y

    Another case for house hacking is that you have to live somewhere. In my case the rent of one unit covers all the principle and intrest of the property plus a little more. 

    Although its not adding to my income, my personal housing expenses are less allowing me to save more for future opportunities, and as others have mentioned, as a newbie I cut my teeth on all the nuisances of rental property investing. 

    Keep in mInd that maintainence, cap ex and the other costs of owning the property still come out of your pocket as you live there

    0Reply
  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    8y

    @Andre Crabb - the main difference is the financing.  Owner occupied is 20% down and 4.25% and non-owner occupied is 25% down and 4.75%

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    0Reply
  • Anthony Wick
    Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
    8y

    All other things being equal (exact same dollars renting both sides and living elsewhere v. renting one side and living in one side), live in the other side. Why? Well, you'll simply take better care of your own place than a tenant will, and you'll be right there for self managing. 

    1Reply
  • Andre Crabb
    OP
    Investor · Tampa, FL · Member since 2017 · 205 posts · 92 votes
    8y

    Thanks for the info everyone! Sounds like the house hack might not be as beneficial to me as I assumed. Though it could be worth looking into for a point off the interest and maybe 5% off the down payment.

    Cheers.

    0Reply
  • Stephanie P.Pro Member
    Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
    8y
    Originally posted by @Andre Crabb:

    Thanks for all the comments guys.

    The main reason I'm asking is because I may not want to live where there are MFHs with numbers that make sense. I don't need the low down payment, but it would be nice for reasons you mentioned @Zachary LaJoye. So for now maybe it makes more sense to just start with investment properties and rent in a place I'd enjoy living.

     One thing I haven't seen mentioned is the ease of property management when you live on site vs being somewhere else.  Lots can happen when you're not there.

    Also, you can accumulate more doors with less money out of pocket.  I understand the down payment is not a big deal, but ultimately it will be (unless you're Bill Gates or Jeff Bezos) and the more doors you can accumulate with the least amount of money out of pocket helps to build your empire.

    One girl's two cents

    Stephanie

    1Reply
  • Andre Crabb
    OP
    Investor · Tampa, FL · Member since 2017 · 205 posts · 92 votes
    8y

    That's a great point @Stephanie P..

    Is it possible to use the FHA loan after I've started investing? Let's say I purchase a non-owner-occupied SFH home as an investment, and this is my first house purchase. Will I still be eligible for an FHA loan when I do decide to owner-occupy?

    Cheers.

    0Reply
  • Stephanie P.Pro Member
    Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
    8y
    Originally posted by @Andre Crabb:

    That's a great point @Stephanie P..

    Is it possible to use the FHA loan after I've started investing? Let's say I purchase a non-owner-occupied SFH home as an investment, and this is my first house purchase. Will I still be eligible for an FHA loan when I do decide to owner-occupy?

    Cheers.

    FHA does not limit you to being a first time homeowner, but you do have to live in the property. I would think that you would use conventional financing, if you can, to avoid upfront MI and monthly MI on top of it. FHA definitely has its place, but can be expensive in that regard.

    1Reply
  • Andre Crabb
    OP
    Investor · Tampa, FL · Member since 2017 · 205 posts · 92 votes
    8y

    Got it, thanks @Stephanie P.!

    0Reply
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