House hacking with FHA

[Shane Boyle]

Hi everyone, been trying to determine a way to get into buying a multi family ASAP but with low funds and no track record to reach out for OPM ect. Trying to house hack with a low 3.5% down with an FHA loan seems like the move to

A) get started

B) begin building credibility

BUT, when taking out an FHA loan you need to reside there. I've "heard" you could live there for a year and then go some where else however you can't pull out another FHA loan with the exception of moving somewhere to work or having an increase in family size.

Any advice on what a good way to start is with no real capital to your name (to BRRRR) and no credibility to raise money?

Thanks Guys!

[Scott Trench]

Hi Shane - yes, you need to live in the property for at least a year with the FHA loan. But, it seems to me that this is no more of a commitment than signing a lease where you have to live there for a full year...

My advice would be to focus on saving, saving, saving for this next year. If you can come out with $10,000 - $15,000 in cash, after-tax, in you bank account, BEYOND the amount that you will be putting down on the property (the 3.5% down PLUS $10K cushion), you are probably getting to the point where you can make a house-hack purchase where the risk/reward is in your favor. 

Investing in real estate with your own money and from a position of financial strength is, I believe, a far more rewarding experience than leveraging other people's money and being dependent on a positive outcome to keep you afloat. 

I'd suggest it's personal finance for the next 12-18 months to put yourself in the position to do this the right way. 

[Shane Boyle]

@Scott Trench

Scott! Really appreciate the help. I guess my follow up question is (and I know I’m getting ahead of myself) what is the “move” afterwards? Stay with me.....

Say I get a place that allows me to live rent free for the year I stay there or best case scenario put a few hundred bucks in my pocket and turn a Profit.

After the year is up am I able to move out and rent my unit? After a year living rent free I could have some money saved up again but still won't be enough to buy a fixer upper outright and BRRRR (Without doing the math) and I wouldn't be able to qualify for another FHA loan presumably. Of course I'd be greatfull to get to a point where I live rent free, but we want more then that here at BP, we want to work towards a portfolio that allows us to quit that day job!

Thanks

[Charles Mitchell]

@Shane Boyle Hey Shane, Great idea! I see you're from Hoboken, where are you looking to house hack? I've searched far and wide for cash flow positive multis in hoboken and JC, and have yet to find a cash flowing property (my goal wasn't to cashflow but to net my monthlies as close to 0 as possible). Shoot me a DM, happy to discuss my findings and help you with any questions you may have

[Bill Plymouth]

I totally agree with Scott.  Having that cushion is a good move.  

So here's the thing. You won't be buying in all cash so the loan that you pick will be very important in this process. Instead of getting the typical FHA (203b) loan, get the FHA (203k) loan. It's similar to the 203b, but it allows you to buy properties in conditions that the 203b loan wouldn't finance. It also allows to finance the rehab cost into the purchase price. You cannot do the work yourself though. you must use a HUD approved contractor.

Now here’s the cool part.  If you buy correctly, you will be able to move into the property you have with some solid equity built in after you do repairs.  After a year or 2 of inhabiting the property, refi and use that capital from the refi to purchase your next project.  

[David Espinosa]

Yes, you can move and rent out the apartment after living in it for a year. If you have saved up a chunk of money but not enough to fund an entire brrrr yourself, you can go to a hard money lender and brrrr with their money using your savings as a down payment towards the property. If you have zero experience it will cost you more for a hard money loan but with the right deal you can make it work. After a few of those deals you can negotiate with hard money lender or start raising private money with your new found credibility.

[Shane Boyle]

@Bill Plymouth

Thanks Bill! I'll have to look into that. Being able to put 3.5 down AND having rehab costs factored in make it a slower way to BRRRR but perfect for someone that doesn't have a lot of capital. I thought in order to refi on an FHA to a traditional mortgage you need to have 20% in equity after refi but it appears once you hit 20% you can refi and pull all your equity out!

[Scott Trench]

@Shane Boyle ah I see what you are getting at.

The answer is that your cash position will continue to accelerate while you house hack. You will likely advance in your career, have no or minimal housing expense and otherwise see your ability to stockpile after tax liquidity accelerate. Perhaps to the tune of $2-$3k per month or more.

Your property will, in average market conditions, appreciate. 12-24 months after house hacking you ideally will find yourself in the favorable position of having 5-10% equity through loan amortization and appreciation. If you rehab or improve the property, this can accelerate even further. From there you can refinance out of the fha loan and go again.

Or, I believe you can use a low down payment (3.5%) conventional loan. Have you explored those? That might solve your financing problem entirely. Might be worth a call with a few local mortgage brokers.

[Jerry Padilla]

@Shane Boyle

FHA is a great product for a low down payment, but costly over time due to the mortgage insurance staying on for the life of the loan, with the low down payment. You would be requireed to live in the property for 1 year, but could purchase up to 4 units. Once you reach greater than 20% equity in the property, it would be a good time to consider refinancing so you could eliminate the mortgage insurance with conventional financing.

@Scott Trench

Freddie Mac just announced that as of July 28th they will be doing away with the no income limit restricted area's for Home Possible, which allowed for house hacking up to 4 units with only 5% down. So anyone wanting to go this route needs to be approved by that date! After that date, FHA will be the only low down payment product for multi-families. There are still low down payment options for single family purchases of 3 - 5% down.

[Steven Holiday]

Someone can let me know iif I'm missing something, butFHA requires pmi.  Not just to 20%, but for the life of the loan.  So when you get to 20% equity, you can refi for cash out, or for a lower rate -w/o the pmi, which allows for cash accumulation.  

[Jerry Padilla]

@Steven Holiday

Conventional lenders require mortgage insurance if greater than 80% LTV. When you reach 20% equity - you can refinance, to remove mortgage insurance with conventional.

For a primary residence to cash out;

You can cash out, with greater than 20% equity on a SFR residence and greater than 25% equity in a MFR.

[Jeff Brower]

I just hit my one year mark on residing in the duplex I purchased with FHA. I am closing on a single family next week that I am going to move into and purchase with a 5% down conventional loan. If you can manage it, you can keep buying a SFR every year with a low down payment product like this so long as you are willing and able to move into them for a year. Right now I am single with no kids, so I will keep trying to use this strategy. Just ensure that you are buying smart when purchasing homes with low down payments/ low equity. This is the lowest barrier to entry that I could think of while using only my own resources.

[Shane Boyle]

@Scott Trench

I’ll have to check out those 3.5% down conventional loans, will report back!

[Shane Boyle]

@Jeff Brower

Jeff, good to know. That does seem like the easy path when you are financing everything yourself.

[Anthony Wick]

@Shane Boyle

In 12-24 months you’ll be older, whether you invest or not. So you might as well get started. So what if you can’t leave your fha multi family for 2 years due to finances? You’ll still be saving money over renting.

Fha does require PMI (MIP) for the life of the Loan now. New rule a few years back. So your goal should be to refinance once you have 20% equity. However, the tenants will be paying that PMI so it's still better than not buying.

Love the idea of keeping fha loan and still buying more with conventional loan 12 months later. It's what I did. I didn't "cash flow" first house hack. But tenants paid about 70% of PITI, which is cheaper than renting. You can still put away more savings that way. When I moved out the property did cash flow at full occupancy.

As some advice, don’t be afraid to ask the seller to buy a 12 month home owners warranty for you. Keeps the large expenses at bay for that first year so you can build up those reserves.

[Sebastian Kressley]

@Shane Boyle That is exactly how I started here in Greenville, NC. I bought a duplex with a 3.5% down FHA loan. Stayed there for a year and just closed on my second duplex. You are correct you can't take out another FHA loan unless you have certain life circumstances.

Hustle on,

Sebastian

[Shane Boyle]

@Sebastian Kressley

Awesome Man! Congrats on the second place. Building that MOMENTUM.

[Sara Schoolcraft]

Quote from @Anthony Wick:

@Shane Boyle

In 12-24 months you’ll be older, whether you invest or not. So you might as well get started. So what if you can’t leave your fha multi family for 2 years due to finances? You’ll still be saving money over renting.

Fha does require PMI (MIP) for the life of the Loan now. New rule a few years back. So your goal should be to refinance once you have 20% equity. However, the tenants will be paying that PMI so it's still better than not buying.

Love the idea of keeping fha loan and still buying more with conventional loan 12 months later. It's what I did. I didn't "cash flow" first house hack. But tenants paid about 70% of PITI, which is cheaper than renting. You can still put away more savings that way. When I moved out the property did cash flow at full occupancy.

As some advice, don’t be afraid to ask the seller to buy a 12 month home owners warranty for you. Keeps the large expenses at bay for that first year so you can build up those reserves.

 "In 12-24 months you’ll be older, whether you invest or not."..wow this quote gave me chills! I was scared to make my first purchase for the longest time but thanks to Bigger pockets, I finally got my first place last year. 

Im currently house hacking my SFH. Lived here almost a year now and breaking even. Hope to cash flow more in the future and refi to get rid of MIP. Got an amazing deal on this place considering it is walking distance to the beach

[Carlos Scarpero]

Yes, FHA allows this for up to 4 units with 3.5% down. You would be required to live in at least one unit.

You can even use the rental income to help you qualify.

Note, when you move a year or two later, you would need to move over 100 miles to be able to house hack again with FHA. Yes, you could also do just a regular FHA or conventional in the same city (non multi) with something showing that the family situation has changed

[Sarita Scherpereel]

Quote from @Carlos Scarpero:

Yes, FHA allows this for up to 4 units with 3.5% down. You would be required to live in at least one unit.

You can even use the rental income to help you qualify.

Note, when you move a year or two later, you would need to move over 100 miles to be able to house hack again with FHA. Yes, you could also do just a regular FHA or conventional in the same city (non multi) with something showing that the family situation has changed

 Just FYI some of these threads you have been commenting on are pretty old. This one is from 5 years ago. I've done that a few times myself.