NWROI vs Equity - House Hacking

[Patrick Schoeben]

Hi all, I am a recent Entrepreneurship graduate from Illinois State University currently studying for my Real Estate License after completing the holy grail that is Rich Dad Poor Dad! After finding my way to the Bigger Pockets Podcast and just today completing Craig Curelop’s phenomenal read, “The House Hacking Strategy,” I was left with a question regarding NWROI and Equity.

I plan to soon purchase a multi-family property (duplex) with a FHA loan and live in it for a single year. I would love to quickly purchase another duplex with another FHA loan after refinancing.

My understanding is that a 3.5% down payment would lower my initial equity, while increasing my NWROI. Whereas a higher down payment would increase initial equity, but decrease my NWROI.

In order to attain 20% equity to refinance into a conventional loan by the end of the first year, should NWROI be a large concern for me? Should I consider the larger down payment? Are there any other advisable methods or a happy medium to attain a viable NWROI while still achieving the equity I need?

I may be missing a critical piece here, but all responses are greatly appreciated!

Thanks,

Patrick

[Will Fraser]

Hi @Patrick Schoeben, welcome to the BiggerPockets forums!

I’m not familiar with NWROI, so I’m stumbling in a dark a bit with this response but I’ll have at it anyways.

The key “lever” being pulled with a house hack is the Cash on Cash return (comparing the cashflow the asset throws off with the initial cash invested).  Low cash in + cash flow = really nice return.  Equity is a secondary benefit, though the more equity the more better there.  Increasing the down payment on a house hack usually decreases the efficacy of the hack by lowering the ConC return.

In order to fund your next hack (after 1 year of course), you'll be able to use a low down payment loan of another sort, just not that FHA loan. Then, when you have achieved a high enough equity slice in your FHA-loan-funded duplex you can refinance that onto a conventional loan and free up your FHA loan for another use (probably).

I hope this is useful to you :)