Should I be using FHA loan numbers in analysis for house hack?

Question

Hey there BiggerPockets community! 👋

I have been actively trying to purchase my first home/investment property (2-4 unit house hack) over the past two months in the Phoenix-Metro area and so far I have put in offers on 5 different properties, but keep getting outbid. Currently in my analyses, to calculate my mortgage expenses, I am using the numbers from the FHA loan I plan on using to purchase the property. With this, I am trying to make sure I am cash flowing at least $50 a unit once I move out of the property in a worst case scenario (accounting for all other expenses besides mortgage such as property tax, insurance, repairs, vacancy, cap ex, etc.).

However, I recently heard a real estate investor say to always use commerical loan numbers in real estate investment calculations (25% down, slightly higher interest rates, no mortgage insurance), even if I plan on originally using an FHA loan to purchase the property. Is this correct? If so, it would increase the purchase price on most of my offers, making my offers more competitive. Also, I do plan on refinancing out of the FHA loan once the property has a 75% or 80% LTV ratio.

Should I switch to using commercial loan numbers in my calculations, or should I stick to using FHA loan numbers since that is what I will originally be purchasing the property with?

Thank you in advance for any advice!!

Matthew Brill · Answer

I would go with the loan that you initially put on the property. Chance are you won't want (or get) commercial financing on the house. As long as you have access to 30-yr fixed rate debt you should take it. After you fill your 10 loans then worry about commercial financing. Unless you are planning on getting forced appreciation, I wouldn't count on using your analysis assuming 20%+ down as it could talk a while to get there through natural appreciation and you could be holding a property with negative monthly cash flow for years. Stick with it and one of your offers will hit.

Grant Schroeder · Answer

Welcome @Tyler OBrien! Especially for your first purchase, I would be more conservative just like you have been with your analysis. If you feel like you can set your self up for success with this other approach and be more competitive to purchase your first house hack, then I would say go for it. The biggest key in this crazy market is to just get your foot in the door and get started. That's when the real learning begins! Do you enjoy the realtor you are working with and do they have experience with putting together good house hack offers for their clients? This is not a common niche for an agent so it is always good to find an agent who specializes in this to help you get offers accepted.Does your lender call the listing agent to connect on each for your offers to vouch for the strength of your offer and give you a fighting chance against multiple other offers? In this market, many a time, that one phone call can make a world of difference.Please do not hesitate to reach out with other questions, I am glad to help. And good luck with your continued search, do not get discouraged!

Tyler OBrien · Answer

@Grant Schroeder thank you for the response! That makes sense. I suppose I was getting anxious and trying to 'make the numbers work' instead of just finding deals where the numbers work.

I am currently working with an agent, but he does not have experience with multifamily properties, let alone house hacks.

My lender does send an email to the listing agent with every offer I submit, validating my credibility. I may ask him to call going forward, after your advice. I think that might be more personable and convincing.

Thank you very much again for the response and advice, I really appreciate it!

Tyler OBrien · Answer

@Matthew Brill thank you for the advice! I will stick to using FHA loan numbers for my calculations. Ideally I would like a property that I can do some costmetic repairs to and force appreciation to get to 80% LTV more quickly. If this were the case and I originally purchased with an FHA, you would suggest refinancing with a conventional loan? If I refinanced with a conventional loan, I would be required to live in the property for another 12 months after refinancing, correct? Thanks!

Matthew Brill · Answer

Yes, definitely refinance to a conventional loan. If you have 20% equity when you refinance you may not need to refinance as an owner occupant. I would say it depends on your situation. If you "intend" to live there for another year then I would get the owner occupant loan with the lower interest rate. If you are moving out soon then you can just get an investment property loan and pay a little higher interest rate. Either way you'll have your FHA loan back and in a good place to move forward.

Grant Schroeder · Answer

Of course @Tyler OBrien! You are definitely best to stick with your current FHA numbers. If you do a rate/term refinance into a conventional loan, you do not have to stay in the property for more than 6 months before buying again. If you were to do a cash out refinance at primary residence interest rates, you would be required to stay in the property for an additional 12 months.

Also, even if you do not get to 80 LTV between market appreciation & forced appreciation, you could potentially go with Single Premium Mortgage Insurance and wrap it into the conventional loan so you do not have monthly MI when you move out and therefore will cash flow the property better.

Hope that helps!

Should I be using FHA loan numbers in analysis for house hack?

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