House-Hacking: Beginning of a Journey

[Corbin Wafford]

Hello,

I started reading Set for Life by Scott Trench, great read so far! A big proponent of the book that Scott seems to adhere to is the idea of house hacking. Which essentially seems to be the best way to propel myself into a great future (in terms of REI) by eliminating one of my biggest spending buckets (living expenses).

That being said, I am currently renting from an apartment complex until February of next year. The goal is to find a duplex/triplex and live in one unit/rent the others out by the time my lease expires. The question that stands currently is: When should I start house shopping and in terms of finding a place/which approach should I take? 

Currently, I am using all the web apps out there to look at homes in my area and networking with local investors. Next step I have is to reach out to a reputable realtor and have them help me find local properties close to work. Any other ideas?

Does anyone else have a similar goal as mine? Those that have already walked this path, do you care to share your story/experience in this sort of setting? What are your next plans?

I would love to hear your journey (especially if it is in Southern IN or Louisville, KY)!

[Thomas Franklin]

Corbin Wafford I am not a fan of purchasing a Residential Multifamily Property known as "House Hacking." If you are looking to owner occupy, you may want to consider starting out, with buying a Duplex, TriPlex, or a Four Plex. Many Realtors will suggest purchasing a property using a FHA Loan, to reduce your out of pocket money. If the property requires rehab, the Realtor and/ or Mortgage Broker will suggest applying, for a FHA 203k Loan. A FHA 203k Loan is where the purchase price and rehab costs are rolled into a single loan.

Assuming you have a respectable FICO you can buy, with a FHA Loan (3-5% down, a 30 year amortization schedule, and a residential loan rate). You live in one unit and let your tenants pay the mortgage and other property expenses. This will give you experience as both a Landlord and Property Manager. The downside is you will need to live there, for a minimum of one year (to satisfy FHA Requirements); AND because you closed personally, you will not have Asset Protection, in the form of closing in the name of a LLC. What happens if one of your tenants has a slip and fall, on your property, or something else happens to them? You are on the hook and can be personally sued, for everything you own. Some people will say, "Take out a quality Insurance Policy and you will be protected." Ambulance chasing attorneys know their way around and can legally navigate around Insurance Policies. Another downside is you loose on the advantages, of the Federal Tax Code, by not closing in the name of a LLC. One last downside, at least for me is if you are going to Self Manage. This will require you to become very familiar with Kentucky's Tenancy Laws, with respect to Lease Agreements, Tenant Notices, Eviction Proceedings, Kentucky's State Statues, the Fair Housing Act (Federal Law), etc. Do you know how to perform the necessary due diligence? Do you know what numbers to crunch, how to learn which markets are good Investment Areas and which may be questionable, etc.?

If you want to close in the name of a LLC, Mortgage Lenders will offer you Commercial Loan Terms (25-30% down, a 15-25 year amortization, and a ballon due in 5-7 years). This is what I am encountering, in the current Mortgage Industry.

If you think you will go FHA, Conventional, FHA 203k, etc. and then Quit Claim the property, to a LLC, or a Land Trust you run the risk of the lender discovering a Title Transfer occurred and activating the "Acceleration Clause" or "Due on Sale Clause" that requires the loan to be paid in full, within 'x' number of days. These clauses are contained, in all Promissory Notes nowadays.

Many Realtors and/ or Mortgage Brokers will not tell you this information. Many, but not ALL are only focused on the commissions he/ she will earn and not focused, on your best interests. You may be asking yourself what can I do? Locate a Motivated Seller that will consider Seller Financing. You may have to put more money down (10-15%), but you can close, in a LLC, with no worries about banks. I have a lengthy Legal Opinion, from my seasoned Legal Team regarding this matter.