FHA House Hack Strategy

[Jeremy Taggart]

I want to get some opinions on a different perspective that came to mind to me regarding a house hack using an FHA Loan purchase. What is a better strategy, buying a 4 plex in a C area that gives you the best cash flow or buying a 4plex in an A area that doesn't cash flow nearly as well and is about 3x the price of the C class 4 plex. We'll use $100k as the hypothetical price of the C class 4 plex and $300k as the price of the A class 4 plex. In both situations, we are going to max out the seller assist to pay for all/most of our closing costs. We also are going to assume that I am a licensed agent getting a commission on the purchase as well at closing. Another assumption would be that I already have a couple investment properties that are cash flowing well to give me some extra income for future purchases and that I am 24 years old with my whole life ahead of me. And that both properties are turn key with maybe some room to update over time.

At first glance most would say go for the cash flow, but I was thinking about the benefits of the higher purchase price as well. If structured properly, between the assist and commission being the agent for myself, I would be paying the same or maybe even less to acquire the 300k property than I would the 100k property. Also the big thing I was thinking about was the loan paydown. From a dollar amount perspective, on a 300k loan you are paying down almost $30k in the first 5 years. Whereas on a $100k loan you are paying the loan down less than $10k. This extra 20k in loan paydown plus the cash flow you would get from the 300k property would be somewhat close to the cash flow + paydown on the smaller purchase price. Assuming the rents are high enough over the mortgage while living there on the 300k property, this would entirely be paid for by the tenants. Not to mention the dollar amount on appreciation is likely to be much higher on the 300k property as well. Now granted this is not money in your pocket but if you are planning on keeping the property long term, does this approach of taking advantage of the FHA loan to buy a property you wouldn't dream of buying right now because you lack the down payment cash make sense to do? I want to clarify that the 300k property would cash flow, it would not be negatively cash flowing and take money out of your pocket every month. It just wouldn't cash flow as well as the C class 100k property. You would essentially, after 30 years, have a much nicer property paid off free and clear going this route as well if the plan is to let the tenants pay it off.

We are also assuming the A class area will increase your quality of life as well for obvious reasons. Another assumption would be that this would probably be the only or one of very few A class properties in your portfolio. The rest would be comprised of assets in C class areas purchased strictly for cash flow and upside. 

My concerns would potentially be reduced future purchasing power as a result of less cash flow along with the increased debt to my name. And don't get me wrong this wouldn't even be a discussion if it wasn't strictly utilizing the low money down FHA owner occupied situation to take advantage of getting the property paid off over time by the tenants. I think this describes what I'm thinking in my head. If I left any assumptions or info out let me know!