First Time House-Hacker

[Reagan Buske]

Hi All,

I am interested in investing in rental properties. I’ve been doing a lot of research and I think the best way for me to get started is by house-hacking a multi-family home. Ideally, this would be done around Rochester, MN, but other locations in MN/WI/IA could work. I have a dependable full-time remote job. I’m 24 and have a good amount of free time, a strong interest in real estate, and about $70k for a down payment. I have a good credit score and no debt. I’m currently learning how to analyze deals and find good locations.

My question is around what price range makes the most sense for my first house-hack? I’d plan to live there for 1-2 years and then buy my own single-family house. I know that since it’s my primary residence I could put 5% or less down, but does that make sense? I’m trying to understand the differences in risk between a $200k property and an $800k property, how a down payment affects that risk, and the benefits to owning something that is nicer or has more doors.

[Evan Kraljic]

Hi Reagan, sounds like you've got a good plan in place already. You should look into the HomePossible 5% down conventional loan and see if you qualify. The maximum income is 80% AMI which for Mpls is ~84k, I just did a blanket search for Rochester using this website and I'm seeing $77,280 there. The reason I like using this loan first is because due to the income limits, it would be difficult to qualify for a second mortgage using this loan, unless the properties are something like 200k or below, because otherwise the debt to income ratio (DTI) won't work as it is a freddie mac loan with a max DTI lower than FHA loans.

https://sf.freddiemac.com/work...

Overall, I would highly recommend going with a low down payment loan when house hacking even though you have a good amount saved up already. That liquidity will be huge if you want to do a value add renovation, covering maintenance/capex items, or for a down payment on a future property if you love real estate investing and want to start scaling a little quicker!

Price point will be dependent on market and how large of a payment you're willing to stomach for the first deal. I will say personally I went with a low cost property (236k, purchased at end of 2019) and while I don't regret it, now that I understand leverage more I think it makes sense to go with a more expensive property with the a low down payment loan, provided the numbers still work for you cash flow wise. Will allow you to control more real estate from your upfront capital, more loans getting paid down from the tenant's rent. 

Of course, the past couple years had been a red hot market with record low interest rates where a hypothetical 4plex worth 700-800k, you could have been getting roughly $1000/month in principal paydown - which is a great return on your investment. Rates have since gone up, north of 4% now, so that principal paydown isn't going to be quite as lucrative right off the bat.

I don't know the market in Rochester very well so I'd recommend reaching out to a local agent who also invests in the area, can find a property that suits you well location and price point wise, also set expectations for the first deal. It can be tough to cash flow with a down payment that low but still doable with the right property and strategy. Good luck! Also if you need a loan officer I have some recommendations there so feel free to message me.