If I house hack first, how can I afford my single family home a year later?

Question

Okay, I am going to try and make this non convoluted. My wife and I sold our condo at the hight of the market, and we are currently staying with family. While saving for a house. We have a substantial amount saved, and instead of buying a single-family home, we thought it would be a good idea to do a house hack for a year in a multi-unit as a way to enter the investing space and then buy our single-family home. We were thinking about going FHA for the multi-unit. We were looking in Baltimore City, Maryland.

My concern is that with a low FHA down payment, the monthly mortgage amount is going to be higher than it would be at 20%, and even when we get tenants in the units, the cash flow will be fairly small. Though the down payment and closing costs will not be huge, they will eat up a sizable portion of our savings. I am concerned that, even with the money we would save from the other tenants paying our mortgage, as well as what we would get in monthly cash flow, it is still going to take us a while to save the money we would need as a down payment for the single-family home that we wanted to buy after we bought our first investment property.

We only wanted to house-hack for a year, but if we do that first, it seems that it will be a good while before we can actually save up again to get into a single-family home.  I know we can go as low as 5% down on our single-family home, but the trade-off there is a much bigger monthly payment. We have about 120K in savings.

Now, I am trying to think of the best course of action to take. Should we go for the single-family home first or go with the house hack first?  I hope this was not too confusing; does anyone have any advice about what to do here? There could be solutions or options that I have not thought about or should consider. I would greatly appreciate your thoughts.  Thanks-Al

Jonathan Greene · Answer

House hacking with FHA loans right now in most markets is not a great idea. The less you put down, the higher your payments plus PMI. If you are running numbers, you run them for when you live there and when you leave, but in order to be able to use equity to buy so quickly, you would need to buy in a heavily appreciating area and if that is the case you will be up against competition that is not using FHA.

Kenneth Cheston · Answer

@Al Seward

You've gotten a lot of good advice. Russell Brazil is a big time investor so anything he says is usually great advice. I also especially agree with Michael Smythe's first thought. You can't predict the future. The most important thing is to take action after you have a rough game plan (which sounds like you have).

I house hacked a duplex back in 2021 for $140,000 in Baltimore City (Overlea) with an FHA. Still under the same mortgage. I then took out a HEL against it to keep going to the next one. It was a steep climb to get the next duplex because of the 25% down (this is changing in the near future). Now I flip properties to replenish cash for the next investment. It's almost impossible to BRRRR now but you can do "soft" BRRRR's to keep the locomotive going. Anyways you have a lot of different strategies at your disposal and 120k is great nest egg. I was all-in 66k for the first duplex... pulled out 23k then bought a nicer one that I was all-in 100k but got a 50k HELOC that started my flipping. I didn't have a clue what I was doing when I started!

Hope that helps. Feel free to DM.

Al Seward · Answer

Thanks for all of the advice/comments everyone.

Al

Jack Seiden · Answer

this^^^ if you buy a property you are happy in and can comfortably afford thats fantasic, if it happens to be a good investment as well even better, if you buy an investment property to live in and you don't like living there & the investment goes south, both strong possiblities in baltimore multi family and you've exhausted your life saving's you are triple screwed.

Michael Smythe · Answer

@Al Seward There's no perfect plan because you can't predict the future.

Here's an idea though:

1) Buy with FHA, but look for a fixer-upper that you can buy well below ARV. You can even use an FHA 203(k) to finance repairs into the purchase mortgage.

2) Put some sweat equity into the property fixing up and renting out the units. Save the one you occupy for last if possible. NOTE: you will need licensed builder bids to get the 203(k) loan, but you can do the work yourself after closing.)

3) Once the rehab is done, watch the market to refi to a FNMA loan. Have agent you bought house with give you CMA for new value. Analyze your refinance options with a goal of financing 80% of new value to avoid PMI.-NOTE: in perfect world you would finance as owner-occupied to get best rate and live in property for another year to qualify. Otherwise you will have to pay higher rental mortgage rate.

4) If all goes well, you buy your new home to live in with FHA 3% down or FNMA 5%+ down and rent out unit you were living in.

5) Yes, you may have negative cashflow on the rental for the next 1-3 years, until rents increase, but this is part of investing.

Be sure to calculate any changes in the rental property taxes and home insurance resulting from you moving out.

James Carlson · Answer

@Al Seward

You seem to have answered your own question but are hoping someone on here has a secret you haven't thought of. Unfortunately, I don't think one exists.

If you exhaust your potential down payment for a future primary residence by buying a multi-family now, then ... you can't buy that future primary residence until later.

If you're running the numbers, and they ain't working, then you've got your answer. Like @Russell Brazil, I think it's never a bad time to acquire another property, but not if its prevents you from your larger goal (which seems to be buying that dream home).

V.G Jason · Answer

You likely can't. The whole nonsense of house hack every year and buy a new one, or what not whatever that shit was just does not apply in today's world with lower housing supply, higher rates, and wages being barely up.

You're likely going to have to put 10-15% down, not 3.5-5% down, and wait 3-7 years not 1 year. That's how it'll work out.

For your personal situation, my personal opinion if you and your wife are trying to start up quit getting cute with investing and go buy a really good SFH is a good neighborhood and cherish family formation. If success continues to come, and I hope it does, then look into investing. Why prioritize investing before your family? If you have a genuine answer for that I am curious to hear.

Wale Lawal · Answer

Al Seward Investing in a single-family home or house hacking both have advantages and disadvantages. A reduced down payment while using an FHA loan for house purchase may enable greater money for upcoming costs or investments. By leasing extra space, making a mortgage payment, and gradually increasing equity, it can help defray housing costs. Tenant relations, property management, and real estate investing may all be experienced firsthand by owning a multi-unit building. On the other hand, exit tactics, market dynamics, and cash flow issues must be taken into account.However, buying a single-family house gives you alternatives for personalization, privacy, and stability. It can be used as leverage for other ventures, including room rentals or as security for further loans. Compared to an FHA loan, a conventional loan with a 5% down payment can have a cheaper monthly mortgage payment.When buying a single-family house, factors to take into account include your financial status, long-term objectives, and required down payment. The optimal course of action is contingent upon an individual's investing objectives, risk tolerance, and personal preferences. A customized plan that supports your objectives can be created with the assistance of a financial adviser or real estate specialist.

Good luck!

Al Seward · Answer

@Russell Brazil,

I understand your point about DTI, but I was thinking more about the fact that we would exhaust a significant part of our savings to buy the multi-unit first and would likely have to save extensively for a couple of years in addition to what we might cash flow from the multi-unit to have enough to buy our single-family home next.

Russell Brazil · Answer

Lender will generally county 75% of the rent to offset the mortgage. Going to use completely made up numbers here.

Property A - $3,000 mortgage. $4,000 gross rent. $4,000*75%=$3,000. This property would have no impact then on DTI, as 75% of the rent off set the mortgage.

Property B - $3,000 mortgage. $3,000 gross rent. $3,000*75%=$2,250. This property then to a lender looks to be negative $750 a month against your DTI.

So really your DTI plays in based on what price point of property you are buying against your incomes and debts. I generally think its always a good idea to acquire more properties. But if youre buying your dream home in a year, then youre likely to run into an issue if your stretching. The reality is with a low down payment, with current rates, properties will be cash flow negative when you move out.

If I house hack first, how can I afford my single family home a year later?

Most Popular Reply