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Updated over 2 years ago, 06/25/2022
Financing second house hack
Hi BP community, looking for some thoughts on how others have moved on to their second property after using an FHA loan on their first house hack.
I purchased my first property a 2 flat as a house hack in December (2021) using a FHA 3.5% down loan. I am looking to repeat the process ASAP in to a second 4 unit property, but am getting stuck with how to finance it.
I could refinance my current property into a traditional mortgage so I can re-use the FHA loan on my next property, but Im not sure how that would work if I dont have a lot of equity in the property, and with mortgage rates going up I dont think I would be able to cash flow on the property after re-financing at a higher rate.
I am saving as much money as possible to use the option of the traditional 15-20% down on my next property but with average 4 unit property prices well above 4-500K in my area, this could take many years to save up a down payment of this size. It is my understanding that conventional loans require at least 15% down on multi-units even while owner occupied.
Any thoughts or advice or possibly alternate loan products would be greatly appreciated!
Congrats on taking your first step.
First of all, no matter which loan product you use, you will need to live in your current home minimum of 12 month per FHA guidelines.
I was under the impression that you can get a 2-4 unit with a 5% Owner Occupied conventional. Please quote me on that, maybe someone else can clarify.
From my experience, if you are going the owner-occupied route... the lender is most likely going to grill you about your "intent to occupy" the new property. They will be looking for you to justify why the move would be an improvement. I.E. closer to work, more space (Growing family), better area etc.
If your current unit is 3bed 2 bath, it may be difficult to justify moving into a 4-plex with efficiency style apartments.
I managed to get away with this twice. Here's how it went down:
#1 duplex FHA 3.5% down. My unit was 2/1 (1200sqft) Refied into conventional after 1.5 years
#2 duplex FHA 3.5% down. My unit was 3/1 (1500sqft) Did Not refi.
#3 Single family home 3/2 (1400 sqft) with 5% conventional primary residence loan
Hope this helps.
cheers
Hi @Bryce Renicker, glad you're moving so quickly! Financing is a good problem to have (vs. analysis paralysis...)
I would look into partnering. I have a couple other properties, so my cash was tied up in them. "I'm not poor, I'm just broke!"
I thought: I can provide the hustle, the analysis, the purchase, and ultimately the management of the property, and my partners could bring the cash to close, furnish, and upkeep the property.
We closed on the property on May 3rd, 2022, and operate it as a short term rental/house hack. My 2 partners provided $25,000 each, which provided the down payment, closing costs, and basic furnishing to the property. My wife and I brought in $4,000, just to put skin in the game and for reserves.
My wife and a partner signed on the loan, so the DTI was not a significant opposition. The partners will get a guaranteed 10% cash on cash return per year, and get a portion of equity on reversion (sale or refinance of the property). We get a property, partners get preferred return, we all get equity. Win win situation!
We ended up putting down 5% down because it's an owner-occupied loan and strategy. Case in point: You don't have to be the only one in the deal. Leverage your partnerships, and if you have to put down 15% down, find a good enough deal where your partner will benefit from it!
Hit me up if you have any more questions. I'm based in the Denver, CO area. Best of luck!
@Bryce Renicker Go with 5% down conventional on a single family home. Don't get fixated on multis. Out of the 100+ house hacks we've brokered, about 10-15% are multis. The vast majority are SFRs, mainly due to financing options. You can always get SFR with an ADU or mother-in-law suite.
Quote from @John Alosio:
Congrats on taking your first step.
First of all, no matter which loan product you use, you will need to live in your current home minimum of 12 month per FHA guidelines.
I was under the impression that you can get a 2-4 unit with a 5% Owner Occupied conventional. Please quote me on that, maybe someone else can clarify.
From my experience, if you are going the owner-occupied route... the lender is most likely going to grill you about your "intent to occupy" the new property. They will be looking for you to justify why the move would be an improvement. I.E. closer to work, more space (Growing family), better area etc.
If your current unit is 3bed 2 bath, it may be difficult to justify moving into a 4-plex with efficiency style apartments.
I managed to get away with this twice. Here's how it went down:
#1 duplex FHA 3.5% down. My unit was 2/1 (1200sqft) Refied into conventional after 1.5 years
#2 duplex FHA 3.5% down. My unit was 3/1 (1500sqft) Did Not refi.
#3 Single family home 3/2 (1400 sqft) with 5% conventional primary residence loan
Hope this helps.
cheers
Hey John thanks so much for the reply, this is very helpful!! It seems like you did what I am considering with the refinancing out of FHA loan to reuse that product at some point... Its such an incredible loan! Thats good to know regarding the increased scrutiny when asking for a second owner occupied loan. I will definitely do some more digging into what options are out there for other owner occupied loans. goodluck to you with your real estate journey
Quote from @Ian Jimeno:
Hi @Bryce Renicker, glad you're moving so quickly! Financing is a good problem to have (vs. analysis paralysis...)
I would look into partnering. I have a couple other properties, so my cash was tied up in them. "I'm not poor, I'm just broke!"
I thought: I can provide the hustle, the analysis, the purchase, and ultimately the management of the property, and my partners could bring the cash to close, furnish, and upkeep the property.
We closed on the property on May 3rd, 2022, and operate it as a short term rental/house hack. My 2 partners provided $25,000 each, which provided the down payment, closing costs, and basic furnishing to the property. My wife and I brought in $4,000, just to put skin in the game and for reserves.
My wife and a partner signed on the loan, so the DTI was not a significant opposition. The partners will get a guaranteed 10% cash on cash return per year, and get a portion of equity on reversion (sale or refinance of the property). We get a property, partners get preferred return, we all get equity. Win win situation!
We ended up putting down 5% down because it's an owner-occupied loan and strategy. Case in point: You don't have to be the only one in the deal. Leverage your partnerships, and if you have to put down 15% down, find a good enough deal where your partner will benefit from it!
Hit me up if you have any more questions. I'm based in the Denver, CO area. Best of luck!
Quote from @Chris Lopez:
@Bryce Renicker Go with 5% down conventional on a single family home. Don't get fixated on multis. Out of the 100+ house hacks we've brokered, about 10-15% are multis. The vast majority are SFRs, mainly due to financing options. You can always get SFR with an ADU or mother-in-law suite.
Hey Chris thanks for your reply! This is a super interesting take which I hadn't considered at all. My focus on multi unit was because I perceived them to be better with cash flow generally speaking. Of course if I am finding the right deal, a SFR would cash flow very well too. Based on your experience, it is true that owner occupied loans on multi unit generally require that 15% down?
@Bryce Renicker Correct, 15% down for duplexes. I believe it's higher for triplexes and fourplexes. 99% of time, 5% down conventional on a SFR is what our clients have done. Other first time home buyer programs usually don't work when you already have a property. I have a cheat sheet I'll email you for financing.
Talk to a lender ASAP! It's best to go to the source of expertise -- lenders!
Quote from @Bryce Renicker:
Hi BP community, looking for some thoughts on how others have moved on to their second property after using an FHA loan on their first house hack.
I purchased my first property a 2 flat as a house hack in December (2021) using a FHA 3.5% down loan. I am looking to repeat the process ASAP in to a second 4 unit property, but am getting stuck with how to finance it.
I could refinance my current property into a traditional mortgage so I can re-use the FHA loan on my next property, but Im not sure how that would work if I dont have a lot of equity in the property, and with mortgage rates going up I dont think I would be able to cash flow on the property after re-financing at a higher rate.
I am saving as much money as possible to use the option of the traditional 15-20% down on my next property but with average 4 unit property prices well above 4-500K in my area, this could take many years to save up a down payment of this size. It is my understanding that conventional loans require at least 15% down on multi-units even while owner occupied.
Any thoughts or advice or possibly alternate loan products would be greatly appreciated!
Hi Bryce,
It is impressive how quickly you are moving to achieve your goals. You are right, 15% down on a conventional loan is for a 2 unit property that is owner occupied and up to 25% for 3-4 units per conventional guidelines. Considering you have already purchased the property with 3.5% FHA, refinancing out into a conventional loan could be a great choice as you may not need to continue to pay Mortgage Insurance. If you want to continue building your portfolio, maybe look into purchasing a larger SFH with extra rooms and house hack or SFH with an ADU addition. Let me know what you think about the information and how I can help!!
Look at the refinance options for your owner occupied 2 plex ....depending on the PMI amount / the value of the proeprty now and the amount you would need to refinance - your resulting payment may not be too much different than your payment now ......Plus you will be able to elimiante the mortgage ins on a conv loan at soem point in the future which you wouldnt with the FHA loan ..... of couse if the new conv refinance LTV is way high or the new proposed #s are way higher than what you pay now - this idea wont be a good one ....freeing up the FHA will be very important to do asap so you can utilize this program again for the future 4 plex option
@Bryce Renicker I'm on my third house hack, all multi-family properties purchased w/ FHA loans. You'll need to refinance your FHA to conventional which will allow you to use an FHA loan again if your goal is to purchase a MFH w/ a low down payment. While it can feel contradictory to refinance to a higher rate, if you have the equity to do so and can drop your pmi it may balance out. I would also challenge you to not only think in dollars if you do refi to a higher rate but instead think about the opportunity cost of your existing FHA which is preventing you from purchasing a new MFH w/ an FHA.
Another option to look into if you don't want to Refi is to find a local credit union or bank that offers 90-100 LTV helocs which may give you the cash to put a higher down payment on a new owner occupied MFH. As others have mentioned make sure you are following occupancy requirements.
Lastly, and this was said before but get creative and don't think a MFH is the only way to house-hack. There are excellent opportunities for SFH w/ in law suites, apartments, ADU's, bedroom rentals etc. This will also come with much more favorable financing options.
Quote from @Chase Taylor
@Bryce Renicker I'm on my third house hack, all multi-family properties purchased w/ FHA loans. You'll need to refinance your FHA to conventional which will allow you to use an FHA loan again if your goal is to purchase a MFH w/ a low down payment. While it can feel contradictory to refinance to a higher rate, if you have the equity to do so and can drop your pmi it may balance out. I would also challenge you to not only think in dollars if you do refi to a higher rate but instead think about the opportunity cost of your existing FHA which is preventing you from purchasing a new MFH w/ an FHA.
Another option to look into if you don't want to Refi is to find a local credit union or bank that offers 90-100 LTV helocs which may give you the cash to put a higher down payment on a new owner occupied MFH. As others have mentioned make sure you are following occupancy requirements.
Lastly, and this was said before but get creative and don't think a MFH is the only way to house-hack. There are excellent opportunities for SFH w/ in law suites, apartments, ADU's, bedroom rentals etc. This will also come with much more favorable financing options.
Hey Chase thanks so much for the reply. That is so awesome you are on your third house hack, this is exactly what I want to do! Thank you for the suggestions and I will definitely look in to these. What was your strategy to gain enough equity in your home to refinance out of FHA and drop PMI? Did you aggressively pay down the principle before refinancing or were you able to find conventional loans that would refinance even with low amounts of equity?
@Bryce Renicker I bought my properties off-market at a discount and rehabbed them. The past 3 years of appreciation haven’t hurt either.
One of the main things to keep in mind when thinking about purchasing a tri-plex or quad to House Hack is the FHA self sufficiency test.
FHA self sufficiency test defined as: You need to prove that 75% of the rental income you're likely to receive will exceed the full monthly mortgage payment.
For Denver market, to make that work you will need to put more money down and by that point you might as well buy it as an investment property.