How to house hack multiple properties?

Question

Hello BP Community!

So kinda of confused on house hacking, such as if you were to move into your 2nd house hack what do you do with the first one?

1. Do I change the loan of the 1st house hack?

2. Is there anything I should know if I'm going with a landlording approach?

3. Can I use a FHA loan again on the 2nd property?

4. What is the best case scenario to house hack multiple properties? Like do you need to use the FHA loan multiple times?

Jeff White · Answer

@Fahadbin Alam Listen to James above, he is a great realtor and knows his stuff with house hacking and lending!

Congrats on getting your 1st House Hack!

I can definitely answer your question, here's what I did with real examples.

1st House Hack - 4 unit - I purchased this multifamily in August 2017 with 7% down (couldn't do 3.5% down because of the FHA self-sufficiency test).

2nd House Hack - 1 unit (single family house with mother-in-law apartment) - I purchased this property in the summer of 2018 with a 5% conventional loan (a little over a year later), and I was able to move out of my unit in the 1st House Hack and into the basement apartment of this house hack. I didn't have change the loan or anything.

3rd House Hack - 1 unit (single family house with mother-in-law apartment) - I purchased this property in the summer of 2019 with 5% conventional loan (one year later), and I just moved out of the 2nd House Hack, had a renter move into our master bedroom in that property, and moved into the top unit of this property.

4th House Hack - 1 unit (single family bi-level house with mother-in-law apartment) - I purchased this property in the summer of 2020 with 5% conventional loan (one year later), and I just moved out of the 3rd House Hack and rented out the master room, and moved into the master bedroom of this house hack.

Do you see the pattern?  All I did was move each year, and I was able to acquire four properties much sooner because each one was my primary residence than if I tried to purchase them as investment properties (minimum 15% for single families).

Also, since the Denver market is very expensive (median price is 500k+), that would be at least 75k down payments for investment properties vs. 25k down payments just to move into the property for one year. That's a huge savings, and I'm in the acquisition phase of my portfolio, so I will do whatever it takes to get more properties here.

Also, I didn't mention that I refinanced the 1st House Hack into a conventional investment property loan, but I had built 25% equity over that time.  I'm looking to refinance my 2nd House Hack as well. Sometimes, you can get the benefits of appreciation.

There is definitely risk to putting 5% down payments, but I also bought down the interest rate and paid points to give me the lowest mortgage payment with that down payment to mitigate that risk.

James Carlson · Answer

If you're buying a primary residence, you can put down as a little as 5% for a conventional loan. If you're buying an investment property, most lenders require 20%. We bought our first two residences with 5% down. You don't want to get overleveraged, so I wouldn't buy 10 houses with only 5% down, but you can definitely do it if you want.

James Carlson · Answer

@Fahadbin Alam

First off, congrats on the first purchase. That's awesome.

You should totally keep that first place. That's the whole point. The question is what you do with it. If you've got a strong market for rent-by-the-room there, then you can keep doing that, even if you're not there.

Be sure to check your local laws ... in Colorado Springs and Denver where we work, up to 5 unrelated adults are allowed to live together. Some other cities allow as few as 2 unrelated adults. Whether you follow those laws or not is up to you, but it's good to at least know the law.

You can do keep house hacking and turning the previous home into a rent-by-the-room rental or traditional LTR rental to one party. If you keep doing rent-by-the-room, just be aware that scaling that can be difficult because at some point, you'll have so many leases running, it can be difficult to manage.

Also, with our house hacking clients in Colorado Springs and Denver, I recommend working with a lawyer to get a lease tailored to the specifics of rent-by-the-room. Denver real estate attorney @Drew Fein has crafted a lease that addresses two issues specific to house hacking. It's important to protect yourself so that one mistake doesn't cost you all that cash flow you've made.

Good luck!

In terms of using the FHA loan, as @Nam Trang said, you can only have one FHA loan at a time, so you'd need to either refinance the first property into a conventional or use a conventional loan for the second home. You can put as little at 5% down on a conventional, so that's a good option.

Jacob Lapp · Answer

@Fahadbin Alam

You are asking about what happens to the first house hack?

By house hacking, you are claiming residency at the property for at least a year. But you are getting a fixed 30 year mortgage on the fact that you are going to live there for at least a year. So when that year is up you can buy your next one.

I’d make sure you talk to a lender first and see if you qualify for a first time home buyer 5% down conventional loan. Because if you use your fha on your first home you are missing out on this program.

After that you still have the option to do FHA. Or a slightly higher down payment on your second conventional loan.

You can only hold one fha loan at a time. So once you either wait until you have 20% equity in the property you can refinance to a conventional loan and now you can do another fha.

Jeff White · Answer

@Fahadbin Alam

1) Mother-in-law apartment is basically another living unit in a single family house with kitchen, laundry room, bedrooms and bathrooms.  Sometimes, they are in a basement, and sometimes, they are just an addition to the house or above a garage.  Some people rent them on Airbnb, and some people rent it out separately.  They are more common out here in Denver, not sure about New Jersey.  It is a way to get the benefits of a duplex. Also, usually single family homes are in better condition than multifamily homes, so you get the best of both worlds.  Check with your local municipality for zoning though.

2)  Actually, I only put 7% down using a FHA loan on my 1st house hack. I did put about 50k in improvements and repairs, and with appreciation, I was about to refinance it into a investment property loan (at least 25% equity).  Actual numbers, 630k purchase price in 2017, and I refinanced it last year at 815k.

3) It depends.  There are three types of refinances: cash out, rate and term, and HELOCs. Each one serves a different purpose.

Cash out is a the goal for everyone, it means that you have enough equity to pull money out, if it is a your primary residence, banks have less equity requirements (usually 15% or more), and investment properties are higher (usually 20% or more).

Rate and term is the one that I've used in the example above. I couldn't pull any cash out since I didn't have enough equity to do a cash out for an investment property, but I hit 25% equity, so I replaced my FHA loan with a new conventional loan that saved me $400 per month, so it was worth it.

HELOC stands for home equity line of credit, and it is a basically like a credit card but using the equity on your house as the line of credit.

John Mayer · Answer

@Fahadbin Alam

You don’t NEED to use an FHA loan for every house hack, BUT that would certainly be an ideal scenario because of how little you put down for every house. Your returns could be well above 100% per house if you’re doing your due diligence.

The ideal scenario would be to acquire 4 househacks in 4 years using only FHA financing. However, sellers don’t really like FHA buyers because they put less money down. Denver is also an extreme sellers market, so FHA buyers have even tougher time￼￼￼￼.

Also, you can only have one FHA loan in your name at a time.

Again though, still possible.. like so:

1) Buy the first home with an FHA loan￼

2) Live in it for a year

3) Refinance that home into a conventional mortgage ￼ (if you’re buying in the right areas you should have the equity by now)￼. This is to eliminate the current FHA loan in your name, thereby freeing it up for the next house.

Fyi** Lenders don’t consider room rental income as investment income. Therefore, even if you refinance, your DTI is likely going to be too high on paper to finance the next property, regardless of if your cashflowing. There are ways around it, so you should work on finding a creative lender who can find ways to make it count, legally.

4) Now that you’re refinanced out of the old FHA loan￼ and your DTI is reset, you can use it again to finance the next property.

Rinse and repeat.

Fahadbin Alam · Answer

@James Carlson Thank you for replying!! I'm confused on the conventional loan, can you always put down 5%? Because I thought it's always 20-25%?

John Mayer · Answer

@Fahadbin Alam

Debt to income ratio. It’s the ratio of your monthly debt payments to your monthly income. Ex: if I make 5000 a month, and I have a 2000 mortgage + 250 student debt payment + 250 car payment, my Debt to Income Ratio (DTI) is 50%.

Inclusive of your new mortgage payment, the FHA program will allow to have up to a 55% ￼DTI. Conventional loans are much less than that, I think around 40-45%.

Fahadbin Alam · Answer

@John Mayer thank you John, what is DTI?

Fahadbin Alam · Answer

@Jeff White I’m understanding a little bit but I’m still confused on how it worked out on the 25% equity. So when you refinanced it to a conventional the bank basically took the 25% ARV and said yep now it’s a conventional. So would that mean you have 0% equity afterwards? And this is called a rate and term would you still have to pay closing cost or would that just come out of the 25%?

How to house hack multiple properties?

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