Investor 路 Boston, MA 路 Member since 2020 路 55 posts 路 50 votes
I'm a strong believer that a house-hack is one of the first steps to wealth and financial freedom.
However, this one rule is overlooked and constantly kills deals before they even happen:
The self-sufficiency test.
I talked about how we can leverage an FHA loan to put 3.5% down on a home.
And a small multifamily property is the ideal situation. This would mean properties that have 2-4 units.
However, there is this quirky rule that applies only to 3&4 unit properties - it must pass the self-sufficiency test.
In order to do this, you'll need to prove that 75% of the rental income you鈥檙e likely to receive will exceed the full monthly mortgage payment.
For example, if the monthly mortgage payment is $3,000, this means the property must produce at least $4000/mo in rent ($4,000 x 75% = $3,000).
In short, it basically means that the income brought in from rent will cover the mortgage.
However, in a market like Boston, this isn't a common situation because property values are high & the cash brought in from rent rarely meets this requirement.
This means that the most realistic outcome is to purchase a 2-family property for one's first house-hack because SS doesn't apply which allows for more flexibility for getting your first property.
Good points made here! You can also apply for Masshousing conventional loan which would not be subjected to the Self Sufficiency Test (SST) as mentioned.
Good points made here! You can also apply for Masshousing conventional loan which would not be subjected to the Self Sufficiency Test (SST) as mentioned.
Hi Lien. This is a good addition. In your opinion what are the pros & cons of MCL compared to traditional FHA? I haven't worked with MCL before so interested to hear your insight.
My Point of View: As @Lien Vuong says, think about more traditional options. Federal programs are great, but they need to consider 50 states plus Washington DC, Puerto Rico and other US territories. Local banks understand our market and are supported through federal programs that support financial institutions.
MCL no not require SST as mentioned, will assist with downpayment assistance, as well as a huge bonus that PMI will automatically drop at 20% equity gain without having to refi. Cons are income restrictions to qualify and they have a loan limit like the FHA program.
I know this post is specifically for larger cities, or at least Boston. But could a person just look outside of the city for less expensive properties? That way the self sufficiency test has a better chance of working?
Also, if the property fails the SS test, you can try: 1) challenging the rent numbers in the appraisal report, 2) negotiating with the seller for either a lower price where the SS test works, or 3) negotiating with seller to provide a credit to buy down the interest rate therefore lowering buyer's monthly payment to where the SS test passes. I am sure there are other tips out there too.
I feel like defaulting to just looking at 2 families in the city could make it hard to cashflow either during occupancy or after you move out if that is your exit strategy. I think house hacks are wins if you have no money out of pocket towards your mortgage/expenses, or if you do come out of pocket but it is drastically lower than what your current rent it, therefore, having huge increased savings every month. Are you able to achieve that with 2 families in Boston? I am curious how those numbers look.
As a note, I house hack a 2 family in the North Shore, where the entry price was much lower than Boston. But my other unit doesn't cover me entirely. I'm still out about $100 out of pocket a month.
Hi @Austin Negron - I understand what you are saying and while 2-families don't have the self-sufficiency rule we regularly help people househack 3-4 unit properties in greater Boston without issue. In fact the self-sufficiently rule is rarely a problem for us in greater Boston but you definitely need to understand it, or have an agent and lender that understands it, so you can be proactive when negotiating offers. To @Jon McCarron's point if you know the rule you can devise a strategy to get over the issue before it becomes one. Just ignoring the 3-4 family properties is not the advice I'd recommend to househackers in greater Boston.
Most househackers we work with in greater Boston area want to "live for free", or at least at a discount, and the property needs to be able to cashflow when they move out and turn it into an investment property. After all an investment that loses money every month is a pretty crappy investment. When running our calculations with the BP calculator most of our buyers use 5-7% for vacancy, 5-7% for Maintenance, 10% for Management, and 5-7% for Cap ex, add those up and you're looking at 25% - 31%. They then back out taxes, insurance, water/sewer, electric (for the common), and a small misc budget. After backing out all of those thing is the cash on cash positive or negative. If negative = move on, if positive = lets go see it! We ONLY take clients to properties where the numbers make sense on paper.
The FHA Self-Sufficiency test, to your point, says take gross rent and multiply by *75% then back out taxes and insurance and it needs to cover the mortgage + PMI in order to qualify. If not then frankly they say its a bad investment and I agree with them. If the rents from the property don't even pay for itself wouldn't it be a liability not an asset?
The reason we don't have an issue with self sufficiency is because our househackers are subtracting 25%-31% plus additional expenses that FHA doesn't even consider (electric, water/sewer, etc) when they're evaluating properties. If it passes the BP calculator it'll pass the self-sufficiency test hands down.
Now I know what you're going to say. BUT most properties on the market have rents that are well below market rent so when I run my projections I put in higher rents, the FHA self-sufficiency rule fails since they take the leased rent not market rent into their calculation. And that is correct, but what happens if the property is vacant? Then the appraisers uses market rent, which is high in Boston. If a property doesn't pay for itself with market rents then why would you even want to buy it?
So the issue really isn't the self-sufficiency calculation its the fact that almost ALL properties that are for sale have rents that are significantly below the market rent for the area. So how can you overcome that issue? Simple, you need the appraiser to recognize higher rents in the appraisal.
So when we're putting in offers, or negotiating offers before going to P&S, we ask the seller to notify the tenants of a rent increase in 30 days. That rent increase just happens to line up with what we need to pass self-sufficiency, which is typically still well below market rent. If the tenant decides to move out the great then its a vacant unit and the appraiser will use market rent. If they agree to the rent increase then we show that to the appraiser and boom we made our case, stick that in the appraisal.
The other thing we can do is we ask them to move the tenant onto a TAW agreement, if they're not already on it. Now it's not "leased rent" so we can make an argument to the appraiser that there aren't any leases in place therefore the buyer is going to increase the rents to $x, which is the rent we need to pass self-sufficiency and still be below market rent, when they take ownership.
If the appraisal still comes in with rents that are too low for the self sufficiency test then we work with our lender and the buyer to submit a well articulated rebuttal. If the property appraised at the right value then we use their comps against them and fight to get the rents recognized at higher rates. We have a very good track record at winning those arguments.
And if all else fails we can renegotiate with the seller, or get creative with loan types if we need to, but by understanding the issue up front we have a very good track record of getting 3-4 families in Boston through FHA.
@Jonathan Bombaci Hi Jon. I appreciate the reply and insight. You bring up some good points. My main point was that the most realistic investment is a 2-family and this provides more flexibility because of all the reasons you just mentioned. I wouldn鈥檛 say it鈥檚 exactly common to find properties that easily pass self sufficiency. If I am mistaken, please send them to me and I am happy to give you a referral fee 馃ぃ
I think it depends on investors timeline as well. If they鈥檙e looking to get their first property over say, a 6 month span, then that would provide more opportunities to find the best situation which would be a 3/4 unit. But if someone is adamant about getting into a property within say 2 months, it may be more *realistic* to look at 2 families. Thoughts? Agree?
Not the Jon you mentioned , but I will put in a thought on that. Haha
What about the 2nd property? Buying a 3 or 4 family first will most likely enable you to get the second property quicker, with the assumption that you have successfully house hacked with no money out of pocket per month and hopefully bought something with a value add.
A 2 family in our parts might actually slow your progress a bit. If you have to take money out of pocket to support your building , that is less money you can put towards your next property.
Also, scaling, to whatever end goal you have in mind , would be easier with more units, 3 or 4 , vs 2 units at a time.
I do think it all depends on what the investor wants to accomplish. But if you want to get to your goals faster, generally more units faster would help.
Hi @Austin Negron sure where in Boston are you looking to invest? Do you know if you qualify for the FHA Max in Suffolk county based on unit count or do you have any restrictions? There are a ton of multis on the market right now if you're looking for another one I'd be happy to have someone on my team find you a 3-4 unit that would pass FHA or 203k financing.
PM me if you're serious we pretty much only do multis in greater Boston. We just closed on one from MLS in south Boston for a househacker 2 weeks ago.
@Lien Vuong yeah, he could "try" for a conventional loan but now he needs 25% vs. 3.5%.
@Account Closed i think you hit the nail on the head. But in BP's defense, BP is just a forum for experts and morons alike to share ideas, experiences, and a55hole opinions. so the info is often only as good as the one providing it, which is prone to biases, fallacies and straight up focked up assumptions.
@Austin Negron any decent, literate, high school graduate loan officer should be able to warn borrowers about this long before it becomes a problem. too bad most MLOs can't tie their own shoes...
