Home Hacking First Time Advice

Des Moines, Iowa
House Hacking
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Home Hacking First Time Advice

Matt T.
Member since 2022 · 1 post · 2 votes

Hi everyone,

I’m new to Biggerpockets and real estate investing in general and am looking forward to learning from you all!

I’m looking at buying my first home and am interested in house hacking since my partner and I don’t have a family (and therefore too many privacy needs) just yet. I’ve saved up a significant sum of money from a well-paying job while living at my parents house for a few years, and am getting some inheritance money as well - I will soon have approximately $300k liquid. 

I'm hoping to buy a duplex for ~$700k and to rent out the other side. Here's where I need some help: I'll have plenty of cash for a conventional loan with a 20% down payment. But, is it still better to use an FHA loan with 3.5% down and put my remaining cash to work somewhere else? Pros and cons to both approaches? I'm having trouble figuring out if the PMI requirement with 3.5% down is worth the smaller capital outlay.

Alternatively, are there any other beginner RE investment strategies that you think would be a better fit for my situation? I’m not a handyman or DIY enthusiast by any means, so I’m not particularly attracted to flipping. I just like the idea of having cash flow to cover my living expenses!

Thank you all for your help. 

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Miller McSwainPro Member
Investor · Colorado Springs, CO · Member since 2018 · 261 posts · 234 votes
3y

If you are interested in a duplex, I would DEFINITELY use the FHA. The less money you put down, the lower your cashflow (because your mortgage payment is higher and you pay PMI); however, your cash-on-cash ROI is higher because you put so little down. PLUS, like you said, you would then have lots of cash left over to invest elsewhere OR purchase another house-hack duplex a year later.

One thing to note: for duplexes, Conventional requires that you put at least 15% down if you are an owner-occupant. For a single-family, Conventional allows you to put 5% down. 
So if you were interested in single-family, I would recommend Conventional (like @Karl McGarvey said) because the inspections/appraisals are more stringent for the FHA, and because 5% down is pretty close to 3.5% down.
But in the case of the duplex, even though you may have more strict inspections/appraisals, 3.5% down will yield much higher cash-on-cash ROI than the 15% down.

Let me know your thoughts!

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  • Karl McGarvey
    Real Estate Agent · Houston, TX · Member since 2019 · 763 posts · 500 votes
    3y

    First, you dont HAVE to have someone live with you or have multifamily to house hack. You could also buy a fixer upper, add value to it over a year through rehabs, then rent it out after a year when you move to your next property. I even have clients that buy turnkey homes that they move into for a year and then move out and rent it out. Lots of ways to skin a cat. 

    Unless you need to do a FHA loan due to credit, I would avoid it. Extra appraisal requirements and the MIP payments never go away. With a conventional loan you can pay as low as 5% down, and the PMI goes away around 20% equity.

    With the economy and RE markets in a very fluid place right now, I think house hacking is the perfect way for people to get into REI with little risk. Worst case scenario you stay in the home you bought and dont turn it into a rental, but you got into that house for low money down!

    1Reply
  • Miller McSwainPro Member
    Investor · Colorado Springs, CO · Member since 2018 · 261 posts · 234 votes
    3y

    If you are interested in a duplex, I would DEFINITELY use the FHA. The less money you put down, the lower your cashflow (because your mortgage payment is higher and you pay PMI); however, your cash-on-cash ROI is higher because you put so little down. PLUS, like you said, you would then have lots of cash left over to invest elsewhere OR purchase another house-hack duplex a year later.

    One thing to note: for duplexes, Conventional requires that you put at least 15% down if you are an owner-occupant. For a single-family, Conventional allows you to put 5% down. 
    So if you were interested in single-family, I would recommend Conventional (like @Karl McGarvey said) because the inspections/appraisals are more stringent for the FHA, and because 5% down is pretty close to 3.5% down.
    But in the case of the duplex, even though you may have more strict inspections/appraisals, 3.5% down will yield much higher cash-on-cash ROI than the 15% down.

    Let me know your thoughts!

    2Reply
  • Dan Dempsey
    Member since 2022 · 7 posts · 6 votes
    3y

    Matt,

    You could buy around 3 pretty nice duplexes in the Des Moines area for 700k.  If you have the want/ability to get into more than one property or a larger property, I would consider doing that.  I think duplexes are a great starting place for a real estate investment.  Generally, the less money you can put down the better, but I would caution against becoming overleveraged depending on the type of debt/loan you choose and the cash flow from the property.  If you still have that well-paying W-2 it would be less of a worry.  Most important thing I would say is to get started.  In the long run you can adapt your strategies as you go and become more experienced and see what works for you.

    1Reply
  • Christian EhlersBusiness Member
    Real Estate Agent · NH & MA · Member since 2021 · 457 posts · 291 votes
    3y

    I'd say everyone so far has had great advice! In the end most answers to these types of questions depends on your goals, and your tolerance for risk I've seen. If you are comfortable house hacking I would definitely suggest that route as you can get several properties with very little risk, while lowering your living expenses and growing a portfolio. If you are looking to grow a portfolio I would put down the Minimum down payments as it will hurt your cashflow yes but the extra cashflow you can get from having additional properties should far outweigh this. 

    Then keep more money in reserves since you are more highly leveraged to cover yourself while you have lower cashflow. 

    My guess is in an expensive market of 700K multifamily's you won't cashflow super well regardless in the beginning, but overtime the value of the property will increase and so will your rents...

    Good luck and keep us posted on what you do!

    [email protected]978-396-9939
    1Reply
  • Winston Jimenez II
    Specialist · Des Moines, IA · Member since 2019 · 38 posts · 6 votes
    3y

    Hey Matt - Congratulations on making the decision to house hack. I was looking to do the same earlier and found out that you will put down less money with the FHA but you'll have the PMI requirement for the duration of the loan. If you have the capital to put down 20% for a conventional that would be the way. Also a lot of people selling their duplex / multifamily homes won't look at FHA because of the appraisal rule.

    I'm also in the Des Moines Area - give me a shout if you want to talk more about the topic over coffee

    0Reply
  • Rick Albert
    Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
    3y

    In my opinion, right now cash is extremely important. The cost of renovations/repairs are still high so having nice reserves is a good thing. Plus if there are other properties that makes sense as a straight investment, then you can jump on it. That's why I would go with FHA.

    Of course you have to factor in qualifications and what the long term plans are for the property. FHA has the PMI for the life of the loan, so the only way out is to refinance. But with a high Loan-to-Value (LTV) that's going to take a minute to get the necessary equity.

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