Could use some House Hacking tips for a new real estate investor.

Question

I am currently in the process of acquiring my first buy and hold multifamily property. My cash on hand is not enough to pay the 20% down payment for a loan so I have opted to put 5% down with a conventional loan. I chose this financing strategy instead of an FHA because I do not want to have mortgage insurance for the life of the loan. This will of course be my primary residence because it is not qualified as an "investment" property yet. So, with only one tenant in place, I would still owe around $350 a month for the duplex. So, with that being said would it be smart to aggressively pay down the mortgage while house hacking? My rational for doing so is to build up to that 20% equity in the home so that when I move out and put a tenant in my unit my margins can be increased. This is because at 20% equity my mortgage insurance will roll off the loan lowering my monthly payment by about $150 a month increasing my cash flow but lowering my COC return because more money is being put into the deal. Is this an ok option to take or should I just continue to save in order to get into another deal?

Nate Sanow · Answer

Long term, is it wise to aggressively pay off? Sure, kinda, sorta, and if you can… short term, would I worry about it? Probably not. I would worry about making sure I saved the difference between what my old monthly expenses were and my new house hack expenses that should be a lot lower. The reason I say this is because you want to at some point transition your mindset to your money and investments working for you. Using extra money from income to reduce a mortgage is a really good mindset of the people who plan to be employees for a long time and obtain 1-2 properties or so based strictly off of income and what they can afford. The REI who aspires to reach a portfolio and financial independence and let’s say 10-20 doors or 100 doors or whatever the bigger than you number is, needs to get their mindset wrapped around finding other peoples money, and getting someone else to pay that money off. By moving out in a year, I’m just guessing but odds are that you’ll be able to make even more than that $350 owed to lender amount. In so doing, your tenant can pay you the extra money to pay off your lender. At this point you’ve hopefully built up reserves, and, are in a place to rinse and repeat and acquire another property all while yes reducing what is owed to the lender… but not strictly from your labor / income. I’m rooting for ya. Best wishes to your success

Jevon Shaw · Answer

It depends on what you want real estate to do for you, and how quickly. Keep in mind, the only thing that allows anyone to leave their job is high enough cashflow, whether that be via rentals, flips, or whatever. If you'd like to eventually do this, the right answer may be to pay down the loan up to 20% equity.For what it's worth, I was in a similar situation, and I chose to pay down the loan up to a certain point. I ended up living off of part cashflow from the house hack and part savings for about 6 months to learn to code full-time. Needless to say, this led to much more lucrative career opportunities. No regrets about it. Hope this helps!

Darius Wade · Answer

Wow thank you so much for that. I do agree that it is challenging at first adapting the mindset to that of a REI and working with the end goal in mind. I will continue to work through this in order to grow my wealth and my portfolio, thank you again and hope all is well on your end.

Benjamin Aaker · Answer

Hi Darius,Have a talk with your banker first. Most PMI can be removed when your equity in the property reaches a certain threshold. If you found a 95% conventional loan, that's great, but have a look at the details around it. These aren't really common so there might be a catch for you that wouldn't be present with FHA. I love the idea of house hacking a multifamily. I always recommend getting as many units up to 4 as possible. The economy of scale is huge along with the benefit of being able to get an FHA loan. You'll be in the red $350 which isn't great for an investment, but not terrible when house-hacking. You are paying much less than even if you are renting and you are building the equity, which is much more important than cash flow in the long term. Short term, you have to pay the bills, so make sure the finances work with your short to medium term employment plans, i.e. don't quit your job right away. When you move out your margins will only increase if you refinance. I don't recommend to bank on this because of rate fluctuations. Since you are buying now at 6% or whatever you get, there is the possibility rates also go down, so you might get lucky, but don't bank on a luck play. I can't tell you whether you should make the deal or not, negative cash flow is difficult to sustain, but as long as you reasonably know you'll keep your job until you can refinance, it seems doable. Good luck.

Bradley Dosch · Answer

Hey Darius, this is an awesome position that you are in and your question is common among new house hackers. Long story short it's almost never worth paying off your loan more than needed, especially when you're just starting out. There are many explanations as to why but, to me, the most powerful is this: look at how much you'll save monthly by dropping off PMI vs how much that will cost you. An example would be for a $500,000 house, let's say the PMI is $120/month. The additional cost of dropping of the PMI is 20% - 5% = 15% = $75,000. So the question becomes: do you want to pay $75,000 to save $120/month? The answer for me is pretty easily noPaying $350/month out of pocket while living there is an excellent house hack. Focus on the numbers for when you move out. Use your capital to continue acquiring properties, doing renovations if necessary, and building adequate reserves.Great question and good luck in your endeavors!

Darius Wade · Answer

It does help thank you for the information I will make sure to keep this in mind and it's good to hear things went well for you.