House Hacking Financing

[Jacob Mitchell]

As a young real estate agent, I have been intrigued by the house-hacking strategy of investing. This strategy wasn't first taught to me by Bigger Pockets, but the platform has clarified many of the misconceptions I've had in the past. However, I still haven't been able to figure out what financing would look like in the most traditional situation. If you finance your first small multifamily property with a 3.5% FHA, what do you finance your next property with? I hear you can grow your portfolio with low money-down mortgages by moving every year and renting the last unit you lived in, but how do you get into the next multifamily with anything other than a 20% conventional loan?

Would appreciate someone's insight on their strategy or (if necessary) conveying a tough reality that it's not that easy.

[Zack Karp]

@Jacob Mitchell some good info here, but I think people are missing the point and not giving you the straight answers that you need.

One critical part that you mentioned is multifamilty (2-4 units). Most of what people are referencing in this post are 1-unit criteria. These are VERY different.

The other critical part you mentioned is not being ready until 2024, which likely means that's when you will have 2 years of self-employment income before you can qualify. To your question about using salary, yes that's part of how you qualify with your debt-to-income ratio (DTI). Your DTI is the ratio between your employment income plus rental income, compared to your monthly liabilities (housing, car payment, student loans, credit cards, etc).

With 2-4 unit properties, you have 2 options (if you are not a Veteran or buying in a rural area) to buy with a low down payment. Either FHA, or Conventional Home Possible. Period.

FHA allows 3.5% down. Conventional Home Possible allows 5% down. With HP, there is also an income cap that you have to navigate.

Strategy-wise, FHA is best to do first. Why? Because when qualifying for a FHA loan, and vacating an existing property with a mortgage, you must prove with an appraisal that you have 25% equity in the vacating property in order to use rental income for qualifying. For most people, without being able to use rental income is a deal breaker. So if you do HP first, and then try to do FHA 2nd, chances are very high that you will be stuck, unless you did some kind of value add and gained 20% more equity in 1 year.

So then for the 2nd property, it's best to do HP (assuming your LO is smart enough to help you to qualify under the income cap). HP only allows you to have 2 financed properties, counting the subject property you are buying, which is why you want to do this loan 2nd. If you can't qualify for HP, then you skip it and just keep doing FHA.

So now you have 2 properties under your belt. For the 3rd property, you now have 2 options for another low down payment. Either buy a 1-unit with 5% down, or if that first property has at least 25% equity, then you can refinance out of the FHA loan and use FHA again for another 2-4 unit. You can only have 1 FHA loan at a time (unless you relocate for work > 100 miles away), which is why you have to refinance out of it to a Conventional loan (or some other product) in order to use it again. And with Conventional financing, as a primary residence, the max LTV for 2-units is 85%, and for 3-4 units is 80%. If you have already moved out and it's an investment property, for 2-4 units it's max 75% LTV.

There are a LOT of nuances with the guidelines, and there should be a lot of mapping out your strategy of the order that you finance, BEFORE you get into any property. Seeing 2,3,4 moves ahead is extremely important to make sure that you don't get stuck. It is very much an art (that even many/most loan officers don't understand lol). The goal is to make sure that you don't get one-and-done, and then forced to save up 20% down for the 2nd property, because you were working with the wrong person who didn't care about your long term plan. Any realtor can sell you a house, and any LO can finance a loan. But finding the right realtor and LO that understands REI and these strategies is critical to your success. Luckily you already have the first part of that solved :)

Hope that helps. Best of luck!