House Hacking My First Investment Property!

[Sophie Grizzle]

Hey Everyone! 

I'm super excited that 2023 is going to be the year I buy my first investment property. I just relocated to Pensacola, Florida and I'm on the hunt for a deal. I'm planning to use my FHA loan to buy a small multi-family property (2-4 units), or a single-family with the potential to rent out a bedroom or ADU.

As a first-time homebuyer & house hacker - I need all the tips! 

What do you wish someone told you when you were buying your first investment or house hacking for the first time? 

[Leonard Rybak]

Hey Welcome, Good luck.  I would say first off, find a mentor.

2nd , I would have my expectations reset. Expect to make mistakes, have heachaches, and don't expect riches or even cash flow in the beginning. But at least you have an asset. Then you will improve and improve, and eventually wont make as many mistakes.   

Goodluck and stay in the game!

[Jevon Shaw]

Congrats on taking the leap, Sophie! A common thing we see on the forums is first time house hackers think they've bought a bad deal if their mortgage isn't completely covered by the rent. This is not necessarily the case. If you are only coming out of pocket $700 per month, whereas rent for the unit you occupy would otherwise cost $1400, that's a pretty solid deal!

It is also worth mentioning that you should be doing analysis on both while you're living in the property and while you're not living in it. If the property does not cashflow while you are not living in it, it may be a bad deal. 

[Caden Wakim]

I second everything @Leonard Rybak stated.

be sure to know the area you are investing in, contact local agents and property managers, to verify rents, and really learn the area.

I think the thing that stuck with me when I bought my first investment is buying a quality home, and if it needs work, do the necessary work and most importantly, do it right, and with quality material. this will save you money in the long run. I cut a lot of corners when I put some work into one of my rental properties, and it still haunts me to this day, seems as if almost every month their is a new maintenance request, or an issue with an inspection. Now I am having to go in and redo all the work we have previously done, but this time we are doing it the right way...

best of luck

[Matthew Kwan]

House hacking with FHA is the ideal way with min down payment. However, anything above 3-4 units you would also need to consider passing the Self Sufficient Rule (SS Rule) where your projected gross market rental at 75% has to be greater or equal to your monthly PITI. The SS rule only applies to 3-4 units when using FHA but if it's single family or duplex, it will not trigger the rule. As for conventional for single family residence, you can go as low as 5% down. As for 2-4 units you would be expected 10-25% down depending on the amount of units. However, the mortgage insurance are usually lower than FHA @Albert Bui @Carlos Valencia

[Michael Hamby]

First deal is the hardest! I don't think I would do my first deal again if it was presented to me but it got my foot in the door and gave me the confidence to do the next one. If you are doing the work yourself, make sure to have a clean space so you can still live your life without interruption. Know your limits. I think it's interesting how home owners believe they can do every task in a house but professional contractors 20+ years in the business will be very strict in sticking to their specific craft. I am a big fan of owner occupant for multifamily to get started. You could do FHA loan almost every year to get to 10 units pretty quickly.

[Alfath Ahmed]

Congrats! It is always very exciting to buy your first deal. I would not recommend the FHA loan unless it is your last resort to buy an owner-occupant property.

Go with a 5% down conventional lender that will lend on a 4-unit. I have recommendations for lenders in FL and all over the country if you would like!

[Ryan Thomson]

@Sophie Grizzle 

House Hacking is amazing. Here are some resources I found really helpful on my journey.

1. For podcasts I really like the Huse Hacking episodes on Bigger Pockets Podcast and other channels. Here is a playlist with the best House Hacking Podcasts I’ve found: https://open.spotify.com/playlist/4A6uLsPfdWEMmJhG4TSjyb?si=743bb403548f47fb

2. Great beginners guide: https://www.biggerpockets.com/blog/wp-content/uploads/2022/08/Ultimate_Beginners_Guide_BiggerPockets.pdf

3. The Book on House Hacking Strategies by Craig Curelop is also a fantastic book

[Kyle Spearin]

@Sophie Grizzle as a real estate agent in your area, you have a competitive advantage finding good deals. That's awesome! 

I recommend having your exit strategy in mind as you're buying the property. Are you gonna combine long term and another type of rental strategy? Figure out what would help you cash flow when you move on to the next one.

[Mohammed Rahman]

Hey @Sophie Grizzle best of luck this year for you, it's a great time to be a buyer :) 

I've also used the FHA loan in the past and what I'd recommend is setting aside more money for operating expenses or random things in the first 3-6 months. Especially after you place a tenant, they will also come across things that need rectification that you may have thought was ok to keep as-is.

It doesn't mean the tenant is being difficult, but you get loyal customers if you keep them happy. 

[Cristopher Agosto]

Definitely getting in contact with an on-fire agent that understands our investor mindset. If you didn't know already the buyer doesn't even pay for the realtor the seller does.

[Christopher H.]

@Sophie Grizzle

Exciting!  

Sometimes people try to complicate things or overthink them.  Investing in real estate is actually very simple if we look at it from a high level.. 

Good House: How's the foundation, roof, HVAC?  What can you expect for repairs over 10 year?

Good Location: Is it located well for its purpose?  I.e. If you're buying a small family home you want schools and grocery stores close by, if its an urban condo you want walking amenities and transit, etc.  

Good Price: Does the deal meet YOUR investment goals?  Is this price fair for this particular property/neighborhood? No special skills needed. Just market knowledge and good math.  Both of which you can learn, hire and/or find pretty easily.  

It's a patient persons game right now.  There is deals coming.  

Good luck :)

[Lawrence Potts]

1. Interview multiple agents. Find out who they served and interview them.

2. Find a lender that is an investor as well! Do your due diligence on their team: the lender may be great but if their team is a problem, you could lose a deal because of it.

3. Surround yourself with investors that have done what you’re doing. Tell everyone what you’re doing and hear their stories. And if people are giving you advice, pay attention to who they are. Uncle Joe that’s never owned a home probably isn’t the best person to get your advice from.

4. Don’t be afraid to make mistakes. Give yourself grace. There’s an ignorance debt that has to be paid, be thankful that it’s now while it’s cheap and more forgivable than later down the road. Pay down that debt and take them as opportunities to learn.

5. Be okay with pivoting strategies and plans. That’s real estate: it’s always changing and the ones that can pivot and be creative are the ones that perform well.

6. If you need something from someone, give give five first and then ask. It’s a win win for you since you’ll learn more from giving first than from asking immediately.

7. Enjoy the process! If you’re doing some rehab projects yourself, it’s going to take longer than you had originally planned. And that’s okay. No excuse to be lazy, just be okay with it and grow.

[Wale Lawal]

@Sophie Grizzle

House hacking a single-family home or small multifamily property follows the same general steps:

1. Understand financing options
Conventional loans, along with FHA and VA loans, are three common ways to finance a primary residence through a traditional lender like a bank or credit union.

Interest rates are often attractive, even for borrowers with lower credit scores, and down payments may be 5% or less. VA loans backed by the Department of Veterans Affairs even allow veteran borrowers to obtain 100% financing on a home.

According to the Consumer Financial Protection Bureau (CFPB), before shopping for a mortgage a borrowers should:

Check their credit report
Assess how their spending habits will change with a mortgage
Budget for additional or changed expenses
Determine how much of a down payment is needed
Decide on a purchase price of a home
Create a loan application package with personal and financial information including pay stubs, W-2 forms, copies of recent tax returns, bank statements, and proof of identity
2. Search for a good property to house hack
A property that is a viable candidate for house hacking may have characteristics that are slightly different than a home that the owner will live in year after year.

That’s because eventually, most house hackers will turn the primary residence into a rental property as they grow their rental property portfolio. So it makes sense to choose a home that will make a good rental right from the start.

Common factors that real estate investors consider when choosing a good rental property include:

The neighborhood, which will influence the type of tenants the home will attract and the rent they can afford to pay.
Property tax rates, which vary widely from one place to the next and can have a significant impact on the total return of a rental home.
School district quality, crime rate, and overall neighborhood ratings affect occupancy levels and the overall value of the home.
Job market and population growth are two indicators real estate investors consider to help predict the future demand from tenants for rental housing.
Housing Price Index (HPI) and Housing Affordability Index (HAI) are two other metrics investors use to anticipate rental property demand, because when home prices are unaffordable more people may choose to rent rather than own.
Average rents and rent growth also affect where to buy a home to house hack, since the rental income will be used to pay for part of the mortgage and other expenses. Good tools to use to learn about market rents include Rentometer, Zillow Rent Zestimate, and Zumper.
The number of rental home listings and vacancies in the area also indicate how strong or weak the demand for rental property is, because high vacancy rates may lead to lower rents and poorer investment returns.
3. Crunch the numbers before making an offer
Before making an offer on a home to house hack, investors crunch the numbers to get a better idea of the potential amount of income the home may generate.

Even though a home being house hacked won’t be used entirely as a rental at first, investors often look forward to the day when the property can be refinanced and the equity turned into cash to use as a down payment to purchase another rental property.

This simple spreadsheet by Roofstock provides an easy way to view the potential financial performance of a given property. You can use it to forecast the potential return of a property. Simply enter some information to view projected key return on investment (ROI) metrics, including cash flow, cash-on-cash return, net operating income, and cap rate.

4. Close escrow, move in, and make repairs
Closing costs on a primary residence normally run between 3% and 5% of the loan amount, in addition to the down payment. Fees to close escrow on a home include costs such as origination charges, appraisal fee, home inspection, title search and lender insurance, prepaids (such as homeowner’s insurance and prepaid interest), and title insurance.

After taking title and moving in, the part of the property being rented out will need to be made ready for a tenant.

The amount of repairs and updating required will vary depending on whether a bedroom in the home is being rented, a basement or attic is being remodeled into a studio apartment, or extra units in a multifamily property are being updated.

5. Find a good tenant
People who are house hacking and being landlords for the first time should take care to understand the state landlord-tenant laws and the Fair Housing Act to avoid breaking the law or discriminating against a tenant.

When the space is ready to be rented, these are the general steps investors follow to screen tenants:

Determine minimum tenant criteria, such credit score or income-to-rent ratio
Pre-screen tenants by discussing requirements such as the monthly rent, security deposit, rental application fee, and background check up front
Gather and review applications from prospective tenants and get permission to run a credit report, conduct a background check, and contact current and previous employers and landlords to verify tenant information
Decide on the best tenant and sign a lease agreement

All the best!

[Sophie Grizzle]

Quote from @Jevon Shaw:

Congrats on taking the leap, Sophie! A common thing we see on the forums is first time house hackers think they've bought a bad deal if their mortgage isn't completely covered by the rent. This is not necessarily the case. If you are only coming out of pocket $700 per month, whereas rent for the unit you occupy would otherwise cost $1400, that's a pretty solid deal!

It is also worth mentioning that you should be doing analysis on both while you're living in the property and while you're not living in it. If the property does not cashflow while you are not living in it, it may be a bad deal. 

Great advice! I completely agree. Thank you.

[Sophie Grizzle]

Quote from @Michael Hamby:

First deal is the hardest! I don't think I would do my first deal again if it was presented to me but it got my foot in the door and gave me the confidence to do the next one. If you are doing the work yourself, make sure to have a clean space so you can still live your life without interruption. Know your limits. I think it's interesting how home owners believe they can do every task in a house but professional contractors 20+ years in the business will be very strict in sticking to their specific craft. I am a big fan of owner occupant for multifamily to get started. You could do FHA loan almost every year to get to 10 units pretty quickly.

Great advice! Thank you. Love the idea of using FHA to scale!

[Sophie Grizzle]

Quote from @Ryan Thomson:

@Sophie Grizzle 

House Hacking is amazing. Here are some resources I found really helpful on my journey.

1. For podcasts I really like the Huse Hacking episodes on Bigger Pockets Podcast and other channels. Here is a playlist with the best House Hacking Podcasts I’ve found: https://open.spotify.com/playlist/4A6uLsPfdWEMmJhG4TSjyb?si=743bb403548f47fb

2. Great beginners guide: https://www.biggerpockets.com/blog/wp-content/uploads/2022/08/Ultimate_Beginners_Guide_BiggerPockets.pdf

3. The Book on House Hacking Strategies by Craig Curelop is also a fantastic book

Thank you so much! This is very helpful. 

[Sophie Grizzle]

Quote from @Christopher H.:

@Sophie Grizzle

Exciting!  

Sometimes people try to complicate things or overthink them.  Investing in real estate is actually very simple if we look at it from a high level.. 

Good House: How's the foundation, roof, HVAC?  What can you expect for repairs over 10 year?

Good Location: Is it located well for its purpose?  I.e. If you're buying a small family home you want schools and grocery stores close by, if its an urban condo you want walking amenities and transit, etc.  

Good Price: Does the deal meet YOUR investment goals?  Is this price fair for this particular property/neighborhood? No special skills needed. Just market knowledge and good math.  Both of which you can learn, hire and/or find pretty easily.  

It's a patient persons game right now.  There is deals coming.  

Good luck :)

Thank you! Great advice. 

[Sophie Grizzle]

Quote from @Lawrence Potts:

1. Interview multiple agents. Find out who they served and interview them.

2. Find a lender that is an investor as well! Do your due diligence on their team: the lender may be great but if their team is a problem, you could lose a deal because of it.

3. Surround yourself with investors that have done what you’re doing. Tell everyone what you’re doing and hear their stories. And if people are giving you advice, pay attention to who they are. Uncle Joe that’s never owned a home probably isn’t the best person to get your advice from.

4. Don’t be afraid to make mistakes. Give yourself grace. There’s an ignorance debt that has to be paid, be thankful that it’s now while it’s cheap and more forgivable than later down the road. Pay down that debt and take them as opportunities to learn.

5. Be okay with pivoting strategies and plans. That’s real estate: it’s always changing and the ones that can pivot and be creative are the ones that perform well.

6. If you need something from someone, give give five first and then ask. It’s a win win for you since you’ll learn more from giving first than from asking immediately.

7. Enjoy the process! If you’re doing some rehab projects yourself, it’s going to take longer than you had originally planned. And that’s okay. No excuse to be lazy, just be okay with it and grow.

Awesome advice, thank you! 

[Jeff Schemmel]

@Sophie Grizzle glad to hear this. Do you qualify for any low-down conventional options? Here in Saint Paul, I often recommend clients take advantage of a 5% down conventional option that's only available to first time buyers so they can keep that FHA in their back pocket for deal #2. Then you have two low-down options available instead of going FHA, then immediately to 15+% down payment on deal 2.

I found that who you partner with in lending is so critical.  they can seriously make or break your deal, and I would make sure you are working with someone that is also an investor, who knows the local multi-family market, and can give you some real advice on lending options and even creative solutions to get competitive in your local market.

I looked for value-add because I wanted to house hack, force equity, improve revenue, and capture both equity and cash flow as soon as I could.  This is the way if you can hack it and you're willing to get your hands dirty.  take good notes on capital expenditures when you're touring a property you're serious about and practice your deal analysis daily to train your mind to spot a deal.

Good luck!

[Sophie Grizzle]

Quote from @Jeff Schemmel:

@Sophie Grizzle glad to hear this. Do you qualify for any low-down conventional options? Here in Saint Paul, I often recommend clients take advantage of a 5% down conventional option that's only available to first time buyers so they can keep that FHA in their back pocket for deal #2. Then you have two low-down options available instead of going FHA, then immediately to 15+% down payment on deal 2.

I found that who you partner with in lending is so critical.  they can seriously make or break your deal, and I would make sure you are working with someone that is also an investor, who knows the local multi-family market, and can give you some real advice on lending options and even creative solutions to get competitive in your local market.

I looked for value-add because I wanted to house hack, force equity, improve revenue, and capture both equity and cash flow as soon as I could.  This is the way if you can hack it and you're willing to get your hands dirty.  take good notes on capital expenditures when you're touring a property you're serious about and practice your deal analysis daily to train your mind to spot a deal.

Good luck!

Thanks, Jeff! Great advice. Definitely plan to find a property that I can add some value to myself.

[Ryan Thomson]

Quote from @Sophie Grizzle:

Quote from @Ryan Thomson:

@Sophie Grizzle 

House Hacking is amazing. Here are some resources I found really helpful on my journey.

1. For podcasts I really like the Huse Hacking episodes on Bigger Pockets Podcast and other channels. Here is a playlist with the best House Hacking Podcasts I’ve found: https://open.spotify.com/playlist/4A6uLsPfdWEMmJhG4TSjyb?si=743bb403548f47fb

2. Great beginners guide: https://www.biggerpockets.com/blog/wp-content/uploads/2022/08/Ultimate_Beginners_Guide_BiggerPockets.pdf

3. The Book on House Hacking Strategies by Craig Curelop is also a fantastic book

Thank you so much! This is very helpful. 

 You are welcome!

[Ryan Thomson]

@Sophie Grizzle Lots of good advice on this thread! I hoped that helped. Do you have any more questions? 

[Sophie Grizzle]

Quote from @Ryan Thomson:

@Sophie Grizzle Lots of good advice on this thread! I hoped that helped. Do you have any more questions? 

This was great! Not at the moment. Now just have to search for the property. 

Thank you so much!

[Ryan Thomson]

@Sophie Grizzle good luck!!

[Mariano Mossburg]

Congratulations on taking the leap and committing to posting your goal on biggerpockets! Life is easier when a community is supporting you. I am new here and planning to do the same thing in the Gainesville area. Please follow up when you make the purchase and let us know what you learned through the process.

- Mariano