House hacking with 3.5% down or 20% down.

[Jonathan Quesadilla]

Hello fellow bp members,

I am currently eager to get my foot in the real estate game and working hard to learn, earn money, and get the ball rolling to house hack. I am eager to start house hacking but I do not have 20% to put down for a down payment. I know that putting more down means a lower mortgage, no pmi, and leaves big margins to cash flow on the house. I don't want to wait 5 years or so to save up 20% down but rather put 3-5% down to get experience and possibly cash flow when I do get my property. What is the best course of action here, 20% down or 3-5 % down. I am aware of additional payments for an FHA such as MIP, but i am completely fine with that. I would want to live there for a year, refi, then buy another property thereafter. Thoughts? Suggestions? Thanks BP community!

-Jonathan 

[Ben Einspahr]

 @Jonathan Quesadilla Anything I post will just be compounding on what others have touched on. Lower the down payment, higher your ROI. Here is an example.

NOTE: Did not factor rental appreciation, property appreciation, inflation, etc. so don't beat me up on the numbers BP :) This is just to show the power of building HH stack and leveraging dept. Yes. You do not want to over leverage. That is why my rule of thumb is 6 months reserves for each rental. Again... this is just for example purposes!

Example 1= 5% down, 1 property ever other year for 6 years

$400k house hack

5% down plus closing costs= lets say all in for $25k

Move out after 24 months and purchase same house house same price. 

HH#1 cashflows $100/month

Do that again at year 4 and year 6

Avatar 1 now has 2 rentals and 1 house hack (future rental)

All in for $75k out of pocket and has 1.2M worth of RE that is appreciation at +/- 4% per year

Cashflow= $200/month total for property 1 and 2. Living in property 3

Example 2= 20% down on house hack. Live in for 6 years

$400k house hack

20% down plus closing costs= lets say all in for $85k

Avatar 2 lives in it for 6 years. Can not purchase next rental because all cash is tied up in HH#1. His mortgage is less but all he is doing is decreasing living expenses, not building wealth. Yes, you can do HELOC but not want to dive into the nuances

I would rather be Avatar 1 that leverages debt by purchase rentals consistently for low down vs tying up cash into 1 house hack at 20% down.

Backing in my answer with actual case study

I recently put together a case study of one our clients that has done this every year consistently since 2016 and is now on his 7 house hack. Numbers are pretty fascinating! Happy to send you the details.