First House Hack - What would you do if you were me?

Question

I currently am looking to purchase my first 3 family in which I would live in one of the units. I'm looking for a place that doesn't need too much rehab work as I have two small children that will be living part time, however, I'd like to continue to build a portfolio after living in unit for a year before moving on to a next property, building my portfolio.

The properties in my area that are in decent shape for a multifamily are around $550k. I currently have $200k to invest but would think I should keep some cash liquid to purchase another property a year from now? Just looking for some guidance from some of the experiences you all may have! After reading Multifamily Millionaire and The House Hacking Strategy, it seems like the tendency is to do a FHA 3.5% loan. Is that would you do?

Thanks so much in advance.

Julien Jeannot · Answer

@Erik Reis

I'd think 2 steps ahead. How much do you need for the property after that and back into how much you can put down today minus rehab cost.

Joey Banasihan · Answer

Hey @Erik Reis, I would start with savvy lender who can tell you more about the new 3.5% for multifamily. I am not a lender, but they do want to see a decent amount of cash reserves, which is sounds like you have. I would lean into finding a property that needs some renovations, but maybe use that cash for the other properties to get the best market rents? Talk with a local investor property management and they can tell you were to invest in renovations and hopefully connect you with contractors (or do it yourself!).  This way you can force some equity in on the front end, give it a year to season, and once you move out maybe renovate that place. I think keeping liquity for future rehab, reserves, and next property is smart. Sounds like you are on the right track, find an investor friendly agent who can hopefully help you negotiate some equity on the front end and go for it! You got this!

Michael Smythe · Answer

Run the numbers backwards!

If you buy a property, what will the payment be after property taxes adjusted (also including insurance)?

What rents will you get from the other unit(s)?

What rent will you get from your unit when you move out?

Taking into account vacancy & maintenance factors, how much of a loan amount will your NOI support?

This will all tell you how much down to put.

If you have anything left over, you can use for next purchase.

Jason Munger · Answer

Would you be making enough improvements to the property that a refi in the near future could be a possibility?  That could free up cash for the next deal.  Essentially a BRRRR

Eric DeNardo · Answer

Hey @Erik Reis,

I suggest using a conventional loan which you can put in as little as 5%. You can maybe find a duplex that needs some cosmetic upgrades (think cabinets, flooring, old appliances) and add value to it, without having a huge rehab project. I think that would be the best way. Reach out if you have any other questions!

Ryan Thomson · Answer

@Erik Reis I would do a 5% down conventional loan. Rent out the other units and scale when it makes sense/is possible. Keeping that cash around is a great idea and will make scaling much easier.

Another interesting strategy could be assuming a loan. In Colorado Springs, we have a lot of properties that are eligible for assumption. Meaning you can take over the loan balance and interest rate. If the purchase price is more than the loan balance (it probably will be) you will have to cover that difference in cash. That difference  is the "equity gap".

In Colorado Springs I am finding plenty of properties with interest rates between 2.5-3.5% that require less than 50k to cover the equity gap. I'm guessing the same would be true for your area.

David Mackin · Answer

If you end up wanting to go FHA and it's a 3-unit, make sure you look into self-sufficiency. The other two units that you yourself are not occupying have to cover mortgage payment based off of rent schedule. In my market, that can be a huge issue. Might not be the case for you, but is something that is often overlooked with the FHA strategy. Talk to a trusted lender and they'll help you navigate this guideline.

Ko Kashiwagi · Answer

Hi Erik,

It sounds like you are in a great place to start. The FHA has more stringent guidelines to qualify than  other conventional programs. If you are able to cash flow (at least after moving out) at 3.5% down, then this seems like a great idea - you can put in 3.5% down (3.5% of $550k is $19,250)) and rent out all units after 1 year. You can also do a house hack BRRRR, where you fix up the property as you live in it, that way you can cash out refinance.

However, if you are unable to refinance, it may be smarter to put a higher down payment (say 5-10%) given you have a lot of cash. This all depends on your income and risk tolerance. Once you gain familiarity with you first investment, you could ideally do more house hacks or investments.

First House Hack - What would you do if you were me?

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