Exit strategy for house hacking with cash out refi or other methods?

Question

Hi community,

As I think about the exit strategy for going from one house hack to the next, I have realized that it would be difficult to cash out refinance and buy the next house with a minimum down payment from a primary resident loan. The image attached is an example calculation I did and I had to push the appreciation to 25% to be able to pull a good amount for the next down payment.

With these calculations, it made me realize that I might have to find alternative ways to go from house hack one to house hack two. What are some other exit strategies I should consider for house hacking? I would love to hear your thoughts!

Andrew Freed · Answer

@Kevin Duong - @Jason Wray brings up a great point and this is exactly what I did. I househacked a 3 family with a 5% down conventional product or a 3.5% FHA loan, improved the property, lived there a year and HELOC'd it before I went onto my next house hack. You can find HELOCs up to 90-95% equity these days hence if you create equity while you live there, you can suck it out in the form of a primary residence HELOC before moving into your next househack. It allows you to pull out equity from the deal without refinancing into an investment loan, which requires normally at least 20% equity and is usually challenging given that you bought it with a low down payment loan. More or less, Househack ----> HELOC -----> Househack -----> HELOC. It's worked for me, I'm on my 4th househack and used money from previous househacks to expand my portfolio.

Andrew Freed · Answer

@Grady Gilman All really good questions. When I search for househacks, I try to idenitfy value by finding a mismatch between square footage and bedroom count. For instance, say I run across a 3 family at 4,000 square feet but its marketed as a 6 bed 3 bath property. Normally 3-4 bed units are 1000-1400 square feet on average hence if you find a property where the average square footage per unit is 1300 but its listed as 2 beds each, there is a high liklihood you can find additional bedrooms increasing value with some simple carpentry work. I hope that helps in your search to find the perfect househack.

Grady Gilman · Answer

Hi Andrew! I have a few questions about your approach to finding houses for house hacking, especially those where you can also force appreciation through improvements.

Firstly, what ratio of bedrooms and bathrooms do you typically look for? Do you prefer houses that already have 3+ bedrooms and 2+ bathrooms, or are you more interested in properties where you can add additional rooms and baths? I'm really curious about your thought process in identifying "hackable" houses that also offer opportunities for value-add improvements.

From what you've shared, it sounds like you're created a hybrid House Hacking/BRRRR strategy. Given that you're already on your fourth house, it seems like this approach has been quite successful for you. I'd love to hear more about how you find these properties and any tips you might have for someone looking to follow a similar path.

Ash Hegde · Answer

You are correct, if you get into a house hack with a low down payment (3.5-5%) it is unlikely that you'll be able to refi the following year and pull out cash for another property. The hope is that while you live in the house hack, rent from the other units (or rooms) is saving you money every month and you can use that savings for the next one. There is a point where  you'll be able to cash out refi from the property, but without extreme appreciation it probably won't be in year 1.

Recycling money from properties to use for the next one is generally a strategy for BRRRR more than for house hacking.

Jason Wray · Answer

Kevin,

If you are using a 80% LTV on the $412500 then yes, $11K.  But if this remains your primary you can take out up to 90% CLTV using a HELOC.  At that point $142500 x 90%LTV ($371,250 - $319K) gives you a LOC of $52,250.00.

You can always speed up the equity/ARV if you can renovate or add sqft possibly an ADU.  But that does require funds - Takes money to Make money!

If you purchased this house turnkey this is why you have to wait 1-2 years to tap into the equity.  It's better to buy what we call "Ugly Inventory" to then close renovate and borrow off the new ARV.  For future reference you can buy a home and use a renovation loan before or after you close.

Dave Foster · Answer

@Kevin Duong. Have you lived in the property for two out of five years you've owned it? If so you could qualify for the 121 exclusion and take the first $250,000 and $500,000 (If Married) of profit tax free, and put it into your next investment property. This would qualify even if the portion used for investment is a part of the main living space, because even though it's being used for investment it still qualifies as your primary residence. If the space being used is detached to the main living space, than that portion is considered investment and you could do a 1031 exchange and defer all the capital gains tax on that portion and still take the primary exemption.  Either way you will free up more dollars for your next investment.  And you will get to use the deferred tax as part of that purchase.

Derek Brickley · Answer

Depends on what you are looking for!  Chances are if you're buying something turnkey rinse and repeat won't be a viable option.  Unless you are forcing equity in some way, you would be rather restricted on what cash would be available.  In today's market, HELOC rates could be a dealbreaker on trying to do that so be sure to look through all your options first.  My thought would be househack with minimum cash contribution, force some equity, then do a rate/term refinance roll in costs and get refunded your escrow balance and another $2k at closing.  Depending on the property could be around $7-9k back.  Won't be all of what you need for another househack most likely but this is what I have done recently.

Exit strategy for house hacking with cash out refi or other methods?

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