House Hacking Combined with BRRRR

[Brody Veilleux]

My plan is to buy an undervalued MUP with an FHA loan, fix it up, rent out the other units while I live in one, then refinance it and use the year I'm required to live in the property to build up my down payment on the next MUP, then repeat until I have at least a $1M portfolio. After that time and loan paydown, I will either sell 1 or 2 of the properties and use the proceeds as a large down payment on my primary residence. After that I plan on continuing to invest in MUP with a conventional loan or transition to SFH. Is it riskier to mix house hacking with the BRRRR method? Does this plan sound good or am I being overly ambitious?

[Kevin Sobilo]

@Brody Veilleux, I don't think there is anything wrong with this approach in general. Here are a few things to think about though:

1. You talk about accomplishing a LOT in 1 year of ownership. Many times you will buy a property that is occupied and it takes time to make the units vacant and it takes time to do rehab work and that leaves little time to save money for the next down payment.

2. FHA loans are good, but all loans have costs associated with closing them. Refinancing out of the FHA loan and then taking out a new FHA loan when you are done won't be cheap and you may be refinancing into a higher interest rate. So, this may not be the thing to do when the time comes.

3. You talk about saving money for a down payment. If you don't have reserves where does the rehab money come from? It isn't free even if you do a lot of your own labor.

4. Rehab work. In many/most places you can pull permits and do work on your primary residence yourself, but you need to be a contractor licensed/insured to do that in the rental units. This may not apply everywhere, but it is a common situation. So, if you planned to do a lot of work yourself that could be an issue.

5. A BIG part of BRRRR is RENTING. Are you hiring a PM or do you plan to learn how to manage your rentals yourself? If you don't take that seriously the experience can be a painful and expensive one. Things very often do not go smoothly with managing tenants and properties.

6. With managing the rentals. Do you have reserve funds to handle things that come up? A nonpaying tenant, tenant caused damage, etc.

7. Do you understand how to budget for maintenance, capital expenses, and vacancy/turnover? These aren't expenses that happen every month but they DO happen and if you are relying on the rental income to do other things you need to have monies for these things when they do come up.

8. A 30 year mortgage pays down VERY slowly to start. I think it takes something like 22 years to pay it off 50%! So, it will be a long time unless you are lucky enough to get some market appreciation (prices can also go DOWN) for you to sell properties to get money for a down payment on a nice primary residence.

9. If you sell houses to buy a primary residence you will pay tax on the profit, PLUS recapture the depreciation deductions you will be taking on your taxes each year. So, the tax man will take a chunk in addition to your costs to sell (commissions, etc).

10. Everything you said is doable in principle, but there is quite a lot more to make it happen and work well. Make sure you do the things to get prepared to make it all work. You can something in one sentence like "rent the property out", but you could make an entire career out of learning to do just that one step. So, be prepared to learn a LOT or to hire or partner with people who have the knowledge and experience in these other areas.