Sam,
First, thank you for your service and hats off to you for willing to become a police officer in today's day and age. Nothing but respect and best wishes to you in your career.
With regard to your questions, I have some very significant first-hand experience both with house hacking and with the BRRRR strategy. I currently own 160 rental units in upstate New York. But, everything started for me with a two family house hack. My advice to everyone who is considering deciding between these two stategies for their first investment is to 100% go with house hacking.
The fact of the matter is that this being your first venture into real estate investing, you don't know what you don't know. You can read a dozen books and listen to a 100 podcasts, but it will never replace actually rolling up your sleeves and going through all the steps involved in investing in and managing your first rental property.
As others have said, yes, the potential return on investment with the BRRRR strategy is much higher (and if you end up developing relationships with private lenders who can finance 100% of your purchases and rehabs the way I do, the ROI can be "infinite"). But, the problem is that in order to execute a BRRRR properly, you need to have so many skills and know so many aspects of the process that it can be completely overwhelming to someone who is brand new and it is very easy to make huge mistakes from which it may be too hard to recover. So, while the rewards are higher with BRRRR, the risks are much higher as well.
Instead, this is how I would approach it in your situation. First, you should consider yours and your wife's comfort level when it comes to living in the same property as your tenants. My wife and I did not want to buy a single family house as a house hack because we didn't want to share our personal space to that extent. Instead, we looked for a small mult-family property (2-4 units) and ended up buying a duplex. We bought it in a good school district. The property was only 40 years old at the time we bought it and did not require a lot of repairs or updates.
Because of these factors, of course, the price wasn't necessarily cheap, but it also wasn't outrageous for our area. We paid $230,000 for it in 2011. I still own it today.
We moved out of it after house hacking it for a few years and put tenants into the unit I was renting. Once we moved out, the combined rents covered all of the property's expenses (including the variable costs of maintenance, repairs, and CapEx) and allowed for about $200 of monthly cash flow.
The property also appreciated over the last 12 years and is now worth somewhere around $375,000. My remaining loan balance is around $170,000. These numbers aren't necessarily that crazy, but they are still pretty nice considering that I have hardly had to do anything at all to manage the property over the years because the nicer school district and neighborhood attracted amazing tenants who take care of the property, never bother me, and always pay on time.
For me this was a great starting point because, like you, I was completely new to real estate investing. I only knew what I learned from reading a few books. The rest was on-the-job training.
Buying that first duplex allowed me to: 1) offset my own living expenses, 2) live in a property, neigbhorhood, and school district that were comfortable, safe, and allowed for steady appreciation, 3) learn how to manage tenants (marketing, leasing, tenant communications, documents, etc.), 4) learn how and when to make repairs on my own and how and when to outsource them to handymen and contractors, 5) start building connections with other professionals in the real estate industry (agents, contractors, lenders, insurance brokers, lawyers, accountants, etc.), and 6) start building experience and a track record in the real estate industry which would later allow me to move onto partnerships, joint ventures, and bigger and bigger deals and opportunities.
I was able to do all of this very successfully, starting with the first property I bought specifically because it was a house hack. House hacking allowed me to reduce my risk because even if everything went wrong and the other rental unit produced $0 for an extended period of time for whatever reason, I would not lose it to foreclosure because I didn't have any other housing expenses outside of my house hack to which my W2 income had to be directed first.
If you buy a non-owner occupied investment property while, either renting or buying an owner-occupied non-investment property to live in, if your investment property income goes to $0 and you have to prioritize between paying toward the place where you live or the investment property, the investment property is getting the short end of that stick. With a house hack you don't have to make that choice. And this is why it is my absolute favorite way for anyone new to get started.
But, since you also mentioned your desire to scale to more than just one property, I would also recommend that, if at all possible (and if you can finance and handle it), you should try to find a 4-family property as your first house hack and try to owner-occupy the smallest or the least desireable unit at that property. The reason is that if you want to buy more properties using the house hacking strategy, many lenders (though not all) will be hesitant to give you another owner-occupied loan (regardless of your DTI and other qualifications) if you can't show that your move from your first property to your next property is an "improvement" to your housing. This is something that a lot of would-be repeat house hackers don't know about or consider as a factor.
I've interviewed several mortgage brokers and other investors on my YouTube channel and podcast and they have all confirmed that this is a real consideration in the lending world.
So, the effect is that, if you buy let's say a nice duplex with 3 beds, 1.5 baths and a garage in each unit and then, after living there for a year, you find a great four-family deal, but where each apartment is 2-bed, 1-bath, with no garage or off street parking and it is say 5 miles farther away from your job than your nice duplex was, even if you qualify with all of the other criteria, the lender may still deny you because they see it as you trying to "game the system." They would say that they don't believe that someone in your position would actually make this type of life and housing change and therefore would deny your loan application. They would say that what you're really looking for is an investment loan and an owner-occupied loan is not something they can approve you on.
So, if you plan on using the house hacking strategy multiple times, you should be as strategic as possible with selecting the size, location, and the unit in which you will be living in the properties you buy. As long as you can continue showing that you are incrementally improving your living situation with each successive house (assuming your DTI is sufficient, you have reserves, and you otherwise qualify) you should be able to build a small rental property portfolio using the advantageous owner-occupied financing.
If I were you, I would absolutely take advantage of the 0% down VA loan on a 4-unit property first (if available in your area). Then, after living there for a year, try to get another slightly nicer 4-unit property with a 3.5% down FHA loan. Then, go down to a 3-family (with let's say bigger apartments or one that is in a better school district, etc.) with a conforming loan at 5% down. Then a two-family with another 5% down loan that is even nicer, with a garage and a back yard for entertaining or something along these lines. Then, finally, a single family home using another 5% down loan. If executed well, this strategy could allow you to get 13 units plus a single family primary residence over the course of 5-6 years with very little money out of pocket. Compare that to putting down 20%-25% each time by using conventional non-owner occupied loans on each property and it's a no-brainer. If you do nothing else with investing and you just hold on to this portfolio until retirement age, you are pretty much guaranteed to retire a multi-millionaire.
Of course, if you'd rather build your portfolio using the method that I used to purchase most of my current portfolio -- the BRRRR strategy using private financing -- then you don't have to be as careful and as meticulous in your planning for purchasing your first house hack. You can just buy something that you'd be comfortable living in and something that would allow you to get the necessary experience and credibility.
Anyway, sorry about the very long answer. I hope this is helpful to you. If you have any follow up questions for me, please don't hesitate to reach out. I love talking about this stuff.
