Non-FHA house hacking benefits?

22 Replies

Hey all,

As we all know house hacking is a great way to get started in real estate.

I've been wondering though, if you don't use an FHA, what are the benefits? For example, let's assume I live in an area where rents re $1000 / month:

If I buy a duplex that rents for $1000 per unit per month:

  • With the house hack, my rent goes to $0/month, I'll get $1000/month for the other unit, and I'll have to pay expenses involved in owning/managing the duplex. Net before expenses is $1000/month.
  • If I don't house hack, but stay renting elsewhere: my rent stays $1000/month, I'll get $2000/month for the duplex, and I'll have to pay expenses. Net before expenses is still $1000/month.

This is very simplistic, I know. But I've been trying to justify house hacking, and without using an FHA loan (I'd rather not pay the extra insurance) I'm finding it hard to see the benefits. Any ideas?

Cheers,

André

To get in with little money, the FHA is a 3.5% down loan... but it does carry the PMI for the full length of the loan. Not a bad jump into investing option with the intent of a refi a short time later.

Originally posted by @Andre Crabb :

Hey all,

As we all know house hacking is a great way to get started in real estate.

I've been wondering though, if you don't use an FHA, what are the benefits? For example, let's assume I live in an area where rents re $1000 / month:

If I buy a duplex that rents for $1000 per unit per month:

  • With the house hack, my rent goes to $0/month, I'll get $1000/month for the other unit, and I'll have to pay expenses involved in owning/managing the duplex. Net before expenses is $1000/month.
  • If I don't house hack, but stay renting elsewhere: my rent stays $1000/month, I'll get $2000/month for the duplex, and I'll have to pay expenses. Net before expenses is still $1000/month.

This is very simplistic, I know. But I've been trying to justify house hacking, and without using an FHA loan (I'd rather not pay the extra insurance) I'm finding it hard to see the benefits. Any ideas?

Cheers,

André

 Truth be told, I don't understand what you don't see. You move in, and rent the other side. Now instead of paying $1000 to rent somewhere, you are being paid to live there, or you are paying very little while paying down the loan. You can then move out in a year and rent out the other half. Boom...instant investment property.

 Is there something else you aren't understanding?

I actually have a place under contract right now that I'll be house hacking, but I'm actually putting 20% down. *full disclosure, one of my parents is helping me with the down payment*. This is allowing me to live in a much nicer area than had I been doing an FHA loan myself. For me, a big part of REI is the lifestyle benefits, and I'll be able to live in a great area. Plus, once I move out, the property will cashflow whereas if I did FHA it wouldn't. Plus, with it being in a nicer area, I'm more likely to get the appreciation benefits.

This was the first deal to get me into the game. I actually plan to live here for a while and look into doing either turnkey or local BRRRR investing depending on the deals I'm able to do to get the supplemental cash flow for future deals.

@Andrew B. Because I could still rent somewhere else for $1000 and get paid the $1000 from the unit which essentially cancel each other out. So buy buying without FHA I could skip living in it for a year and going straight to "Boom...instant investment property."

Right?

The other comments are about low down payments. Clearly one big benefit is FHA allows MFH properties which allows people to get into investing with low money down. But if that's not what I'm looking for then house-hacking doesn't necessarily seem like the best move.

Originally posted by @Andre Crabb :

@Andrew B. Because I could still rent somewhere else for $1000 and get paid the $1000 from the unit which essentially cancel each other out. So buy buying without FHA I could skip living in it for a year and going straight to "Boom...instant investment property."

Right?

The other comments are about low down payments. Clearly one big benefit is FHA allows MFH properties which allows people to get into investing with low money down. But if that's not what I'm looking for then house-hacking doesn't necessarily seem like the best move.

I'm not sure I am following....but the point of house hacking is low down payments through primary residence loans (3.5% FHA, 5% Home Possible).

Otherwise you have to put down 20%-25%.  It's about cash on cash returns/more capital to invest in next investment

Account Closed I wouldn't necessarily agree with that. Everyone is going to have a different strategy and a different "why" for investing. Yes, if you're able to buy a property you want in an area you want to house hack with that low down payment, that's great. That isn't always possible for every person. 

That is a great strategy, but it doesn't jive with everyone's strategy/long term goal. 

Agreed with what @Account Closed is saying. Getting into to a property for less money can equate to a higher cash on cash return. The amount of PMI you will have to pay is negligible when you look at it from a point of view of what else that extra 16.5% of downpayment could be doing for you.

Originally posted by @Andre Crabb :

@Andrew Boettcher Because I could still rent somewhere else for $1000 and get paid the $1000 from the unit which essentially cancel each other out. So buy buying without FHA I could skip living in it for a year and going straight to "Boom...instant investment property."

Right?

The other comments are about low down payments. Clearly one big benefit is FHA allows MFH properties which allows people to get into investing with low money down. But if that's not what I'm looking for then house-hacking doesn't necessarily seem like the best move.

If you are not looking for low down payments, the benefits to house hacking are still lower down (20% for owner occupants to avoid PMI vs 25% required by many lenders). This increases your cash on cash return. Next is better rates as owners get more favorable rates that save you money over the life of the loan. Next benefit is you now have a place to live, as opposed to renting. This saves you money as a beginner. Next benefit, is it is easier for the beginner to "test the waters."

If you have $100k to invest, and are already in a primary home that you don't want to leave, then house hacking may not be for you. I look at it as a beginners strategy to get started on a path to real estate investing.

Originally posted by @Brian Medansky :

@Erik S. I wouldn't necessarily agree with that. Everyone is going to have a different strategy and a different "why" for investing. Yes, if you're able to buy a property you want in an area you want to house hack with that low down payment, that's great. That isn't always possible for every person. 

That is a great strategy, but it doesn't jive with everyone's strategy/long term goal. 

 Yeah, I really should have been more clear. Many people do it because of the low down requirement/use other money to get another deal. Many don't have that DP assistance. 

Thanks for all the comments guys.

The main reason I'm asking is because I may not want to live where there are MFHs with numbers that make sense. I don't need the low down payment, but it would be nice for reasons you mentioned @Zachary LaJoye . So for now maybe it makes more sense to just start with investment properties and rent in a place I'd enjoy living.

Great points made all around, but one of the primary factors to house hacking is to get "primary residence" rates on a house that eventually becomes an investment property after you occupy it.

In order to make an informed decision for your scenario, ask your lender to run the actual numbers... taking into account your credit, down payment, property type, primary vs. investment property, etc. Not only will you find this exercise informative and enlightening, you'll also get an opportunity to understand if that lender is someone you want to work with.

Originally posted by @Andre Crabb :

Thanks for all the comments guys.

The main reason I'm asking is because I may not want to live where there are MFHs with numbers that make sense. I don't need the low down payment, but it would be nice for reasons you mentioned @Zachary LaJoye . So for now maybe it makes more sense to just start with investment properties and rent in a place I'd enjoy living.

The only other advantage beyond low down payment is lower interest rate. Investment properties are a half to full point higher. Otherwise you are right, really there is no advantage. I would not want to live next door to my tenant, but to each their own. For people who have very little cash, house hacking is a great way to get started.

Another case for house hacking is that you have to live somewhere. In my case the rent of one unit covers all the principle and intrest of the property plus a little more. 

Although its not adding to my income, my personal housing expenses are less allowing me to save more for future opportunities, and as others have mentioned, as a newbie I cut my teeth on all the nuisances of rental property investing. 

Keep in mInd that maintainence, cap ex and the other costs of owning the property still come out of your pocket as you live there

@Andre Crabb - the main difference is the financing.  Owner occupied is 20% down and 4.25% and non-owner occupied is 25% down and 4.75%

All other things being equal (exact same dollars renting both sides and living elsewhere v. renting one side and living in one side), live in the other side. Why? Well, you'll simply take better care of your own place than a tenant will, and you'll be right there for self managing. 

Thanks for the info everyone! Sounds like the house hack might not be as beneficial to me as I assumed. Though it could be worth looking into for a point off the interest and maybe 5% off the down payment.

Cheers.

Originally posted by @Andre Crabb :

Thanks for all the comments guys.

The main reason I'm asking is because I may not want to live where there are MFHs with numbers that make sense. I don't need the low down payment, but it would be nice for reasons you mentioned @Zachary LaJoye . So for now maybe it makes more sense to just start with investment properties and rent in a place I'd enjoy living.

 One thing I haven't seen mentioned is the ease of property management when you live on site vs being somewhere else.  Lots can happen when you're not there.

Also, you can accumulate more doors with less money out of pocket.  I understand the down payment is not a big deal, but ultimately it will be (unless you're Bill Gates or Jeff Bezos) and the more doors you can accumulate with the least amount of money out of pocket helps to build your empire.

One girl's two cents

Stephanie

That's a great point @Stephanie P. .

Is it possible to use the FHA loan after I've started investing? Let's say I purchase a non-owner-occupied SFH home as an investment, and this is my first house purchase. Will I still be eligible for an FHA loan when I do decide to owner-occupy?

Cheers.

Originally posted by @Andre Crabb :

That's a great point @Stephanie Potter.

Is it possible to use the FHA loan after I've started investing? Let's say I purchase a non-owner-occupied SFH home as an investment, and this is my first house purchase. Will I still be eligible for an FHA loan when I do decide to owner-occupy?

Cheers.

FHA does not limit you to being a first time homeowner, but you do have to live in the property. I would think that you would use conventional financing, if you can, to avoid upfront MI and monthly MI on top of it. FHA definitely has its place, but can be expensive in that regard.