Looking to get started in real estate investing with house hacking within the next year. I've been reading everything I can find and listening to the podcast, but I still have a question.
If I go FHA at 3.5% down to minimize out of pocket cost up front, how do I have the equity to refinance into a conventional in only a year or two? If I buy a distressed property and rehab it, then that defeats the purpose of going FHA to minimize up front cost? Am I missing something here?
@Eric Charles are you confusing house hacking (buying a property where you can rent one or more of the rooms or attached units) with the BRRR strategy (Buy, Rehab, Rent, Refinance)? If you are house hacking then you would need to put all the rental income you make towards the mortgage principal or improve the property so that you could have it appraised at a higher value and have the required amount of equity to refinance.
It could be challenging to pay down the principal enough to qualify for a refinance.
That's my confusion. I keep hearing people say "live in the first one for a year and then refinance and go get another FHA." I'm confused how you would have the equity.
I am in the process of house hacking a small multi as well. Refinancing does not have to be part of the plan. My plan is to buy a good enough deal that, hopefully I can add a bit of value and wait for the tenants to pay the principal down past 20% equity (5-10 years ish). At that point I can refi and get out of the PMI. During that time I will recycle the cash flow into the next property.
You do not have to refinance to get another FHA loan. Keep in mind the only advantage to FHA is low down payment, but if you only pay a small down payment you will be forced to pay PMI (private mortgage insurance) which can potentially send a lot of cash flow down the toilet. Conventional loans are being offered at 3% down now as well with less PMI cost.
Are one year you can get another FHA loan and keep the first one in place and go buy another property. This is a great strategy which I've used with success to acquire a few properties. ALWAYS by Value add or as I like to say, "upswing potential". This gives you instant equity and the ability to refinance if you need to or sell without a loss (and potentially a profit).
I am happy to discuss with you further if you wish. Sounds like you're on the right track.
Thanks, David. I was not aware that you could have multiple FHA loans. My local credit union told me the only other low down loan was a rural development loan, so the conventional 3% is news as well. Joining this site was apparently a good idea, lol.