Advice on how to proceed?

Question

Hello,

I recently joined biggerpockets and have been really excited about getting into real estate investing. I've started looking at multifamily homes with the idea that I can do a house hack. I have about 14,000 saved away and was thinking of doing an FHA loan to fund my first purchase. However, I'm currently renting an apartment and I am under lease until September 2020. I was reading the lease and in order to terminate early, which I would need to do in order to live in the mfr I'd buy, they want 75% of the remaining lease amount. Currently that would amount to around 7600. Now the goal behind the house hack is to eliminate or reduce my largest budget expense(housing). So I understand I wouldn't necessarily need to move if I can figure out a deal where I can cash flow the property without needing to live there. If I do that though, I don't see how i'd afford a down payment at the higher percentage. Should I just continue saving for a larger down payment and look at purchasing once my lease is closer to ending or is there a way to still make this work with the constraints I'm under?

Nathanael Giovanni Opoulos · Answer

Account Closed

I have spoken to a few different lenders, some local banks and credit unions. They have recommended I wait until the end of my lease as well. I haven't started the pre-approval process because I didn't want to ding my credit before I was sure I'm going to go out and make a purchase. I've saved about 14k, have no debts, and a credit score of about 789. Every time I've inquired about pre-qualification instead of pre-approval I've been informed that they only do hard checks, which i'm okay with but not sure if it is necessary given the time frame.

@JD Martin

I imagine I can use google to search for state laws on landlord/tenant issues?

JD Martin · Answer

You can, but usually your best bet is an online visit to your state's list of General Assembly statutes and codes. Somewhere in there is likely to be a section called "Landlord/Tenant Act" or similar, and it will set out what is legal and illegal and basic codified responsibilities of both sides.

Account Closed · Answer

@Nathanael Giovanni Opoulos I say don't bother buying. Ride out your lease. It's not like it's a good time to buy anyways.

Have you spoken to a lender? What purchase price are you prequalified for? House hacking a duplex is no different than investing in a duplex, other than your downpayment being lower when it's owner occupied. If the cash flow isn't that strong and the property isn't poised to appreciate much before it depreciates, it's not such a screaming investment that I'd recommend spending extra money to have the opportunity to make an eh investment.

JD Martin · Answer

Check your state laws, but all states that I know of require the property owner to attempt to re-rent the unit in order to minimize damages when a tenant breaks a lease early. Considering how long you have to go until the end of your lease, there would be few courts that would side with a landlord taking 10 months to re-rent, and thus their "75% penalty" is likely unenforceable. Technically, you are responsible for rent until they get it re-rented, so if for some reason they couldn't get it re-rented, then yes you are responsible for the remainder of the lease.

75% to break early is unreasonable. We have done a few early terminations for tenants and generally do 2 months rent with a clean break - they get to walk from utilities, lawn care, etc. Essentially if they've done no damage they pay one additional month plus the deposit (that's already on hand), sign a termination form and away they go. Alternatively we offer the re-rent route and they are responsible for all costs until re-rented and no one has ever gone that route. Most people prefer a clean break. If you want to break to buy, I would check your state laws, see what responsibilities they have, and then discuss it with them when you are familiar with what they legally can and cannot do. Remember, just because someone puts it in a contract doesn't mean it's legal or enforceable.