House Hacking plan to get started?

Question

Hello BP community, I am new to investing and wanted some guidance/recommendations for my path to real estate investing. I have read "The Book on Rental Property Investing" and have been researching real estate investing in my free time. My brother and I want to get into real estate as a side business, currently we both have full time jobs and plan on keeping them. We wanted to buy a Duplex for our first investment and live it for one year (House Hacking). We plan on putting down around 3.5% down payment either using an FHA loan or a Conventional loan. After one year of living in the Duplex, we were thinking of house hacking another Duplex or buying our own home (SFH). We eventually want to have a few rental properties in the next couple of years and start an LLC. By the way, we plan on investing in Philadelphia, PA to start out. Does anyone have any recommendations or thoughts on this plan?

Couple of questions:

Would it be better to get an FHA loan, Conventional loan, or any other type of loan for a one year house hack?

Would it make sense to purchase another Duplex/Triplex after the first investment or get a SFH?

For starting an LLC, when does it make sense to form one? When you have a few investment properties?

Lastly, we plan on buying our first investment property in the winter to let the market cool down. If anyone has any advice or thoughts on this plan that would be greatly appreciated.

Thank you for taking the time to read this and am looking forward to any responses!

Eric Greenberg · Answer

I would personally focus on step one and acquire that first small multi then move on. I think its great to have a plan but things will change. You or you brother may find out you dislike house hacking.

I'd start understanding your budget and seeing what areas of the city you can afford. Most areas of the city with the best cashflow are areas you may or may not want to live in. Id start going to the areas you can afford where the numbers work to make sure you like the area and feel comfortable living there. Then study the market and get ready to jump on a deal when it comes up. Small MFHs around here are a hot commodity.

Brandon Rush · Answer

Hey Matt,

Here are some on my suggestions to your questions:

Would it be better to get an FHA loan, Conventional loan, or any other type of loan for a one year house hack?
If you could get a low down payment conventional loan such as a first time homebuyers loan for 5% down, I would go that route. While you will have to pay the mortgage insurance premium every month, it goes away after 20% LTV on conventional, where it stays permanently on an FHA until you refinance. FHA also charges a premium on top of your loan of around 1% which increases your mortgage balance. FHA is not a bad way to go, but it is not always the best.

Would it make sense to purchase another Duplex/Triplex after the first investment or get a SFH?
Just curious, why not start in a four plex or triplex? It may be a matter of availability in your area, but if they are available go after the biggest bang for the buck. From my experience getting into a 3-4 unit will allow you to live for free and also leave space for vacancy of tenants. In a duplex you most likely would not be living for free and vacancy in one of the units affects you more. If you can only do duplexes, then yes, try to acquire multiple over the years. Note that some banks may not like you moving from a unit of the same size to another unit of the same size if you are occupying the properties. This is because they are trying to avoid people committing mortgage fraud by investors purchasing a property with a low down payment but never actually occupying the property.

For starting an LLC, when does it make sense to form one? When you have a few investment properties?
You will know when it is time. Pick up 2 or 3 first and see how you feel afterwards. If you have a significant number of assets to protect from the start, then you may want to consider an LLC. Just note, you will not get these low down payment options if you are looking to acquire them via an LLC, they will have to be in someone's name.

Lastly, we plan on buying our first investment property in the winter to let the market cool down. If anyone has any advice or thoughts on this plan that would be greatly appreciated.
The winter is a good time to buy as things slow down and people are inside getting fat! Its a good idea, but do not wait until the winter. Keep your eyes open at all times. If you find a deal now, then its a deal.

Good luck and let me know if you have any other questions!

House Hacking plan to get started?

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