My first Duplex- FHA House Hack Case Study with Tips

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I have now been living in my FHA-purchased duplex for 6 months, and I wanted to share the story to encourage those who have been waiting on the sidelines stuck trying to figure out how to get started. If you read the forums and blogs on BiggerPockets often, you will no doubt have read many folks touting the FHA 2/3/4 unit ‘house hack' as the best way to get started in real estate. I am here to reiterate this point with a case study of my experience over the past year where I purchased my first duplex.

My first purchase after getting settled into a nice 9-5 job, like many people, was a single family home that was near the top of my price point ability, which crippled my ability to save money for outside investments. Many people fall for this trap, and I was in it. I purchased this home in 2012 and lived there for 5 years. After reading on BP for years, in 2016 I knew it was time to get in gear and make some important decisions and moves. I searched for a 2/3/4 unit for a while, but could not find anything in my area that met my criteria and also was in a location where I wanted to reside. Even though I could not find anything then, I knew I at least needed to sell my current home to get the ball rolling. I ended up selling my single family home in 2017, and moved into a rental until I was able to find a suitable multi-family. I planned to be there temporarily while searching, and purposefully entered into a month to month agreement so I could move out as soon as I found a small multifamily to buy and move into.

During this timeframe, while I do have a nice 9-5 job in a corporate environment, I made the effort to go to the classes and pass the state test required to get my real estate license. I knew this would help me in my quest for a multifamily, and also I would be able to do a couple of transactions a year for friends which would cover my yearly fee’s.

I now had access to the MLS and was ready to pounce when a good multifamily hit the market… I waited and waited for one to pop into my pre-set auto email MLS search… nothing. After waiting for over a year, I took advice from BP and did a mini off market mailing campaign. This was not hard and was accomplished in less than 5 hours of labor. I scrubbed the county auditors website and made a list of 60 properties from 2-4 units that I was interested in. I printed out letters, and hand wrote addresses on the envelopes (good *TIP* from BP for higher open rate. This would be time consuming on a larger campaign, but 60 was easily manageable). After dropping the letters in the mailbox, I knew I had taken an easy step forward in my quest. After 1 week, I received about 8 phone calls from the 60 that were sent out. I filtered out the one’s with high asking prices, and ended up viewing 3 in person.

One of the duplexes had been owned by the same owners for 40 years, the husband had managed the property for the entirety up until he passed away 5 years ago. His wife had moved in and was managing the other side with the help of her son. They called me up and said that they were thinking of listing the place in the next few months and that my letter arrived at the perfect time. Score! After viewing twice, I began the negotiations with her son who happened to previously work for a mortgage division at a bank. I was not looking to low-ball this sweet old lady in order to get the property for a steal, but was willing to make a fair offer for a nicely kept place that would suit my needs and was in a great location.

This duplex was in a row of 7 other identical properties, the one next door having sold two years prior. A comparable was easy, and a price was settled upon. The next door property had sold for 165k two years prior, was not nearly as nice on the interior, and this property had a larger lot size. The seller had also spent $20k 4 years prior to have some updates done to the kitchens and baths. Since the property was off market, and I have my license, I was able to leverage myself a little bit as she was not having to pay any realtor fees, which would have amounted to roughly 10k. While making my offer, I made sure to mention that if they had listed the property on the market, they would have to ask about 10k more in order to make up the cost of realtor fees. We settled on 180k with 5k back in seller paid closing costs. Structuring the price point a tinch higher, while including closing costs and prepaid fees, is a good way to minimize cash outlay required for the purchase. *TIP* This extra money for closing costs is 5k less out of your pocket that is rolled into a 30 year loan at a low interest rate, definitely a good strategy to use to minimize the cash needed to close.

The transaction went smooth with the bank. The appraisal came in at 175k. I did attempt to ask them to come down and meet me halfway, but it was reasonable that they did not want to since I had worked 5k of closing costs in. We agreed to 175k with no closing cost assistance. *TIP* I purposely set the closing date for the 5th of the month and here is why. My mortgage payment would not be due until the 1st of the month, while I would receive pro-rated rent from the tenant for the 5th-31st. This helps to minimize cash required at closing as a credit is given back for the rent that had been payed to the seller for that month. I closed with about 10k required out of pocket including the down payment of 3.5% and closing costs.

$10,000 was it!

I was now the owner of a solid 1964 brick 3 bed 2 bath (each unit) duplex with a 2 car garage in a very solid location. Central air on both sides, full basements, concrete driveway, extra lot for parking, it was a great property for me to cut my teeth on. Being an FHA owner occupied loan, I was required to move into the property and stay for one year. My plan is to satisfy this requirement and purchase my next home at that mark and move out, leaving both units open to rent. I will keep this as an investment property for a long time. If I had attempted to make this purchase with a conventional loan, generally requiring 20% down, I would have been out of pocket around 40k. This avenue of purchasing a first investment property with an FHA loan, in my opinion, cannot be beat.

While I did inherit a tenant in the open side, she decided to move out after 1 month of me owning the property. (she was a friend of the seller and was paying below market rent anyway). I did not have any major repairs to perform, mostly just cleaning. I have since placed a new tenant in the other unit, and while the rent does not cover my entire monthly payment, it is a very large chunk of it.

The top level numbers:

30 YR FHA loan rate: 5.25%

Purchase price $175,000

Monthly PITI+FHA MIP (principal, interest, tax, insurance, FHA mortgage insurance premium): $1375

Rent: $1075

I am now essentially paying $300 a month for the cost of living in my unit. Once I move out, the monthly rent will be $2150.

After gaining 20% in equity, my plan is to refinance out of the FHA loan which will rid the monthly FHA PMI cost of $140, taking my payment down to $1235.

The in depth numbers that nobody talks about (except the realists on BP):

Monthly rent: $2150

Monthly PITI+FHA PMI: $1375

Expense estimates: $560 (details below)

  1. Capital expenditures (roof, HVAC, etc) @ 8%: $172
  2. Maintenance (repairs, leaks, etc) @ 5%: $108
  3. Vacancy @ 5%: $108
  4. Property Mgmt @ 8%: $172

    (all utilities, trash, lawn care, and snow removal are tenant responsibilities. These must be accounted for if the owner is responsible for paying them and are easily missed)

While I self-manage for now to save money, including the management cost is important because eventually I will want to hire this out. If you do not include this number and plan to self-manage forever, you are basically buying yourself a new job with each property you purchase. The investment needs to stand on its own, and so this number should be included.

Rent minus all expenses including debt service: $215 monthly cash flow.

After refinancing out of FHA and MIP this should increase to $355 monthly cash flow.

There you have it! Easy as pie :)

Lessons learned:

  • Don't wait for the market to provide easily picked properties from the MLS. Do the work to seek out potential off market properties. My county auditor's site had a great reporting structure which allowed me to export my search results into excel. 5 hours of labor and $50 for materials and my letters were sent.
  • I waited years before taking action, it turned out to not be hard at all. I read and read on BP, but never did anything with my newly gained knowledge and waited for something to fall in my lap. Get out there and make something happen, don’t let fear stop you.
  • Even though my numbers turned out good, if you are using FHA and moving into a property, don't let decent numbers slip away while waiting for the perfect deal. If you are paying rent currently, and can get into a duplex property where your portion is way less than that amount, then you are saving money comparatively. The 2% rule is a unicorn in many markets for a property that is going to be nice enough for you to want to move in yourself and your family.
  • Getting my real estate license was not hard, just time consuming on the front end. Even if you acquire it and only work as an agent for a year or two, you will gain an immense amount of knowledge on the process. At the least, become friends with a real estate or title agent who can help you understand the process and can refer you to other professionals that you might need along the way.
  • Don't let MIP/PMI scare you away from an FHA loan. Yes, this insurance premium is an extra monthly cost that you would not incur if you put 20% down and go conventional, but the tenants are going to be paying it for you. Getting a 3.5% down loan, at near historic low interest rates, is one of the best ways out there to get started. A borrowed quote: Don't wait to buy real estate, buy real estate and wait.

Thank you BiggerPockets!

Updated over 1 year ago

Interest rate typo: My rate is 4.25%

Very interesting about getting your real estate license before actually purchasing your first investment property. I hadn't thought about that, but I'll probably look into it after moving out of California. 

Jeff - congrats!

I too got into investing with an FHA driven house hack of a duplex I now moved out of and rent fully.

It’s a strategy that I think is the lowest barrier of entry, so long as you are patient and persistent. 

Great post @Jeff Brower now you have a model to help others.  Keep telling your story and you will find people who want to do the same.  That will translate into a nice income and more down payments.

Did the same with a 4-Plex several yrs. ago.  Lived there for a year, owned it for 15.  Good positive net cash flow, and as it paid for itself, I could time the market as to when I wanted to sell (at a high water mark), and although I did not factor inflation of real estate values into doing the deal, I doubled my money (purchase price after sales price), and my cash on cash return (including rental profits and sales profits was more than (annual return over initial cash investment) = 270%, netting me over $200,000 over 15 yrs. from an initial $5,000 investment.

Caveat for readers.  I didn't read something about an umbrella policy.  As this is in the owner's name, any lean, law suit or personal judgment may be attached to the property and vice versa: Any law suit or lean from the property may be attached to other personal assets, including future salary.  As this is the best way to start and limit out-of-pocket, a personal umbrella policy, and perhaps high limits on P&C insurance for the property could be a good idea to limit risk of loss.  It's not too expensive and typically it will be written under your personal auto insurance (also requiring to raise the minimums in the auto policy), but all in all, a good idea.

Good Job @Jeff Brower ! I did something quite similar back in 2015, hands down a great financial decision. 
What were your criteria for the county assessor? [i.e. what were you looking for to send the letter?] And how did you send it to the owners? the ones I've seen list the name and property address not the service/mailing address. Thx!

@Jeff Brower As someone planning to do exactly this (hopefully within the next year) I just wanted to say thanks so much for the detailed write up. This is extremely helpful and actually motivated me to attempt a similar letter writing campaign.

Thank you for posting, @Jeff Brower! So intelligent and inspiring! 

Newbie question here: I tried to google "county auditor's site" for Orange county, NY, but have hard time to figure out what exactly is that? (Department of Real Property Tax Service Agency?). 

Thank you, Jeff!


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I really like that you appreciated what you were getting. A property owner before you spent hundreds (thousands?) of hours maintaining that property, & you are the beneficiary, as is his widow. My parents have maintained their properties very nicely, and have been rewarded by very long-term tenants & being able to be very picky about who they allow to move into their properties (while they budget for vacancy, the actual spend is very low). 

@Tim Kaminski it was not difficult at all. FHA is a standard loan and is typical for most banks. While I do not recommend this for everyone, I did not do a standard home inspection as I am well versed on what to lookout for. The FHA appraisal is essentially their 'inspection', I wasn't even present for that and it went without a hitch. Any home that is in decent condition and move in ready shouldn't have many issues in that regard.

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