Exit strategies for house hacking on an FHA loan?

Question

Hello there. I'm a stereotypical millennial professional: still leaching off the parents by living at home. I am very interested in house hacking. And like many am considering a 3.5-5% FHA loan for a two or three family to at least neutralize cost of living and perhaps create some cashflow, although that seems difficult in my area. After which id like to expand to a second property etc. My question is, what is ones exit strategy with an FHA loan after owning the property for say two years? Obviously at this point I would not have the 20% required to refinance and then get a second FHA loan?

Chris Purcell · Answer

@Chris Nunes get a 5% conventional as your primary and then do it again in 2 years

Chris Purcell · Answer

@David Faulkner Solid analysis!  I actually did it with 12% equity, just need to find a lender who will work with you.

Jessie Tetreault · Answer

Live in the building for free until you have a good amount of money saved up. Down payments and cash reserves and BRRRR the next one @Chris Nunes

Logan Allec · Answer

@Chris Nunes, smart move with the FHA idea!  My first investment was a four-unit financed with FHA financing, and it was a great move.  Apart from falling under one of the very specific exceptions (e.g., relocating for a job, your family grew too large and your current property cannot accommodate it, etc.), I'm not aware of any "exit strategy" that would allow you to obtain an additional FHA loan apart from selling the property or refinancing into a conventional mortgage.

Kevin Kellish · Answer

To be fair, I know the 4flats in our area are going for $700-800k. Most new investors out of college will find it hard to come up with 20% of that after just a year or even two. I thought of this too and decided to put 30% down on a $150k condo using a conventional loan first. Lived there while I got my funding+reserves together to buy a 4flat using my FHA. Did the required year living there while renting my condo, but moved back as soon as my year was up. Now I can continue saving for a refinance /repeat on 2nd FHA Multi-Fam while at my own place and not onsite.

Logan Allec · Answer

@Sung Park, very interesting, I will admit that I haven't heard of that product, though it looks like its application is somewhat specific in terms of who or where may qualify.

Could one use this product to purchase a 2-4 unit, live there for the required length of time, and then purchase another 2-4 unit using low-down payment FHA financing?

David Faulkner · Answer

Agreed ... and if/when equity grows to 20%, appraise out of the PMI on the loan, which you can do with 5% conventional but not FHA. Chris Purcell of course already knows this, but this is probably the main rationale behind his excellent advice. That and inspections required for conventional financing are much more lenient than they are for FHA, allowing you to get more of a fixer at a discount to build sweat equity easier.

Ralph R. · Answer

@Chris Purcell  Most conventional low down payment loans do in fact require a one year residency. The problem isn't the one year residency as much as it is trying to get a property below market enough to cash flow when its leveraged that heavy.  That's part of the reason the banks want 20-25% down on a non owner occupied property.  you need to be covered well enough to pay the bank back.  at least in their eyes.

RR

Ralph R. · Answer

@Chris Nunes

Am I missing something? after 2 years your residency requirement should be met I thought.  cant you just move out??  if you cant save a decent down payment living rent free for 2 years I would suggest you need to look at how serious you are about being an investor.  the FIRST step to building wealth is learning to manage your finances, and credit so you will have the down payments, or the money to invest.  House Hacking is a great means to an end, but the end is enough money in the bank to invest again, not enough money to live on forever.  one residential property probably wont do that.  Not many people are going to lend you enough money to finance your entire investment strategy.

RR

Exit strategies for house hacking on an FHA loan?

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