House Hack #2. How do I finance it?!

10 Replies

Hi everyone!

I'm about 7 months into my first house hack in Chicago and it's going great! It's only a duplex, so I'm not quite living for free, but I will cash flow about $250/door once I move and rent out my unit. I'm obviously excited about how well this went and was hoping to continue buying a new house hack every year, while holding and renting the others. 

My big issue now is financing! I bought my current duplex for $600k and I am starting to really get to know the area. I was hoping to continue to buy properties at that price point or higher, but I'm not sure that will be possible without a large (~25%) down payment. I bought the current property with a VA loan and about 7.5% down. Unless I sell that, I can't use the VA loan again, so the other low-down-payment option I considered was FHA. I didn't realize until recently that FHA loans in my area are capped at $565k for a 3-unit and $703k for a 4-unit. Unless I move out of the city or to a more dangerous area, it will be extremely hard to find a property for those prices (especially one that meets FHA standards).

I'm starting to call local banks in search of portfolio loans, since I've heard rumors of local bank loans with 5% or 10% down and no PMI. I'd like to keep my down payment to $50k or less, but might be able to swing $80k with contributions from friends/family. I'm currently looking at properties in the $500k - $850k range, but those at the lower end wouldn't qualify for FHA (maybe a 203k). With the current property still at about 92% LTV, I'm worried that trying to essentially double my debt will scare off most lenders.

I know there are a ton of people in the BP community who built their real estate businesses like this. How did you make the jump from your first house hack to your second? Any tips on getting low-down-payment financing? Am I being unreasonable trying to stay at or above the $600k price point? I would hate to have to slow my momentum just to fund a down payment. 

Thanks for the help!

Mike

What kind of rents are you getting that you are able to cashflow $250/door per month on a $550k mortgage? I am blown away by this. 

I would very much like to see your deal structure. 

Hi Dave, 

The one rented unit is renting for $2200/month right now and mine should do the same once I move out. The low interest rate and no PMI on the VA loan definitely helps.

Hey @Mike S. I went this route myself doing the house hacking and moving from one property to the next, getting myself up to about 30 units. @Michael Facchini is the guy to talk to about lending in the multi family market. 

As far as the purchasing side, I am not sure what areas you are looking in, but we d have clients we are working with to help find these properties. Right now we are working with a lot of off market activity with our buyers and sellers but expect to see lots of new listings come up begin in March. 

Did you do a lot of upgrades to you're current property?

@Weston Harding Thanks for the reply!! 

I did very little to my current place (minor structural issue in the attic repaired/certified by a structural engineer after purchase), but would definitely be willing to do some cosmetic rehab on the next one. 

I'll connect with @Michael Facchini regarding financing, but I'm glad to hear you think it's possible. 

Just some thoughts to consider. No need to reply, just my 2 cents.

1. You don't mention how much your interest rate is on your current VA loan. Can you do an IRRL (Interest Rate Reduction Loan) on this VA loan (to lower the payments even further & have even more cash flow monthly)? (Search for a reliable web link that explains IRRL's).

2. Can you refinance this current VA loan & pull out all cash, to be able to put it into the next property? Either a VA, or a conventional loan with no PMI, and then use your VA loan benefit again on the next 2-4 plex?

3. I know you want to "trade up" to a property worth more than your current property, but could you instead buy another similar property within the VA limit for your next 2-4-plex?

4. Could you buy a property in need of renovation and use the FHA Reno loan?

5. With the same $600k or so that you intend on spending, would you be better off buying a portfolio of properties that cost $40-60k each, in another market. See Clayton Morris's suggestions on buying "B class" 3/1 single family homes in certain (many Midwest) markets. Or invest with someone like Morris Invest who deals with turnkey rentals.

Food for thought. Good luck!

What are the limits on a VA loan?

@Daniel Diaz - VA loans info.: https://www.biggerpockets.com/renewsblog/build-wealth-va-loans/

VA Loan limit info: http://www.loanlimits.org/va/

Originally posted by @Mike S. :

Hi everyone!

I'm about 7 months into my first house hack in Chicago and it's going great! It's only a duplex, so I'm not quite living for free, but I will cash flow about $250/door once I move and rent out my unit. I'm obviously excited about how well this went and was hoping to continue buying a new house hack every year, while holding and renting the others. 

My big issue now is financing! I bought my current duplex for $600k and I am starting to really get to know the area. I was hoping to continue to buy properties at that price point or higher, but I'm not sure that will be possible without a large (~25%) down payment. I bought the current property with a VA loan and about 7.5% down. Unless I sell that, I can't use the VA loan again, so the other low-down-payment option I considered was FHA. I didn't realize until recently that FHA loans in my area are capped at $565k for a 3-unit and $703k for a 4-unit. Unless I move out of the city or to a more dangerous area, it will be extremely hard to find a property for those prices (especially one that meets FHA standards).

I'm starting to call local banks in search of portfolio loans, since I've heard rumors of local bank loans with 5% or 10% down and no PMI. I'd like to keep my down payment to $50k or less, but might be able to swing $80k with contributions from friends/family. I'm currently looking at properties in the $500k - $850k range, but those at the lower end wouldn't qualify for FHA (maybe a 203k). With the current property still at about 92% LTV, I'm worried that trying to essentially double my debt will scare off most lenders.

I know there are a ton of people in the BP community who built their real estate businesses like this. How did you make the jump from your first house hack to your second? Any tips on getting low-down-payment financing? Am I being unreasonable trying to stay at or above the $600k price point? I would hate to have to slow my momentum just to fund a down payment. 

Thanks for the help!

Mike

 There are others who can give you far better info than I in terms of the financing, but I want to bring up where you said: 

I considered was FHA. I didn't realize until recently that FHA loans in my area are capped at $565k for a 3-unit and $703k for a 4-unit. Unless I move out of the city or to a more dangerous area, it will be extremely hard to find a property for those prices (especially one that meets FHA standards). 


What neighborhood are you in and what neighborhoods are you looking in? There are many places in Chicago where you find a 2 unit for under 468.15K(FHA limit for 2 flats) and/or a 3 unit for under 565.9K. And these are not neighborhoods that I would consider to be dangerous, at all....especially if you're willing to do work on the property, which you eluded to in another post.

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