How to hack my way into 2nd house

20 Replies

Hello BP! I own a home through an FHA loan. I rent out the spare bedrooms, which covers the mortgage, taxes, insurance, and repair reserve. It doesn't cash flow beyond that, but that was not my goal when I purchased it. It would produce a good cash flow if I rented it as a whole house rather than by bedroom. I'm tired of having roommates, but I'm not tired of having someone pay my mortgage. I'd like to hack my way into a duplex. I'd be making more money off of my current house, and I'd have my own space. I've set up a budget and savings plan to have a small down payment saved up by early spring of next year. I have a list of local credit unions and small banks in the Cleveland area that was created here on BP. I have a realtor from buying my current home, but she is not an investor, and I worry she won't understand how the numbers will have to work for me. She's also not a fan of looking at multiple neighborhoods, which I may have to do in order to find a good deal. I regularly attend local REI meetups and have told others about my plans in hope that, when I'm seriously looking, others may point me towards good deals. I'm still at least 7-1/2 months from being able to really start looking at houses. But is there anything I can start doing now to prepare? I'm especially concerned about finding a loan that doesn't require a 20% down payment. I know I won't find another loan that let's me put 3.5% down, but something in the middle (5-10%) would be much more manageable. TIA!

you planning on keeping current house or selling. If selling can probably still get another FHA loan. If keeping current house, refi property asap to get off books then can get another FHA loan. Hopefully you have enough equity in home to refi and keep payment low enough to cash flow as a rental for you.

Oh, and get a different agent.  I be damned if an agent gonna hold me back.  I drag mine all over if deal right.  They making money off this they better be there with a smile and a list of properties that meet my criteria. 

@Nicole Heasley

You might want to speak with your lender about having two FHA loans at the same time as it was difficult for me in the recent past. My understanding is that FHA doesn't like two of these loans out at once with the same signer as these are owner occupied loans. Again -- I am not an expert in FHA land for less than 6 units.

Have you lived in your current home for at least 2 out of the last 5 years? If so, you might be able to sell that home and take the proceeds (tax free capital gains exception) to reinvest into the duplex with another FHA loan. Since you didn't originally purchase your home as an investment you don't need to worry about 1031. It sounds like your single family is very tight as you focused on getting into the place and having your expenses almost paid.

HACK SUGGESTION: Almost all FHA loans are assumable for qualified buyers. This means that you can sell your house to someone that will take over your loan (and mandatory PMI probably). This is worth it to many folks because they will be locked in at yesterday's super low fixed rate. So, say your home value is $200,000 and you owe $160,000. You can sell your home and mortgage (they must be approved/qualified by the lender) for $200,000 and then negotiate the rest of the money ($40,000).

Maybe they have it in cash and will pay you at closing (tax free capital gains if qualified). 

Maybe they can give you $10,000 and you can hold a second note on the house for the remainder ($30,000). Remember holding the note has tax ramifications. 

Maybe they have a free and clear home that would cash flow well or make a good flip for you.

What other terms would support your goal of getting into the duplex? 

Maybe you will hold a $30,000 note and sell it on a note network after 6 months of seasoning (for around $25k). The monthly payments might pay for the unoccupied side of the duplex for those 6 months while you do the repairs and get it rented out. Then the $25,000 from selling the note at a discounted rate can pay for all of the repairs on your side as well. 

Just spit balling some creativeness.

Good Luck!

Refinance your current FHA to conventional, buy again using your (1) FHA loan available, you'll have to move and live in it though.

On the new home you can do 15% down on an owner occupied duplex. If you didn't own any property or have a current FHA loan you could do either a new 3.5% down FHA loan or a 5% down home possible loan on a 2 - 4 unit. Your current situation prevents that.

I'm with @Chris Svendsen . Drop that agent. If your agent won't do what you need go just another one. There are thousands of them.

@Chris Svendsen I plan to keep my current home. I would absolutely refi, but I was told it would cost me like $5k. That is a last resort option as it would probably put me behind another 6 months-1 year. Since I only put 3.5% percent down and have only owned it for two years, I definitely don't have enough equity in it yet to tap into that.
@Joe Gamatoria I can't have 2 FHA loans in my name unless I meet a set of very specific circumstances, which I do not. So the only option for me to have multiple FHA loans in my name is to refinance, which would cost a large chunk of money. I have been in my home for 2 years, but I do not wish to sell it as part of the point of house hacking is to obtain more units. This unit, went rented as a whole unit as opposed to by bedroom, would cashflow very well. So it seems foolish for me to sell it. I am, however, very interested in your idea of having someone assume the loan. I wonder if I could convince my dad to assume it and continue to pay it and collect the rent. He could make a small amount off of me each month. I have to do some more research on this.
@Josh Engelhart I'd really like to work with an agent that specializes in working with investors. I think that would make this process much easier. There are other low down payment options besides FHA, or so I've been told, as long as the home is owner-occupied. Or have I been misinformed? I do realize I'm facing an uphill battle when it comes to finding a bank that will work with me. But I was also once told I would never find a bank that would allow my family to do a HELOC on an investment property, and we made that happen. I've learned that "can't" usually means "won't" in bank/lender language. Is it too early to begin talking to banks?

I justified selling my house to buy two as using the stacking technique. I sold one unit to have two. Also, I need the equity as I didn't have time to flip houses to build up reserves. 

Sounds like there is a different solution for you. Great to hear that you can make it cash flow. Sounds like a partnership is in the works for you and Dad! Awesome to work with family. 

Originally posted by @Nicole Heasley :
@Chris Svendsen I plan to keep my current home. I would absolutely refi, but I was told it would cost me like $5k. That is a last resort option as it would probably put me behind another 6 months-1 year. Since I only put 3.5% percent down and have only owned it for two years, I definitely don't have enough equity in it yet to tap into that.

Have you had house appraised to see what the value is.  2 years could be a large jump, never know.  Or talk with an agent see what they think price point may be.  Sometimes you get pleasantly surprised.  

@Nicole Heasley If you are looking to purchase a single family home as a primary residence you can get away with as little as 3% down. Multi unit properties are a different story. The low down payment multi unit primary residence options are either FHA with 3.5% or HomePossible/ HomeReady with 5% down. Based on the situation as you've described it, none of those options will currently work with the next purchase. The freddie mac home possible and fannie mae home ready programs require that you aren't on title to any other real estate. FHA will likely have an issue because you currently have an FHA loan unless you can prove additional extenuating circumstances and it sounds like that won't be the case.

Getting your dad to assume the FHA loan would have a lot of additional complexities. They will likely want to see him move into and take title to the house in order to make that work.

If you are only looking at multi units the best path I see/ know of based on your current position is a 15% down payment on a Fannie Mae conventional loan which will max out at 2 units. It is possible a local bank, credit union, or portfolio lender has another option.

It's never too early to start talking to lenders. Knowing your financing options ahead of time is probably the most important piece of structuring your next deal.

@Josh Engelhart That's very helpful! Thank you. Someone here on BP put together a master list of small banks, credit unions, and lenders, and I've created a decent network of fellow investors here in Cleveland, so I have a lot of people to work with. If worse comes to worst, I have to suck it up and save 15% or refinance my current home. 

@Joe Gamatoria @Chris Svendsen It's something to consider. The cash flow would have to be really good to make it worth selling my current home, though, because the cash flow from renting out my current home would be pretty decent. The best case scenario would have me owning my current home AND living in the duplex for "free" so that I'm actually making something off the investments. Regardless of whether I'm living in the duplex or the house, there's no additional cash flow coming from the unit. If I'm in the unit, it's breaking even. So the only way I'm making some money in the near-term future is by getting a new building in my name. I hope that makes sense.

Originally posted by @Nicole Heasley :
Hello BP!

I own a home through an FHA loan. I rent out the spare bedrooms, which covers the mortgage, taxes, insurance, and repair reserve. It doesn't cash flow beyond that, but that was not my goal when I purchased it. It would produce a good cash flow if I rented it as a whole house rather than by bedroom.

I'm tired of having roommates, but I'm not tired of having someone pay my mortgage. I'd like to hack my way into a duplex. I'd be making more money off of my current house, and I'd have my own space.

I've set up a budget and savings plan to have a small down payment saved up by early spring of next year. I have a list of local credit unions and small banks in the Cleveland area that was created here on BP. I have a realtor from buying my current home, but she is not an investor, and I worry she won't understand how the numbers will have to work for me. She's also not a fan of looking at multiple neighborhoods, which I may have to do in order to find a good deal. I regularly attend local REI meetups and have told others about my plans in hope that, when I'm seriously looking, others may point me towards good deals.

I'm still at least 7-1/2 months from being able to really start looking at houses. But is there anything I can start doing now to prepare? I'm especially concerned about finding a loan that doesn't require a 20% down payment. I know I won't find another loan that let's me put 3.5% down, but something in the middle (5-10%) would be much more manageable.

TIA!

 If you are going to move into the next house you won't need to put down 20%. Other than that it's pretty simple. Find yourself a duplex in a neighborhood that you are willing to live in that will also have a decent chunk of rent coming in to cover some or all of your mortgage. 

Originally posted by @Nicole Heasley :
@James Wise Do you agree with Josh's estimate of 15% down, or have you heard of lower?

 There are conventional loans with 1%, 3%, 5% & 10% down. So long as you've got good credit & income you should qualify for a loan.

On top of that there are a couple exceptions that would allow you to get an FHA loan such as job relocation or family growth.

I am coming at this from a different angle. The first thing you should do is get a new finance guy. They should have started you with a 5% conventional loan so you were able to purchase your second home as a low down FHA loan. Said finance guy could also walk you through different options you currently have.

Room renting is fine in the beginning but you may want to check local ordinances as some have limits on only allowing 3 unrelated people living together.  Would be an issue if you had a 4br house and rented each room out.

@James Wise That's what I heard too, but then I received feedback on this post telling me I would have to put down 15%. I don't qualify for any of the FHA exceptions; I've already checked :(

@Andrew Burgoyne I will definitely look into this--thank you!

@John Woodrich I had no idea I wanted to get into REI when I purchased my first home. If I had, I would have gone for a duplex from day 1. I agree--the room renting thing has been nice, but after doing it for 2 years, I'm spent. I really want my own space. Since my home is only a 3-bedroom, I don't have to worry about 4+ unrelated people living together. I don't rent to couples, so no one is sharing a bedroom.