House hacking via an FHA loan and AirBnB for a multi-family

10 Replies

Hello fellow bigger pockets users,

I am a new bigger pockets podcast listener and forum member and this is my first post!  I recently discovered the bigger pockets podcast and it has blown my mind and changed how I think about real estate and home ownership.

I live in San Diego, CA and as many of you know it is a very high cost of living area.  House prices are extremely high with prices for desirable area's going $600k+.

I recently had an idea that would help me afford property in this city.  So here we go.

My plan was to purchase a four-plex multi-family with an FHA loan where my girlfriend and myself would live in one of the units and we would AirBnB the remaining three apartments to cover the cost of the mortgage. I was planning on using the FHA max loan amount of $1.326M and buy a four-plex in a desirable beach area where AirBnB's go for a premium and have high occupancy rates. According to airdna.com the areas I have been looking at average $120+ a night and are occupied approx 75% of the time. This would more than cover our monthly PITI payment. This would allow us to no longer spend any money on rent and our AirBnB tenants would fully cover the costs of home ownership.

So my question is, how feasible is my plan?  My girlfriend and myself both make good money ($185k combined) from our careers, but without the income of our AirBnB tenants we would not be able to afford a $1.3M mortgage payment.  Would a lender even consider approving us for a loan knowing that much of our monthly payment would come from AirBnB rental income?

Thanks in advance for any advice and critiques.

@Patrick McNerney I believe it could work but it is unlikely for a major bank to approve such a loan especially since you won't have any leases to show. I do think it risky on your end since atleast 30 percent of time the rooms will be vacant. I wish you all the best and hopefully someone in that area can give you some specific insight.

Solid plan, but wrong area.  I realize that living beach-front is attractive, but the bank isn't going to consider AirBNB income, they are only going to look at your financials and tax returns.  I would look someplace cheaper that you can actually afford, and then use AirBNB to pay it off for you.

Another advantage to this is that, at least in my local market, the vacancy rate is a lot lower on cheaper units which often makes up for the discount in rates, and you'll be able to pay something cheaper down faster so that you can rinse and repeat to 8 doors in two more years.  

Whatever you choose, I wish you luck and hope that helps at least a little!
- JM

Base on my experience, some banks would use up to 75% of rental income, but they would rather use the long-term rental income specific to your area. If you can qualify for the loan with 75% of the long-term rental income, that might work.

I see replies but not from people familiar with the San Diego market. We have San Diego STRs and LTRs. Our STRs (a duplex) are beach and go for over $250/night average (We average over $15K rent/month for the duplex).

Here are some hurdles/risks:
-Finding a 4 plex at the price you indicate is unlikely. That is about the value of our little beach duplex.
- As others indicated getting financing will be an issue.
- There is a big risk with San Diego STRs. San Diego a while back passed anti STR regulations but a petition gathering was performed to put it on the ballot. The regulation was pulled when the issue qualified for a vote. So you may think all is fine. However, there are multiple anti-STR regulations being proposed at the state level. Until this stabilizes, STRs are high risk. As a house hack your risk is less than non-owner occupied STR investors because some of the proposed regulations exclude owner occupied.

IMO it is too high risk to purchase in CA (anywhere in the state) relying on STR rents. The RE must pencil out as profitable as a LTR (No San Diego beach RE at this time would be financially smart as an LTR because they are priced as though they are an STR) and if it can be used as an STR it is bonus.

Good luck

@Patrick McNerney

Great plan but unfortunately, I believe for FHA loans, you cannot rent the remaining non-owner units as short-term rentals, i.e., less than 30 days. Check with a lender but I'm certain this was the case two years ago unless the rules have changed.

@Patrick McNerney Airbnb is not your issue. if you speak with a lender familiar with fha for 3 and 4 unit properties you will find that it’s pretty close to impossible for a property in San Diego to qualify for one due to the self sustaining requirement. 75% of rents have to cover the piti (including the mortgage insurance).

Best of luck

Hello Bigger Pockets users,

Thanks for all of the great responses!

I have been talking with a few mortgage brokers and from what they have been telling me, the plan is feasible, but will be tough. Here is what I have learned so far.

My mortgage broker has told me that AirBnB isn't allowed, so I will have to rely on long term rental income to offset my mortgage costs until I can refinance to a conventional loan. Once I can get out of the FHA loan, I am free to AirBnB all I want.

As for financing, there are two tests I have to pass. The debt to income test and the sustainability test.

Debt to Income Test

The debt to income test means that my total monthly debt payments must stay below 56.99% of my income. I am allowed to use 75% of my projected long term rental income as part of my income to qualify.

Example:

Let’s say my girlfriend and I make $200k/year from our jobs. Let’s divide this by 12, so we make $16,667/month gross.

Now let’s say that my property has 3 1BR/1BA apartments in the back that I can rent for $1,500/apartment. I can use 75% of this rental income to qualify for the loan, so 75% of (3 x $1,500) is $3,375.

Add my monthly income to my projected rental income and we get $16,667 + $3,375 = $20,042

I have no debt so my mortgage will be my only monthly debt payment, but if you have any other debt (credit card balances, car loans, etc...) you must take those into account. The monthly PITI on the FHA max loan amount of $1,326,950 for a four-plex is $8,099.

So, if you take our monthly mortgage payment divided by our income you get $8,099 / $20,042 = 40.4%. This is under out debt to income ratio of 56.99%, so we pass this test. Yay!

Sustainability Test

This test is the harder of the two to pass, especially in San Diego with high home prices. The sustainability test takes all of the estimated long term rental rates for all of the units and your monthly mortgage payment cannot exceed 75% of the long term rental rates.

Example:

Let’s stick with the scenario above and say that I’m looking at the same property, a 3br/1ba house with 3 x 1br/1ba apts in the back. My apartments rent for $1,500/unit and the house could rent for $3,500/month based upon similar rents in the area (3 x 1,500 + 3,500 = 8,000).

So now if you take 75% of our estimated long term rental rates of 8,000 we get $6,000 (75% x 8,000 = 6,000). This is the max amount our mortgage could be for this property. Our estimated mortgage for this property was $8,099 which is far above our maximum allowed mortgage payment of 6,000 (8,099 > 6,000). We have failed this test and will not be allowed to get a loan for this property. Booo!

Conclusion

Long story short I will either have to settle on a duplex or search for the right deal where the rents and home price line up just right. I only seen a few properties that come close, but they are few and far between. In addition I would have to negotiate on the home purchase price to get my monthly payments to within the 75% threshold for the sustainability test. Not impossible, just going to take some searching and negotiating.

If you have made it this far, thanks for sticking around and reading!

Originally posted by @Patrick McNerney:

Hello Bigger Pockets users,


Thanks for all of the great responses!


I have been talking with a few mortgage brokers and from what they have been telling me, the plan is feasible, but will be tough. Here is what I have learned so far.


My mortgage broker has told me that AirBnB isn't allowed, so I will have to rely on long term rental income to offset my mortgage costs until I can refinance to a conventional loan. Once I can get out of the FHA loan, I am free to AirBnB all I want.


As for financing, there are two tests I have to pass. The debt to income test and the sustainability test.


Debt to Income Test


The debt to income test means that my total monthly debt payments must stay below 56.99% of my income. I am allowed to use 75% of my projected long term rental income as part of my income to qualify.


Example:


Let’s say my girlfriend and I make $200k/year from our jobs. Let’s divide this by 12, so we make $16,667/month gross.


Now let’s say that my property has 3 1BR/1BA apartments in the back that I can rent for $1,500/apartment. I can use 75% of this rental income to qualify for the loan, so 75% of (3 x $1,500) is $3,375.


Add my monthly income to my projected rental income and we get $16,667 + $3,375 = $20,042


I have no debt so my mortgage will be my only monthly debt payment, but if you have any other debt (credit card balances, car loans, etc...) you must take those into account. The monthly PITI on the FHA max loan amount of $1,326,950 for a four-plex is $8,099.


So, if you take our monthly mortgage payment divided by our income you get $8,099 / $20,042 = 40.4%. This is under out debt to income ratio of 56.99%, so we pass this test. Yay!


Sustainability Test


This test is the harder of the two to pass, especially in San Diego with high home prices. The sustainability test takes all of the estimated long term rental rates for all of the units and your monthly mortgage payment cannot exceed 75% of the long term rental rates.


Example:


Let’s stick with the scenario above and say that I’m looking at the same property, a 3br/1ba house with 3 x 1br/1ba apts in the back. My apartments rent for $1,500/unit and the house could rent for $3,500/month based upon similar rents in the area (3 x 1,500 + 3,500 = 8,000).


So now if you take 75% of our estimated long term rental rates of 8,000 we get $6,000 (75% x 8,000 = 6,000). This is the max amount our mortgage could be for this property. Our estimated mortgage for this property was $8,099 which is far above our maximum allowed mortgage payment of 6,000 (8,099 > 6,000). We have failed this test and will not be allowed to get a loan for this property. Booo!


Conclusion


Long story short I will either have to settle on a duplex or search for the right deal where the rents and home price line up just right. I only seen a few properties that come close, but they are few and far between. In addition I would have to negotiate on the home purchase price to get my monthly payments to within the 75% threshold for the sustainability test. Not impossible, just going to take some searching and negotiating.


If you have made it this far, thanks for sticking around and reading!


 

I have always thought 75% of rent counting toward the income is too optimistic. I am confident that those who set this policy are unaware of the 50% rule or have ever calculated out expected cap expenses. If I were setting the policy, only 50% of the rent would count toward income. I would hope my number would be conservative in many markets and not too optimistic in any market.

@Patrick McNerney your first step should be to speak with a residential lender in San Diego that frequently does 2-4 unit loans. This is the first place you should start. I have a few that I use frequently who can give great insight if you need any recommendations!