Want to house-hack a 3/4-plex within 2 years but also want to be able to enter other cash-flow deals with conventional mortgages, can I?

21 Replies

Hi All,

I've  been listening to @Brandon Turner  and @Joshua Dorkin on the BP podcast a lot lately and I keep getting crazy excited about house-hacking a MFR 3 or 4-plex to live rent free and cashflow on a property. Even my reluctant wife is excited about the idea after listening to the BP podcasts on our road trip. I know FHA/203k loans are available to us if we are going to live in the property, but what else is available?

Also I want to be able to get conventional financing for other rental properties... Is it possible to get loans on more than one property in a year?

For instance, I'm evaluating this deal on a $65k 3/2 halfplex in Houston that has a tenant ready to renew there lease at $1000. I have a friend who will provide the 20% down payment for 50% equity if I provide the loan because I have a good job and we think this will bring about $300-400 in cashflow after mortgage, insurance, and taxes. Seems like a good deal. Can I get into this deal and still get into a MFR to live in with a 3.5% down FHA/203k loan with my wife and I's salaries later this year?

Hey @Tim Shin  - you should be able to do that - there are no rules against it - but you might run into problems with qualifying for the loan, in regards to "debt to income" and such. The bank will likely not give you any allowance for the rental income, since you haven't been a landlord for 2 years, which means you will essentially have to qualify on your own for both loans. I would sit down with a lender soon and pick their brain. 

And I'm glad Josh and I could help bring your wife on board! :) 

If all goes well we are buying 3 houses this year in a five month time frame. So yes you can buy multiple houses using a conventional loan. The problem that you run into is that you have to carry the debt. Ie even though it is producing income you have to carrying all the mortgages as if you don't receive any income. For how long, how much, etc depends on the bank. We have had some banks let us count the lease, and other require it to be on our taxes. So I recommend not just shopping around for best prices but also the loan rules that works best for you :)

@Tim Shin  When I got my loan for my first house hacked 4-plex I went to five different lenders before I got one that really understood what my goal was and was able to help. The fifth lender counted 75% of the rental income from the previous landlord to help me qualify for the loan. I've used that same lender for every deal since. 

Most won't work with you like that, and you'll want to make sure to disclose everything and keep as much cash in reserve as possible, but sometimes it just takes finding the right professional to help you get the type of deals you need to do. Have you talked to other investors in your area about which lenders they've had good success with?

Thanks @Brandon Turner  ! Yeah, boy was she (my wife) super reluctant before... I was absolutely shocked that she requested to listen to more BP podcasts even when SHE was the one driving. We listened to probably 6 or 7 shows together. Her favorite so far was the one with @Elizabeth Colegrove whom I think gave her mega inspiration. Particularly in the reluctant spouse department hehe. Thanks Elizabeth! My wife Steph previously didn't even like the idea of sharing a wall with our tenants. Even if we could only live rent free (not cash-flowing), we'd be saving some serious dough.

So I guess that means if I get a loan for the half-plex, I won't have been a landlord for 2 years it will just look like debt added so it will decrease my loanabillity when it comes time for the deal I'm hoping will appear some day. 

I missed the posts earlier from @Elizabeth Colegrove and @Skyler Smith   Smith because I was typing a response to BT, sorry! Thanks for the tips. It sounds like I need to shop around for banks that won't tell me no. Would you jump on a cash-flowing half-plex first then hope you can figure out the loan situation later with the owner-occupied 4-plex? Or would you sit it out until the 4-plex deal came along since it's your main goal? 

I'm a relative newbie and I just moved to Houston in January of 2014. I really only know 6-7 other RE investors who typically use hard money but I will ask them. I'm meeting with a real estate agent tomorrow so maybe he'll have some suggestions too. 

Steph loved y'all on that podcast and i was like, would you believe I've actually had conversations with these folks on the forums and Elizabeth was one of the first people to welcome me? haha Thanks!

There might not be a wrong answer here. Your first priority is making sure that you have a good place to live, even if it's just renting for now. I'd make an excel spreadsheet with all the numbers for both properties and see where the numbers come out best. Take into consideration the 50% ownership, ROI, and your IRR (internal rate of return - including tax advantages, loan pay down, etc.)

House hacking doesn't always have to mean sharing a wall or a downstairs neighbor. I was living in my 4-plex when I was single, but was able to buy a 5-plex sold together with a 3/2 SFH (all from the same seller) by the time I got married. Now my wife and I live in the 3/2 home and can easily manage the 5-plex. Looks like you're looking in the right places, it all is going to come down to how the numbers work, not just now but also in the long run. I'm excited for you!

@Tim Shin  

I am not a partner person outside of my husband. So I would find something that I could do with just my husband and I. We are conservative in that situation. Mostly because of my husband job. So I would do something you can do yourself. Also don't spend to much time trying to get the perfect house. Just do something that you can do. For us the follow on deal has always been the better than the one before :)

@Skyler Smith how does that property work? Are they on the same property the sfh and 5 Plex? Did you do that with an FHA loan? Also, I don't know the first place to start to calculate irr with tax advantages. Do you have suggestions?

@Elizabeth Colegrove

Thanks. That's good to hear, hopefully I can pass that on as "Elizabeth said don't try to find the perfect house, Honey" haha. 

Do you guys have an opinion on halfplexes?

@Tim Shin  If it were me, I'd focus on getting the 3 or 4 plex first because everyone needs a place to live, you might have problems getting the loan if you make this one the second loan, and you have your wife on board with the idea (maybe she'll change her mind!). Then, focus on getting your investment properties. I know you're excited but there will always be more deals that come along.

Just my opinion :)

Good luck!

Thanks @Andreas Mirza. Another thing I came across today: there is this great but expensive 4-plex in a hot neighborhood of Houston where you'd have no trouble finding renters. My realtor said that the owners occupy 1 unit and their 3 sets of tenants bring in $3,775. If you paid list price ($695,500), and put 20% down, your mortgage would be $2,654/month, taxes $786/month and insurance would come to about $300/month for a total of $3,740. If you average the rent across the 3 units, it's about ~$1258/unit so if you rented out the 4th you'd collect $5033/month in rent leaving a positive cashflow of $1258/month if you didn't have to do any repairs before fixing it up. Using the 50% rule, you're still cashflowing over $600 a month. 

I don't have $695,500 or even a 20% down payment for this home. What are some ways to finance this property if you know someone who has the cash for the down payment? Isn't there some sort of limit of how big a gift you can give per year? Can you get someone else to pay the down payment for equity?

Just wanted to jump in and say thanks to @Elizabeth Colegrove @Skyler Smith  @Andreas Mirza  for chiming in on this topic. I'm looking at the exact same circumstances and this information is good to hear from the experienced.

@Tim Shin  I hope you find what you're looking for. MF properties even in B/C areas here in Houston are crazy expensive, which might keep me from being able to utilize this strategy...Once you figure things out please post back here how the deal broke down as I'd be curious to compare and see if I could afford it..

@Benjamin Ouderkirk  thanks for posting and revitalizing this post. Hopefully someone can help me address this question. I bought @Brandon Turner 's book to find the answer but I'm unclear on what's allowed for down payments. I contacted a mortgage broker and am waiting for a response. I think I'm going to have to flush out some MFRS that aren't on the MLS. What do you mean by B/C areas? Are you talking about the quality? B or C neighborhoods?

also do you know what the houston cap rate is?

I just picked up a townhouse that lender allowed me to use 75% of the rental income.  They do require proof like current lease agreements, transfer of lease agreement.  Without the rental income, I probably would not have gotten the loan.

I believe the cap rate is a personal number.  There is no standard rate.  You just use it as a metric against your other investing options like savings, CD, etc.

@Tim Shin  Yes you may have to search for motivated sellers directly to find good deals, it seems Houston has been hot for years now and I've heard a few mention that things have been selling at/above retail for some time.

Yes I meant B and C class neighborhoods. I wouldn't want to live in the MF properties on the MLS, even those with 4-600k price tags.. That being said, I didn't search for too long and was looking inside the 610. Also, I'm new to Houston and RE so take that all with a grain of salt. I switched gears to take an FHA on a 4/3 SFH in the Woodlands area and rent to some coworkers of mine to save the money I'm spending to rent downtown..

@Tuan Le  Where did you end up getting the townhouse? And I agree, even if there were standard cap rates, I bet they would vary significantly between the inner city and outside the beltway

@Benjamin Ouderkirk  I got it in SW Alief.  I'm investing in areas I'm familiar with.

My lender was Flagstar Mortgage, I believe.  So ask your mortgage broker about them.

@Tim Shin  Hi Tim!  My strategy is similar to yours, my first (and only as of now) property is a 3 family that I occupy.  I'm looking forward to following your deal!

Just an FYI about the FHA/203k loans with 3.5% down, I did the same and there is a requirement that if you use another person's money for the down payment they require you to fill out a "gift letter" stating that it is truly a gift and that they giver does not expect any form of repayment. They also need proof of the transaction taking place. Let your friend know that ahead of time. There were also reserve requirements that must be met but the money doesn't have to be liquid, you can count investment accounts like your 401k etc.

Good luck!

Originally posted by @Tuan Le :

I just picked up a townhouse that lender allowed me to use 75% of the rental income.  They do require proof like current lease agreements, transfer of lease agreement.  Without the rental income, I probably would not have gotten the loan.

I believe the cap rate is a personal number.  There is no standard rate.  You just use it as a metric against your other investing options like savings, CD, etc.

 I'm not sure I understand what you mean about using 75% of the rents. For what? Instead of your credit? Is it a non recourse loan?

Thanks @Kim Giannola and @ben I'm traveling and on mobile so posting is not easy. So if you receive a gift from a friend and wanted to gift them their money back and then some, that would be the way to do it with an FHA loan?

@Tim Shin  I'm not sure if that would work.  Ask your broker ahead of time, maybe if you get the deposit a few months prior to applying for the loan it wont matter.  I can't remember how many months of bank statements they ask for, maybe it was 2 or 3 months worth.  That way you aren't breaking any rules.

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