Funding Brainstorming for House Hack
Hello all - fairly new to the REI (and BP) community, but I've invested a lot of time listening to podcasts, reading books, starting to network locally etc. I'm looking for some creative options for financing a potential next purchase. I'll try to briefly describe my current situation:
I'm looking at turning my primary residence into a rental and buying a duplex, triplex, or quad and house hacking. Started talking to some lenders and things aren't looking too well. Not a whole lot of multifamily units on the market locally right now, but a decent duplex would most likely be in the 350k to 450k range. If I have to put 25% down, that's going to cost me ~100k that I don't have. I work a W2 job that pays slightly higher than the median income for my area. I work a gig type of job on the side trying to build up for a down payment.
Primary residence is a townhouse that currently has a ~83% LTV and I will most likely break even with rent or have to pay less than $50/mo out of my pocket to cover expenses. Property is in a desirable area with lots of opportunity for appreciation (value has increased by 35% since I purchased in 2018).
What are some creative options I can look into for financing a next purchase? Or if you would advise against buying a 2nd property right now, what other ideas would you recommend?
Thank you all in advance for your responses!
To your first point of purchasing a 2-4 plex, if your plan is to move out of your current primary residence and into this next property, then you do not need to down 20-25 %. Rather you can take advantage of low-down payment (low as 3%) primary residence loan since anything <=4 units is still considered single-family. Being that you are wanting to move into the next place, I would recommend taking advantage of this low down payment option and this would remove necessity of creative financing.
There is also low inventory for 2-4 plexes in my market, and when available, they're at quite a considerable premium that usually does not make the #s work out. A good alternative is looking for a single unit that has a floor-plan that could be "split" into two. These characteristics may be separate entrance, walk-out basement, or stairwell to basement located near an entrance. Not sure if this floor-plan is typical where you are but a pretty common strategy here that can get almost duplex level rents at a much lower purchase price.
A little more detail on the #s maybe helpful here too; we are seeing appreciation of 35% but only at 83% LTV on your current townhome? Even with downing 0% at time of purchase, appreciation of 35% would mean at least ~74% LTV assuming you did not take any equity out. If so, you may have more equity than you think and this could open the door to HELOCs or a home equity loan. Also, I am curious as to the type of market you are in-- if it's desirable and appreciation is good, I would imagine you are able to cashflow even as a LTR if the home was purchased in 2018?
Quote from @Josh Schaap:If you’re planning on owner-occupying said multifamily, you can only use FHA 3.5% down or go significantly higher down payment with a conventional product. If it’s a three or four unit, the property needs to pass an FHA self-sufficiency test as well. All things to consider when financing a multifamily using FHA. My guess is you’ll have to have a signed lease for your current primary to show that you have rental income to offset your mortgage payment. Then you’ll need to show 3.5% down + reserves and funds for closing, inspection, appraisal, etc. Not including money you’ll need for repairs before leasing out if needed. Sure, you can go creative, but maybe look a bit deeper into what tools you have at your disposal right now. I highly encourage you talk to a few more lenders, especially lenders that own real estate. Kind of surprised this lender missed that one.
Hello all - fairly new to the REI (and BP) community, but I've invested a lot of time listening to podcasts, reading books, starting to network locally etc. I'm looking for some creative options for financing a potential next purchase. I'll try to briefly describe my current situation:
I'm looking at turning my primary residence into a rental and buying a duplex, triplex, or quad and house hacking. Started talking to some lenders and things aren't looking too well. Not a whole lot of multifamily units on the market locally right now, but a decent duplex would most likely be in the 350k to 450k range. If I have to put 25% down, that's going to cost me ~100k that I don't have. I work a W2 job that pays slightly higher than the median income for my area. I work a gig type of job on the side trying to build up for a down payment.
Primary residence is a townhouse that currently has a ~83% LTV and I will most likely break even with rent or have to pay less than $50/mo out of my pocket to cover expenses. Property is in a desirable area with lots of opportunity for appreciation (value has increased by 35% since I purchased in 2018).
What are some creative options I can look into for financing a next purchase? Or if you would advise against buying a 2nd property right now, what other ideas would you recommend?
Thank you all in advance for your responses!
@Josh Schaap like others mentioned look at a FHA loan to go with a low downpayment option. You can find some creative deals on SMF but you will still need funds to close them. As the seller is likely going to have depreciation recapture, and/or need funds for a 1031.
You can also look outside of owner occupied loans. There are different down payment options out there just have to have your finances in order. Best of luck!
@Alan Le thank you for the insight! Surprisingly one lender came back to me today with an option to put 3% down getting me to around 300k. There is a program here is MN where MN Housing will essentially fund part of the down payment in a 2nd mortgage with deferred payments. Not a great option, but an option nonetheless.
To answer your question about the numbers (and provide broader context) just wrapped up a divorce 2 months ago. My primary is where all 4 of us used to live. I got the house out of the deal, but it is too much space for just me, but I want to hold onto it because I see opportunity for appreciation (just want someone else to pay my mortgage via rent). Part of the divorce agreement was for me to pay my ex-wife half of the equity in the house so I took out a HE loan/2nd mortgage to buy her out, hence the ~83% LTV.
I do like your idea of buying a single family and having an ADU of some sort. There are properties like that here. Just need to keep my eye out for a deal and see if it works for me. Thanks again for your insight!
@Lawrence Potts thank you for chiming in here. Unfortunately I used an FHA loan on purchasing my first home, so that option is off the table. Just found out today though that there is a program in MN where I can put 3% down and an organization called MN Housing will effectively issue a 2nd mortgage to cover an additional 2% down, getting me to 5% and the payments are deferred. Not a great option, but it is an option. I'm certainly going to continue to seek out other lenders. I do have a relationship with the one I'm talking to now and they've been very helpful in the past. But there are certainly other options out there. Thank you again for your insight!
@Chris Davidson thank you for your feedback! Unfortunately I already used up my FHA loan on my first property. Sorry I'm trying to stay up with all of the lingo and acronyms in this world. SMF?
Also unfortunately I was in a lot better financial position about 4-5 months ago before my divorce. And lost a lot of money to legal fees. So maybe my timing is just off at this point.
Thank you again for your insight!
@Josh Schaap SMF is small multi family, 2-4 units. I would look into some portfolio style loans that may have lower than a 25% down payment. Another option would be a nonconforming unit or one with a adu where it by paper is a single family and banks will go down to 5% on owner occupied. Getting in with a lender who does investments will be able to best help you as they can give you some ideas on how to actually fund your goals.
Hope that helps!
@Chris Davidson thank you for your input on this. Gives me a lot more options to consider. Now I got some homework to do.
I am just playing devils advocate here so dont shoot the messenger. I was in a similar situation years ago with a divorce and having to buy out the equity of my former spouse, so I understand you on that one my friend.
Even though you WANT to hold onto the house...does it make sense? Some will say yes and some will say no...both are likely correct. However if this home is preventing you from spring boarding your investments moving forward IMO I would personally think that selling it ( even if for a break even ) to free up your ability to get into a multi family would likely be more advantageous in the long run. You would take the currently owned one door that as you mentioned could cost you to hold, affect your DTI on the multi purchase and hinder you in acquiring it with the FHA. I would think ( depending on the numbers mind you ) that getting into the multi cheaper, having your then portion of the mortgage very much offset if not all out eliminated and allowing you to stack cash for the next acquisition would serve the long term purpose more efficiently.
This was almost the exact spot I was in years ago. The divorce really took its toll financially and made a home I purchased well turn into something that was now getting in my way. Especially after the buy out and how messed over I was on the equity.
These are just my opinions. Sometimes it is helpful to hear the arguments for the other side though. I hope this helps in some way.
Hey @Tysson Dykes there will be no messenger shooting on this thread. I always appreciate hearing other’s perspectives. Honestly I’m just encouraged that we have similar stories and it’s nice to know I’m not the only person that’s ever been in this situation or similar.
Since my initial post I've done more local research and met with some folks who offered valuable insight. I've decided to hold on to the house as a rental. At going market rate, there is a significant cash flow opportunity and even with the home equity loan I'm roughly around 83% LTV on the property. So there's a decent amount of equity. And I do see long-term appreciation in the location it's in. In fact it's appreciated by roughly 75k since I bought it in 2018.
Thanks again for offering your insight and sharing your story. Really appreciate it!