As a young real estate agent, I have been intrigued by the house-hacking strategy of investing. This strategy wasn't first taught to me by Bigger Pockets, but the platform has clarified many of the misconceptions I've had in the past. However, I still haven't been able to figure out what financing would look like in the most traditional situation. If you finance your first small multifamily property with a 3.5% FHA, what do you finance your next property with? I hear you can grow your portfolio with low money-down mortgages by moving every year and renting the last unit you lived in, but how do you get into the next multifamily with anything other than a 20% conventional loan?
Would appreciate someone's insight on their strategy or (if necessary) conveying a tough reality that it's not that easy.
@Jacob Mitchell some good info here, but I think people are missing the point and not giving you the straight answers that you need.
One critical part that you mentioned is multifamilty (2-4 units). Most of what people are referencing in this post are 1-unit criteria. These are VERY different.
The other critical part you mentioned is not being ready until 2024, which likely means that's when you will have 2 years of self-employment income before you can qualify. To your question about using salary, yes that's part of how you qualify with your debt-to-income ratio (DTI). Your DTI is the ratio between your employment income plus rental income, compared to your monthly liabilities (housing, car payment, student loans, credit cards, etc).
With 2-4 unit properties, you have 2 options (if you are not a Veteran or buying in a rural area) to buy with a low down payment. Either FHA, or Conventional Home Possible. Period.
FHA allows 3.5% down. Conventional Home Possible allows 5% down. With HP, there is also an income cap that you have to navigate.
Strategy-wise, FHA is best to do first. Why? Because when qualifying for a FHA loan, and vacating an existing property with a mortgage, you must prove with an appraisal that you have 25% equity in the vacating property in order to use rental income for qualifying. For most people, without being able to use rental income is a deal breaker. So if you do HP first, and then try to do FHA 2nd, chances are very high that you will be stuck, unless you did some kind of value add and gained 20% more equity in 1 year.
So then for the 2nd property, it's best to do HP (assuming your LO is smart enough to help you to qualify under the income cap). HP only allows you to have 2 financed properties, counting the subject property you are buying, which is why you want to do this loan 2nd. If you can't qualify for HP, then you skip it and just keep doing FHA.
So now you have 2 properties under your belt. For the 3rd property, you now have 2 options for another low down payment. Either buy a 1-unit with 5% down, or if that first property has at least 25% equity, then you can refinance out of the FHA loan and use FHA again for another 2-4 unit. You can only have 1 FHA loan at a time (unless you relocate for work > 100 miles away), which is why you have to refinance out of it to a Conventional loan (or some other product) in order to use it again. And with Conventional financing, as a primary residence, the max LTV for 2-units is 85%, and for 3-4 units is 80%. If you have already moved out and it's an investment property, for 2-4 units it's max 75% LTV.
There are a LOT of nuances with the guidelines, and there should be a lot of mapping out your strategy of the order that you finance, BEFORE you get into any property. Seeing 2,3,4 moves ahead is extremely important to make sure that you don't get stuck. It is very much an art (that even many/most loan officers don't understand lol). The goal is to make sure that you don't get one-and-done, and then forced to save up 20% down for the 2nd property, because you were working with the wrong person who didn't care about your long term plan. Any realtor can sell you a house, and any LO can finance a loan. But finding the right realtor and LO that understands REI and these strategies is critical to your success. Luckily you already have the first part of that solved :)
Hi @Jacob Mitchell my go to is low money down loan and finding a property I can add value you to. I have purchased many properties with low money down loans the key is to make sure the previous properties has over 22% equity. For this reason my go to is a conventional mortgage because you just need an appraisal with enough equity for PMI to go away (if there is any). long story short once you have enough equity you can do multiple low money down loans.
So ideally you like to find a distressed Multifamily to purchase with a Conventional Loan, and then you fix it up to increase the appraised value. From there you cash out refinance to get money out of the property to move into your next property where you will do the same? If I misunderstood please correct me. However, if I'm right how much equity must you have in the property to refinance or should you leave the money in the property and come up with the funds elsewhere?
@Jacob Mitchell as a recovering Great Recession-er, I lost all my properties because I was over leveraged. I had 80% LTV in all six of my properties that I would house hack, refi, rinse, and repeat. I was living in Vegas and that market took a huge hit. In retrospect I thought I had enough reserves (a year was not enough). Prices fell so did rent. Presently, I have two years of reserve and keep more equity in each property usually 30-40%. This gives me meat on the bone and learning from history.
That's definitely a great viewpoint to have brought to me. I am not currently in the position to invest yet but would like to be prepared when I do in a few years. It also allows me to help my clients.
I hear many people talk about buying 1 property a year, and I just haven't fully cracked that code yet. I assume the only way that makes since is to use a portion of your salary every year and leave the properties alone to gain equity.
I am not quite ready to invest in real estate but hope to be able to at the start of 2024. However, everything I am learning will allow me to help my clients when buying an investment property in the meantime.
I still hear people suggest buying a property every year, and I haven't quite cracked the code on how that is possible. My common sense assumes it must be just a portion of the individual's salary set aside each month, but I keep trying to convince myself that there are other methods people use. Would you say that the main way to grow is to invest new money into each property at the beginning stages of investing, or to try to stretch the original dollar as far as safely before it tears?
it seems like you have a pretty strong understanding of how this works. Yes, the goal is to refinance out of the FHA loan and then get a new one, and you need cash and/or equity to do this. when houses are appreciating at double digits each year with no improvements just because of the market, it's a lot easier to do than it may be in the next few years.
on the other hand, one good thing about today's financing environment is that you can avoid personal DTI limitations by refinancing into a DSCR loan instead of a conventional loan. but... this will still require equity in the property.
if you can find something that somehow qualifies for an FHA loan but still needs improvement you can try to force the equity. or... and this is anathema to BPers - you can wait longer than a year and/or make money from a job =)
your question to be about low down financing options in regards to programs and frequency, so I want to answer specific to that.
Quick notes: Good mortgage brokers can easily offer 15% down loans with conventional and other programs like DSCR, so I'm only going to address <15% Down options.
The path of House Hacking hit a Y's in the road. You have the option to house hack alone or with partners.
Alone "House Hacking" <15% down options: Private & Portfolio Loan, FHA 3.5% down**, USDA 0% down**, VA 0% down***, Conventional with DPA (down payment assistance programs like CHFA) 0-5% down*, Home Ready Loan 1-3% down*, Conventional 2nd Home 10% down**, and Conventional 3% down*. KEY: *limited to 1/year. ** limited by one purchase until refie'ed out of program; ***limited by total of all loan(s).
With Partners (I call this "House Hacking 2.0" for clarity sake): You have all the above options but remove the limitations because you are partnering with partners, so you are NOT limited by your past loans. Examples from my portfolios include getting a $370k property with using a Conventional mortgage w/DPA and only requiring $1k cash; getting a $316k property with 1% down Home Ready Loan; and actually none of my properties have cost me a dime because my partners provided the cash. All of this is done in complete compliance with mortgage and governmental rules/regs. House Hacking 2.0 has the additional benefits increasing capital (partners provide cash), decreasing risk (spread out among partnership), and increasing loan worthiness (partners provide loan worthiness).
I am a fan of low/no down b/c instead of money going towards the acquisition it can increase financial reserves; provide money for more properties; and massively increases cash ROI %.
I wanted to answer your specific questions, but there's other more foundational factors including acting according to your risk profile (for instance I like having 3 back up plans), initiating/managing good partnerships, etc.
I love house hacking and have used it to live my day dreams, so please lmk if I can be of any other help to you.
Loan programs are constantly changing, so I highly encourage you find a stellar mortgage officer to serve you. I'm happy to connect you w/the one I use, if you shoot me a message. Creative financing offers more options like master leases, lease option, seller financing, and more. You are in the right place with BiggerPockets. Don't give up and I encourage you to move solidly and quickly towards your first rental property.
@Jacob Mitchell some good info here, but I think people are missing the point and not giving you the straight answers that you need.
One critical part that you mentioned is multifamilty (2-4 units). Most of what people are referencing in this post are 1-unit criteria. These are VERY different.
The other critical part you mentioned is not being ready until 2024, which likely means that's when you will have 2 years of self-employment income before you can qualify. To your question about using salary, yes that's part of how you qualify with your debt-to-income ratio (DTI). Your DTI is the ratio between your employment income plus rental income, compared to your monthly liabilities (housing, car payment, student loans, credit cards, etc).
With 2-4 unit properties, you have 2 options (if you are not a Veteran or buying in a rural area) to buy with a low down payment. Either FHA, or Conventional Home Possible. Period.
FHA allows 3.5% down. Conventional Home Possible allows 5% down. With HP, there is also an income cap that you have to navigate.
Strategy-wise, FHA is best to do first. Why? Because when qualifying for a FHA loan, and vacating an existing property with a mortgage, you must prove with an appraisal that you have 25% equity in the vacating property in order to use rental income for qualifying. For most people, without being able to use rental income is a deal breaker. So if you do HP first, and then try to do FHA 2nd, chances are very high that you will be stuck, unless you did some kind of value add and gained 20% more equity in 1 year.
So then for the 2nd property, it's best to do HP (assuming your LO is smart enough to help you to qualify under the income cap). HP only allows you to have 2 financed properties, counting the subject property you are buying, which is why you want to do this loan 2nd. If you can't qualify for HP, then you skip it and just keep doing FHA.
So now you have 2 properties under your belt. For the 3rd property, you now have 2 options for another low down payment. Either buy a 1-unit with 5% down, or if that first property has at least 25% equity, then you can refinance out of the FHA loan and use FHA again for another 2-4 unit. You can only have 1 FHA loan at a time (unless you relocate for work > 100 miles away), which is why you have to refinance out of it to a Conventional loan (or some other product) in order to use it again. And with Conventional financing, as a primary residence, the max LTV for 2-units is 85%, and for 3-4 units is 80%. If you have already moved out and it's an investment property, for 2-4 units it's max 75% LTV.
There are a LOT of nuances with the guidelines, and there should be a lot of mapping out your strategy of the order that you finance, BEFORE you get into any property. Seeing 2,3,4 moves ahead is extremely important to make sure that you don't get stuck. It is very much an art (that even many/most loan officers don't understand lol). The goal is to make sure that you don't get one-and-done, and then forced to save up 20% down for the 2nd property, because you were working with the wrong person who didn't care about your long term plan. Any realtor can sell you a house, and any LO can finance a loan. But finding the right realtor and LO that understands REI and these strategies is critical to your success. Luckily you already have the first part of that solved :)
Hey Jacob, great questions! You are correct in that you can only have one FHA loan at a time. The way I have "nomadically" house hacked is by utilizing the 3-5% down conventional loan on a single family house hack. The transition can be a little tricky at times but it's doable. I'm on my third house hack using this strategy. I do still have one FHA loan and the other two are conventional loans. I am of the opinion that, in most markets, a creative single family house hack is the way to go over MFH. Good luck and hope you crush it as a new agent!
Appreciate the advice and support! Would you care to share why you think a single family is the way to go and explain your strategy? I have enjoyed the thought of Multifamily for the fact of more potential earnings in the long run, but have also not enjoyed the thought of living in a multifamily scenario for so many years. I am willing to do whatever and make it work, but I am always interested to learn more.
Thank you for the rundown! That helped me see so many more options! I think a big reason for my confusion is the lack of understanding of the vast amount of loan programs. Most of the lenders that I have spoken with only educate us agents on the most basic residential mortgage loans.
Any insight on how to learn about more loan programs and their best uses?
I appreciate the outlook of different methods of obtaining loans for low money down, and some I am definitely a little hesitant to entertain at this time, but I am always happy to broaden my knowledge!
I really appreciate the honesty here! You have acknowledged that the market isn't going to keep shooting up like a rocket ship like many people are unable to do, but instead, the value will have to be added forcefully!
I have made myself the victim of assuming sacrifices would be minimized but in reality, that's not how it typically works. In many markets value of the previous property will not just be a guaranteed jump start to the next property, but instead, I will have to save money for the next larger down payment. Maybe not always 20% but also not always 3.5%
@Jacob Mitchell this is where the confusion lies. These aren't various loan programs. There are only 2 programs...FHA and Conventional. It's that simple. However it's the deep understanding of the guidelines of each of these programs that matters. 24 years writing mortgages, I know these guidelines inside and out, and how to use them in a way to help real estate investors and house hackers. It's not something you can easily learn. It's years of practice, and learning what you can do, what you can't do, and the repetition of doing thousands and thousands of loans and the nuances of working around the guidelines. This is what sets someone like me apart from the order-taker LO's in the call centers and banks. Any LO can quote a rate, or teach a room full of realtors a few nuggets, but very few can actually do what I do.
Let me be clear. You CAN house hack a new 2-4 unit property every year with a low down payment. But people talking about it on BP is very different than walking the walk. Any decent LO can explain how to buy properties 1 and 2. But very few LO's can actually guide you through getting to properties 3,4,5... I have done that successfully for dozens if not hundreds of house hackers. You just need a very realistic and pragmatic approach to the properties you buy, and the right LO and realtor team to support you, and as I mentioned you already have one of those :)
@Jacob Mitchell this is where the confusion lies. These aren't various loan programs. There are only 2 programs...FHA and Conventional. It's that simple. However it's the deep understanding of the guidelines of each of these programs that matters. 24 years writing mortgages, I know these guidelines inside and out, and how to use them in a way to help real estate investors and house hackers. It's not something you can easily learn. It's years of practice, and learning what you can do, what you can't do, and the repetition of doing thousands and thousands of loans and the nuances of working around the guidelines. This is what sets someone like me apart from the order-taker LO's in the call centers and banks. Any LO can quote a rate, or teach a room full of realtors a few nuggets, but very few can actually do what I do.
Let me be clear. You CAN house hack a new 2-4 unit property every year with a low down payment. But people talking about it on BP is very different than walking the walk. Any decent LO can explain how to buy properties 1 and 2. But very few LO's can actually guide you through getting to properties 3,4,5... I have done that successfully for dozens if not hundreds of house hackers. You just need a very realistic and pragmatic approach to the properties you buy, and the right LO and realtor team to support you, and as I mentioned you already have one of those :)
Hi Zack- I'm really appreciating your thoughts. In regards to there only being two loan programs, what do you think of Multifamily USDA loans and the 10-15% down multifamily DSCR loans? In my experience, these are rare but findable with persistence. Have your written any of these loans yet and have any insight to share?
There are many loan products available with lower down payments, making homeownership more accessible and achievable. It's important for borrowers to shop around and compare options to find the best product for them. With research and patience, anyone can become a homeowner!
It is also important to note that lower down payments often have associated costs, such as mortgage insurance. It's a good idea to factor in these additional costs when deciding which loan product works best for you. The right lender can help guide you through the process and provide advice on the best option based on your individual needs and circumstances.
In the end, there are many loan products available for those who don't have 20% for a down payment. It's just important to be aware of associated costs and do thorough research when selecting the best option for you. The right loan can make all the difference!
@Grant Shipman if you read my first post, yes I mentioned both VA and USDA, but neither of these are applicable for the OP. Which is why I said he has 2 options.
When I say low down payment, I am talking 5% or less. Yes, there are much more expensive options out there for 10% down and 15% down. However, if you really do the math, when you factor in the cost of the rate and fees/points, and the potential prepayment penalty to get out of the loan quickly, frankly they will just eat away at your profits. I am not a fan of these loans unless you have zero other options. And I wrote a lot of subprime loans back in the day, I can speak from experience. These newer loan products are the same thing just packaged with a new PC name, because no one wants to call it subprime again after that meltdown. I'd rather see someone get financial help from a partner or family member and put 20% down, than these non-QM/DSCR/hard money/whatever you want to label them, loans. Just my 2 cents...
@Grant Shipman if you read my first post, yes I mentioned both VA and USDA, but neither of these are applicable for the OP. Which is why I said he has 2 options.
When I say low down payment, I am talking 5% or less. Yes, there are much more expensive options out there for 10% down and 15% down. However, if you really do the math, when you factor in the cost of the rate and fees/points, and the potential prepayment penalty to get out of the loan quickly, frankly they will just eat away at your profits. I am not a fan of these loans unless you have zero other options. And I wrote a lot of subprime loans back in the day, I can speak from experience. These newer loan products are the same thing just packaged with a new PC name, because no one wants to call it subprime again after that meltdown. I'd rather see someone get financial help from a partner or family member and put 20% down, than these non-QM/DSCR/hard money/whatever you want to label them, loans. Just my 2 cents...
Thanks! I thought I had read all the comments, so I'll go back an re-read. Thanks again Zack :)
Appreciate the advice and support! Would you care to share why you think a single family is the way to go and explain your strategy? I have enjoyed the thought of Multifamily for the fact of more potential earnings in the long run, but have also not enjoyed the thought of living in a multifamily scenario for so many years. I am willing to do whatever and make it work, but I am always interested to learn more.
Hey Jacob, yes will do. A few reasons. A big one is that I love the 3-5% down conventional loan over the FHA loan. The 3-5% down conventional loan can only be used on single family and, I think, in the long term, this is a cheaper loan. If you go 3-4 unit and use FHA, you'd have to satisfy FHA self sufficiency which can be really tough to do in this market.
Another reason is that, in bigger markets like Seattle/Denver, there are just a lot more SFHs than MFHs. The multifamily tends to get bid up a lot more and it's hard to make the numbers work with the price point.
I love being creative in the SFH space and adding separate/additional living spaces. With the way housing is going these days, having a AADU/DADU/MIL really increases the value of the asset.
@Jacob Mitchell- the majority of investors doing what you outline - will use the FHA loan to acquire the property and then get it refinanced into a conventional loan asap ( either before they move or even after they move out ) ...with property values appreciating fast and rates having been low for soemtime - this strategy was realtively easy to accomplish ....with values being flat or decling and rates being much higher - this strategy isnt as easy to accomplish
