House hacking strategy for second property
Hello bigger pockets community I have a question about how to get my second property. More than a year ago I bought a duplex to house hack with a conventional 20% down with 3.5 interest rate. I renovated the entire Unit B after I bought it. It took me 4 years to save enough money and want to speed up the process of buying. I was wondering would doing a cash out refinance or some HELOC be a smart way to get enough for a 20% down payment or should I hold on to my equity and do a FHA loan. I'm nervous about FHA because they seem to have high monthly payments. Does refinancing impact my original interest rate? What do you think I should do? Thank you for your time.
First off, congratulations on getting your first duplex! Good work 👍
Most people in your situation would utilize the equity to purchase their next property. If you were to refinance, you would be replacing your existing mortgage with a new one at today’s interest rates (refinance rates are typically a little higher than purchase rates). However, it’s access to liquidity that would be substantially faster than waiting and saving cash.
You could set up a HELOC to access your equity as well. It doesn't effect your current interest rate but you would need to shop around and see what interest rates for HELOCS are at for specific brokerages, credit unions, etc., and how much equity they will let you borrow against.
FHA tend to have lower interest rates but high PMI. It's up to you what you want to do, there's no "wrong" answer in this scenario. I think doing nothing is about the worst thing you can do and that's not bad considering the current success and position you have create for yourself right now.
You can always refinance out of an FHA. We bought our first home using conventional 5% down. We profited from that sale and used that money as a down payment going FHA on a 4plex. Our PMI was high (around $250/month) at the time, but our interest rate was 2.75%, making our mortgage about $1850/month. After less than a year, our 4plex went from $298k to $505k (we did a lot of needed repairs) and we had the opportunity to cash out $75k if we refinanced to a conventional loan at 75 LTV. Our interest rate was going to be 3.6% pushing our mortgage up to $2085/month. We did it and we lost some in cashflow but we deployed our equity ($75k) and bought more assets and now we make more. We also didn't have PMI anymore when we refinanced so we had more principal paydown with each mortgage payment.
I wouldn't be too concerned about PMI and monthly payments if you are going to be house hacking your next purchase and you'll still cashflow from your current duplex when you move out.
Do some math and figure out what makes sense to you. Can you buy the property and cashflow after you move if you went FHA 3.5% down? How many properties could you buy with your equity position right now?
Your current strategy isn’t wrong, it’s very safe and guarantees cash flow. But it’s very slow. Not saying you have to choose between the two, but sometimes they are at odds against each other….
Hope that helps! Let us know what you decide to do or if you have more questions!
I am gonna repeat what @Lawrence Potts has said here. If you have run the numbers and they work base on your goals, even with PMI, go for it. Personally, I would rather put 5% down, pay the $250 a month in PMI (especially if the property cashflows), and keep the 15% in my pocket to go buy another one a year later (if you're buying it as a primary then you have to wait a year with FHA). Compared to refinancing your current spot and doubling the interest rate, getting a heloc that is a variable rate (what's the difference between this interest payment and your PMI?) or spending so much time saving for 20%.
My first property I purchased FHA, refinanced to conventional and have around $200k in equity with a 2.25% rate which I refuse to touch, its basically free money. I am currently buying a duplex and I am doing it FHA because I can keep more money in my pocket for rainy day problems, slight remodel and buying my next duplex. You should know, cashflowing at 3.5% down can be tricky so you have to do more due diligence, I am looking for $300-$500 a month.
For me it all comes down to security, I will happily pay the PMI to I have money for emergencies and/or buy more properties. Lawrence nailed it when he said your thinking isnt wrong, its just slow. If you're okay with slow, or even looking for slow (some people LOVE slow) then stick to it. But if your goals are acquiring more properties and growing your portfolio, saving for 20% or messing with your current mortgage seem like the wrong path to me. People would kill for a 3.5% mortgage these days!
Hey Michael,
Lawrence and Luke covered pretty much everything I would have suggested regarding the route to traditionally financing the property.
My suggestion would be getting creative and leveraging someone else's money, or multiple someone's money, that is looking at getting into their first or next investment property.
If you find a good deal, then find equity investor(s) that bring the financing while you bring the knowledge and ability since you're already experienced. Structure the deal where they cover the purchase and rehab cost (either entirely or the majority) on a multifamily and you handle the acquisition, rehab, and property management aspect. Divvying up equity and cash flow percentages accordingly.
Maybe even see if you can negotiate the agreement to where you act as a live-in property manager, and your cost to manage the property and labor costs to rehab it offset your rent for that unit. Livin free and makin moves on your next property
hope that helps, best of luck 🤝🍀
Echoing what others have said, I would go FHA 100%. Definitely allows you to recoup your original investment quicker.