House Hacking 1st Property!

New to Real Estate · Memphis, TN · Member since 2019 · 11 posts · 8 votes

Hi All,

I'm from the Memphis area and want to start investing in real estate in my area. I've did a lot of reading and watching YouTube videos on strategies to getting my feet wet and house hacking seem like a good way to get some skin in the game. I plan on using FHA loan 3.5% down to get started with a 2-4 unit multi family.

At that year Mark I would put both units up for rent. Then I’ll like to do the process again with another 2-4 unit property. Any advice on how this could be done if I wanted to repeat the process?

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Lawrence Potts

Real Estate Agent · Member since 2018 · 459 posts · 414 votes

Hey @Tiffany Johnson, that’s an excellent way to get into the real estate game! House hacking has been one of the best decisions I’ve made in my life.

There are a few things to consider with this strategy:

1. As mentioned earlier, there’s a self sufficiency test for triplexes and 4plexes that can throw a wrench into financing. Depending on if underwriters will take current rents or market rents, it can change how much a lender is willing to lend.

2. Typically you can only have one FHA mortgage at a time. The work around is to refinance your FHA mortgage into a conventional once you hit 25% equity (75 LTV). Then you have your open FHA back and you can buy another multifamily. If you find something where you can force equity (sweat equity through rehabbing), that may help you hit that mark sooner.

3. FHA just changed their refinancing rule to 12 month seasoning period. Once you hit the 12 month mark and you have the equity, you can start the refinance process. Aka seasoning.

It’s still an AWESOME strategy and 100% doable! As the market and lending changes, you just need to pivot and learn and be creative. You got this! Find a lender that knows exactly what you’re trying to accomplish and they can get you connected to an agent that can find the right deal and can close 👊 @Grant Schroeder has helped quite a few investors in TN, I highly encourage you connect with him since he can get you connected to investor-friendly agents as well.

Hope that helps!

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Christopher H.
Lender · Okanagan, BC · Member since 2017 · 105 posts · 77 votes
3y
My honest advice is to put as much effort and focus on getting that first deal done. You will learn a ton going through your first one and that could have a huge impact on what you want to do going forward.
Keep it simple and focused.. find a good deal and buy it.
1 Reply
Tiffany Johnson
OP
New to Real Estate · Memphis, TN · Member since 2019 · 11 posts · 8 votes
3y
Quote from @Christopher H.:

My honest advice is to put as much effort and focus on getting that first deal done. You will learn a ton going through your first one and that could have a huge impact on what you want to do going forward.
Keep it simple and focused.. find a good deal and buy it.
Thank you for the feedback. Also, just hypothetically if the units are in need of a lil rehab, am I able to get a renovation loan with the FHA, or will I have to take them out separately?
0 Reply
Matthew Kwan
Lender · Seattle, WA · Member since 2022 · 482 posts · 768 votes
3y
Hi Tiffany,

House hacking with FHA is the ideal way with min down payment. However, anything above 3-4 units you would also need to consider passing the Self Sufficient Rule (SS Rule) where your projected gross market rental at 75% has to be greater or equal to your monthly PITI. The SS rule only applies to 3-4 units when using FHA but if it's single family or duplex, it will not trigger the rule. As for conventional for single family residence, you can go as low as 5% down and house hack by the room. As for 2-4 units you would be expected 10-25% down depending on the amount of units. However, the mortgage insurance are usually lower than fha.
As f
@Albert Bui @Carlos Valencia

1 Reply
Lawrence Potts
Real Estate Agent · Member since 2018 · 459 posts · 414 votes
3y
Hey @Tiffany Johnson, that’s an excellent way to get into the real estate game! House hacking has been one of the best decisions I’ve made in my life.

There are a few things to consider with this strategy:

1. As mentioned earlier, there’s a self sufficiency test for triplexes and 4plexes that can throw a wrench into financing. Depending on if underwriters will take current rents or market rents, it can change how much a lender is willing to lend.

2. Typically you can only have one FHA mortgage at a time. The work around is to refinance your FHA mortgage into a conventional once you hit 25% equity (75 LTV). Then you have your open FHA back and you can buy another multifamily. If you find something where you can force equity (sweat equity through rehabbing), that may help you hit that mark sooner.

3. FHA just changed their refinancing rule to 12 month seasoning period. Once you hit the 12 month mark and you have the equity, you can start the refinance process. Aka seasoning.

It’s still an AWESOME strategy and 100% doable! As the market and lending changes, you just need to pivot and learn and be creative. You got this! Find a lender that knows exactly what you’re trying to accomplish and they can get you connected to an agent that can find the right deal and can close 👊 @Grant Schroeder has helped quite a few investors in TN, I highly encourage you connect with him since he can get you connected to investor-friendly agents as well.
Hope that helps!
4 Reply
Dan Portka
Real Estate Agent · San Pedro, CA · Member since 2019 · 253 posts · 128 votes
3y
@Tiffany Johnson yes check out the FHA 203k loan! There's also a conventional non fha version as well. The renovation costs are included with your mortgage all in 1 loan. Awesome strategy!
1 Reply
Tiffany Johnson
OP
New to Real Estate · Memphis, TN · Member since 2019 · 11 posts · 8 votes
3y
@Lawrence Potts so if the property needs a little rehab I can earn equity a little faster correct? But what if the property is newly renovated or a new build. How would I earn equity?
1 Reply
Lawrence Potts
Real Estate Agent · Member since 2018 · 459 posts · 414 votes
3y
Completely dependent on what homes similar to said property sell for within a close proximity. You buy below value assuming it needs rehab. So you rehab to force the value to equate to similar properties that are of the same and near each other. That spread is your equity. One rule to remember: you make the most money at purchase. So if you can buy it at a lower price, your spread is larger (spread=equity).

Your value is ultimately going to be determined by an appraiser and that appraiser is going to go off of like properties nearby that have sold recently. So account for that in your search.

Typically, buying brand new doesn’t leave much equity because you’re buying at the top of your market. It’ll take longer for equity to be made (appreciate & principal paydown).

Hope that makes sense!
Doesn’t mean you shouldn’t buy brand new. If that’s the only property available, that may be your best option. But that’s for you to determine. Just know how to adjust your plan with whatever decision you make.
1 Reply
Tiffany Johnson
OP
New to Real Estate · Memphis, TN · Member since 2019 · 11 posts · 8 votes
3y
@Lawrence Potts Thank you so much!!
1 Reply
Dave Skow
Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes
3y
@Tiffany Johnson- thanks - 1) if using a FHA loan to buy a multi family property to live in - ideally you will need to refinance out of the FHA loan to a conventional loan if you want to be able to use a FHA loan again for the 2nd property .....the issue with this is that you will likely need a large amount of equity ( 25% + ) in order to refinance a MF rental property ( which is unlikely ) .....you might consider buying a 1 unit / use a conventional loan with 3% down - learn the ropes - then buy your 2nd prop as a MF using the FHA strategy ...if you do buy usign FHA loan and then cant refinance it you will need to use a conventional loan for the 2nd proerpty ( which will require a 20% + down payment )
0 Reply
Tiffany Johnson
OP
New to Real Estate · Memphis, TN · Member since 2019 · 11 posts · 8 votes
3y
Quote from @Dave Skow:

@Tiffany Johnson- thanks - 1) if using a FHA loan to buy a multi family property to live in - ideally you will need to refinance out of the FHA loan to a conventional loan if you want to be able to use a FHA loan again for the 2nd property .....the issue with this is that you will likely need a large amount of equity ( 25% + ) in order to refinance a MF rental property ( which is unlikely ) .....you might consider buying a 1 unit / use a conventional loan with 3% down - learn the ropes - then buy your 2nd prop as a MF using the FHA strategy ...if you do buy usign FHA loan and then cant refinance it you will need to use a conventional loan for the 2nd proerpty ( which will require a 20% + down payment )
When you say 1 unit are you referring to a single family home?
0 Reply
Dave Skow
Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes
3y
Quote from @Tiffany Johnson:

Quote from @Dave Skow:

@Tiffany Johnson- thanks - 1) if using a FHA loan to buy a multi family property to live in - ideally you will need to refinance out of the FHA loan to a conventional loan if you want to be able to use a FHA loan again for the 2nd property .....the issue with this is that you will likely need a large amount of equity ( 25% + ) in order to refinance a MF rental property ( which is unlikely ) .....you might consider buying a 1 unit / use a conventional loan with 3% down - learn the ropes - then buy your 2nd prop as a MF using the FHA strategy ...if you do buy usign FHA loan and then cant refinance it you will need to use a conventional loan for the 2nd proerpty ( which will require a 20% + down payment )
When you say 1 unit are you referring to a single family home?

Yes - single family / condo or townhome
1 Reply
Ryan ThomsonBusiness Member
Real Estate Agent · Colorado Springs, CO · Member since 2018 · 1k+ posts · 1k+ votes
3y
@Tiffany Johnson great idea! Absolutely doable. With current interest rates and price run ups it is a little more difficult to meet the self sufficiency test for triplexes and fourplexes (luckily you don't have to meet this test for duplexes).

My advice is to make sure you record all of your income on your taxes (and get leases) so you can use that as income and basically erase the first mortgage in your debt to income calculation. Then you can use your income to qualify for the next property.

@Lawrence Potts has some great answers here as well.
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Tiffany Johnson
OP
New to Real Estate · Memphis, TN · Member since 2019 · 11 posts · 8 votes
3y
@Ryan Thomson this is great information. When you say “get leases”, can you explain that more to me if you do not mind?
1 Reply
Bud Gaffney
Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
3y
@Tiffany Johnson get it done! Buy a 4 unit multi
0 Reply
Tiffany Johnson
OP
New to Real Estate · Memphis, TN · Member since 2019 · 11 posts · 8 votes
3y
@Bud Gaffney 4 unit with a FHA 3.5% down?
0 Reply
Ryan ThomsonBusiness Member
Real Estate Agent · Colorado Springs, CO · Member since 2018 · 1k+ posts · 1k+ votes
3y
@Tiffany Johnson I just meant make sure that you have signed leases with your tenants. A signed lease in one way a lender can count your rental income towards your qualifying income.
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