Advice for a successful first house hack

Dallas, Texas
House Hacking
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Advice for a successful first house hack

Colton Schrader
Member since 2021 · 3 posts · 6 votes

Hey BP community, 

I'm a new investor that just recently graduated college and have been storing money for a house hack for about 6 months now. I was wondering if you guys have any advice or tips on a successful house hack. I'm going to be starting the preapproval process in the next few weeks. My goal is to purchase a duplex or more than likely a single family with an ADU in the Dallas area and live for as close to free as possible. I know this might be difficult with rates like they are right now but I was thinking about living in the ADU and renting out the main unit (not sure if this is against any rules). I also might rent out a room if space allows. The goal is to be able to cash flow when I move out after a year. I'm planning on financing it through a FHA or potentially a 5% down Fannie Mae loan. I just read in an article that ADU's can now allow borrowers to use 75% of the estimated rental income from and existing ADU to qualify for a mortgage which may help with helping me get approved for more. Have yall heard about this new policy? Thoughts on my plan or problems I might run across or advice from other house hackers would be super appreciated!!

Big questions I have

Fannie mae vs FHA loan?

Favorite markets in the DFW area or ways to analyze?

and rules regarding living in the main unit vs the ADU and which ones you can rent out?

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Ryan ThomsonBusiness Member
Real Estate Agent · Colorado Springs, CO · Member since 2018 · 1k+ posts · 1k+ votes
2y

Also, I want to make sure I make this point. You mentioned wanting cashflow when you move out in a year. 

I wonder if your criteria may be a little unrealistic for the current market.

House hacking is tough to cashflow in year one (with current house price run-ups and interest rates) for a couple reasons:

1. You are living in one of the rentable units

2. You are only putting 5% down so your loan amount is much larger and therefore your mortgage payment.

Cashflow is tough when you move out because prices doubled since 2015 (at least in Colorado Springs) and interest rates have tripled in a year. Cashflowing within the first couple years is somewhat of an anomaly due to the low interest rates of the last couple years.

I would consider your net worth ROI. What I mean by this is considering how much your down payment returns to your net worth (appreciation, loan paydown, tax benefits, AND rent avoidance). Don't forget to include rent avoidance in your numbers! You have to live somewhere.

Don’t throw away getting a good investment now because you can’t yet scale to number two. If interest rates come back down, your numbers will look a lot better and scaling might be possible. If they don’t, you’ll be glad you bought since you are avoiding rent and cashing in on loan paydown and leveraged appreciation.

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  • Jason WrayPro Member
    Banker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
    2y

    Colton,

    Nice to see you are doing some research and correct on your approach to financing. FHA versus Fannie is simple if the metrics are excellent credit, mid-to low DTI, down payment, No gaps or issues with employment and the property is self sufficient in debt service. So if you fit the above metrics and 5% is reasonable I would say Fannie over FHA.

    FHA is going to have monthly MIP insurance for the life of the loan or until you refinance and switch to conventional. FHA also has a 1.75% UFMIP up front premium so 1.75% x the loan amount finance charge built into the loan. (Fannie does not) FHA does offer higher DTI options up to 59% back end where as Fannie is around 49% with reserves and good credit.

    Fannie is going to have PMI but the PMI is calculated on credit and other factors so you could see a PMI of .25% versus an FHA standard .55% regardless of Fico score. Fannie PMI falls off at 78% LTV or when you refinance at or below 80% LTV.

    Overall rates are fairly close with FHA offering a lower rate with the higher Fico above 740+ but the .55% MIP usually negates any savings. Fannie would offer the lower rate due to the PMI being lower, no UFMIP for added loan amount and 5% down versus 3.5%.

    In a nutshell FHA is good for lower credit scores, less money down and issues with income or DTI debt to income ratios. There are also other factors like recent derogatory trade lines late payments, Bankruptcies chapter 13 or 7 where FHA has a shorter seasoning requirement before a person can buy a home.

    Both FHA & Fannie will use 75% of the appraisal 1007/rent schedule for the other unit(s) rents to help qualify. They use the lesser of the two either current rents/lease or the appraisal 1007/rent schedule. They will both also use and consider any ADU rents.

    I would reach out to @Lucia Rushton in Dallas to see if she can point you to a good duplex.  Great realtor in and around the DFW area in Texas and a member here on Bigger Pockets.

    [email protected]727-637-4289
    3Reply
  • Denver McClurePro Member
    Financial Advisor · Dallas, TX · Member since 2018 · 659 posts · 479 votes
    2y

    Hey @Colton Schrader, feel free to PM me so we can chat sometime. I'm an investor in the Dallas area as well. I own a few duplexes and an ADU rental, so I have plenty of experience in what you are trying to accomplish!

    [email protected]
    3Reply
  • Lucia Rushton
    Realtor · Dallas - Fort Worth Metroplex, TX · Member since 2016 · 1k+ posts · 925 votes
    2y

    @Colton Schrader welcome to BiggerPockets! I can see how committed you are to start off on the right foot. 

    @Jason Wray thank you for the recommendation.

    Colton, I would be delighted to assist you in getting on the Property Ladder as a househacker, I think it is one of the best moves! 

    1Reply
  • Corby GoadeBusiness Member
    Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
    2y

    Welcome and congrats on thinking ahead and being a much better planner than I was when I was in college!

    I don't know anything about the specifics of the Dallas market an ADU regulations, but the Fannie Mae loan is a better option by far than FHA- you can drop PMI without a refi and you will want to do that asap. With FHA, you'll spend another $5-10k to make that happen.

    Best of luck!

    2Reply
  • Ray WilliamsBusiness Member
    Lender · Denver, CO · Member since 2017 · 153 posts · 69 votes
    2y

    An exciting time for you for sure. If you go 2-Unit Fannie still hasn't released the exact guides, and pricing isn't available. So to know how it will compare against FHA is an unknown. As Corby mentions there is an advantage to conventional with removing PMI. At the same time, anyone buying now will likely refinance "when" rates come down. One benefit FHA affords is a streamline refinance, which you can do even when it becomes a rental. I wouldn't get tripped up on mortgage insurance, it is relevant to the time you own the home.

    For ADU, FHA just announced allowing this to be used as qualifying income, so that is great for you in your analysis. And you can with a conventional loan as well. Feel free to DM me with any specific guideline questions , I am a guideline geek.

    2Reply
  • Bruce Lynn
    Real Estate Broker · Coppell, TX · Member since 2011 · 5k+ posts · 4k+ votes
    2y

    Depending on where you want to buy or where you live now, there is a pretty neat deal now with Wells Fargo where they will give you $10,000 for closing or down payment.  Of course lots of restrictions but worth looking into.   It can be combined with other assistance programs as well.

    Probably the best house hacks I see right now are 4bed 3bath homes vs the duplex or ADU homes. We just don't have a lot of duplexes or homes with ADUs and what we do are fairly expensive and so often the numbers don't work well. The single family and rent by the bedroom is probably the best option right now for most people.

    1Reply
  • Benjamin Sulka
    Cleveland, OH · Member since 2022 · 811 posts · 578 votes
    2y

    Colton, 

    I sense some great things in your future! 

    I'm pursuing a house hack as well. ADUs aren't really a thing in my area but it's great that that is something you can leverage. 

    Regarding FHA vs. conventional, FHA is a bit easier to qualify for because of the DTI requirement. Additionally, PMI falls off of a conventional loan once you hit a certain LTV threshold. FHA PMI stays attached to the loan for life unless you refi.

    Best of luck! 

    3Reply
  • Mathew Pezon
    Rental Property Investor · Allentown, PA · Member since 2014 · 67 posts · 38 votes
    2y

    Great responses above ^^ Definitely great info.  I would add that once you buy, the key is to manage right. You can cut off a couple hundred to thousands of dollars here and there by getting the right loan. But if you rent to the wrong tenants not only will you have a bad living arrangement but all that research for the right loan product goes out the window when you have to do a $10k+ turnover. In summary: buy right, finance right, and manage right. Good luck!

    2Reply
  • Ryan ThomsonBusiness Member
    Real Estate Agent · Colorado Springs, CO · Member since 2018 · 1k+ posts · 1k+ votes
    2y

    @Colton Schrader

    Good thinking! My first piece of advice is to find a house hack friendly realtor. They can help you think through a lot of this! 

    I would use Conventional if you have the 5% down. 

    The Assumable Guy544 Reviews
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    1Reply
  • Ryan ThomsonBusiness Member
    Real Estate Agent · Colorado Springs, CO · Member since 2018 · 1k+ posts · 1k+ votes
    2y

    House Hacking is amazing. Here are some resources I found really helpful on my journey:

    1. For podcasts I really like the House Hacking episodes on Bigger Pockets Podcast and other channels. Here is a playlist with the best House Hacking Podcasts I’ve found: https://open.spotify.com/playlist/4A6uLsPfdWEMmJhG4TSjyb?si=743bb403548f47fb

    2. Great beginners guide: https://www.biggerpockets.com/blog/wp-content/uploads/2022/08/Ultimate_Beginners_Guide_BiggerPockets.pdf

    3. The Book on House Hacking Strategies by Bigger Pockets is also a fantastic book

    4. Happy to talk if you want more advice

    5. Connect with a realtor who understands house hacking and has invested themselves

    6. Connect with a lender to see what you qualify for and how you can improve that situation

    7. Go to local Real Estate meetups and learn from people there

    The Assumable Guy544 Reviews
    WebsiteView Page
    2Reply
  • Ryan ThomsonBusiness Member
    Real Estate Agent · Colorado Springs, CO · Member since 2018 · 1k+ posts · 1k+ votes
    2y

    Also, I want to make sure I make this point. You mentioned wanting cashflow when you move out in a year. 

    I wonder if your criteria may be a little unrealistic for the current market.

    House hacking is tough to cashflow in year one (with current house price run-ups and interest rates) for a couple reasons:

    1. You are living in one of the rentable units

    2. You are only putting 5% down so your loan amount is much larger and therefore your mortgage payment.

    Cashflow is tough when you move out because prices doubled since 2015 (at least in Colorado Springs) and interest rates have tripled in a year. Cashflowing within the first couple years is somewhat of an anomaly due to the low interest rates of the last couple years.

    I would consider your net worth ROI. What I mean by this is considering how much your down payment returns to your net worth (appreciation, loan paydown, tax benefits, AND rent avoidance). Don't forget to include rent avoidance in your numbers! You have to live somewhere.

    Don’t throw away getting a good investment now because you can’t yet scale to number two. If interest rates come back down, your numbers will look a lot better and scaling might be possible. If they don’t, you’ll be glad you bought since you are avoiding rent and cashing in on loan paydown and leveraged appreciation.

    The Assumable Guy544 Reviews
    WebsiteView Page
    4Reply
  • Colton Schrader
    OP
    Member since 2021 · 3 posts · 6 votes
    2y
    Quote from @Bruce Lynn:

    Depending on where you want to buy or where you live now, there is a pretty neat deal now with Wells Fargo where they will give you $10,000 for closing or down payment.  Of course lots of restrictions but worth looking into.   It can be combined with other assistance programs as well.

    Probably the best house hacks I see right now are 4bed 3bath homes vs the duplex or ADU homes. We just don't have a lot of duplexes or homes with ADUs and what we do are fairly expensive and so often the numbers don't work well. The single family and rent by the bedroom is probably the best option right now for most people.


     Thanks for the insight I will definitely look into the Wells Fargo grant!

    0Reply
  • Colton Schrader
    OP
    Member since 2021 · 3 posts · 6 votes
    2y
    Quote from @Mathew Pezon:

    Great responses above ^^ Definitely great info.  I would add that once you buy, the key is to manage right. You can cut off a couple hundred to thousands of dollars here and there by getting the right loan. But if you rent to the wrong tenants not only will you have a bad living arrangement but all that research for the right loan product goes out the window when you have to do a $10k+ turnover. In summary: buy right, finance right, and manage right. Good luck!

    Yeah absolutely. Definitely going to do some research on the tenant screening process! Thanks
    0Reply
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