Hi guys,
I would like to get your advice on a strategy I have been thinking about for the last few weeks from reading discussions, listening to podcasts and seeing how my local market is.
Thank you in advance to all of you for taking the time to read this long question.
Just for background, my GF and I want to purchase our first home here in the East Bay Area and later on house hack it. In addition to that, we don't want to purchase at retail prices but instead at wholesale prices which means we need to find a property that has value add or needs work in order to build some sweat equity (although we are newbies, don't mind having to spend several months doing renovations before being able to move in). Originally, I was thinking that a 203k would be the way to go however after speaking with a few real estate agents I've been told that doing FHA 203k isn't very advantageous the reason being that lenders who do 203k are PITAs to deal with, which means they will be slow to close resulting in sellers most likely ignoring our offers.
With this in mind, my thought turned to using a HML to either:
- finance the purchase plus renovation costs with the HML
- finance only the purchase with the HML and then get a separate personal loan to fund the renovations (I am pre-approved with SOFI for up to 100k otherwise I would consider something like Lightstream).
I would think that if I can close really fast with the HML I would become that much more interesting despite me asking for a lower than asking sale price.
Obviously I would do research and get RE agent and/or appraiser to tell me what the property could be worth once renovated in this current market and assuming I got an offer approved for less than asking I could get working on the renovations.
I don't have experience doing renovations so I am not hoping to get such a project done in 30-60 days. I realize this could very well take 6-8 months. In the meantime I would just pay the HML and separate loan (if needed).
Once renovations would be done, I would get the property re-appraised and then go to a big lending institution and do a refi so we can:
- Pay off the HML
- Pay off the personal loan used for renovations (if not done thru HML)
- Lock in a lower rate with a longer term and smaller payment
- Get back as much as possible of the original down payment money we would have had to put towards the original purchase thru the HML
After doing the REFI, my GF and I would move into the property and house hack it. Because we intend to do that, we want to look for something with 3 to 4 bedrooms and at least 2 bathrooms (or we would build the second one if it didn't have a second one to begin with). Ideally we want to have 2 roommates who would rent out 2 bedrooms from us while we would keep our own and hopefully another one to make it into an office or guest room. We figure if we can get between $1,500 and $1,900 between the two roommates that would most likely cover at least half of the mortgage (assuming 3k-3.5k/month in PITI). We wouldn't be relying on the rent money from our roommates as we would be able to afford the mortgage on our own however we don't want that much of our disposable income to go out towards the mortgage. We don't mind house-hacking in order to continue re-building our reserves as much as possible.
Our target date will be later in the year at which point we hope to have between 100k and 150k in savings. We wouldn't want to put all of it in the deal as we would want to keep some reserves however we think that should be a good enough down payment from the HML's standpoint. Also, we both have great credit (750 - 780) and a very low debt to income ratio which I don't know to which extent will matter for a HML.
We would hope to do this house-hacking strategy for at least two years and hopefully after the 2 year mark sell the property and pocket some of the earned equity tax free and probably redo it again.
Does this make sense or am I forgetting something? It seems to me that my GF and I have the high credit score, low debt-to-income ratio, decent down payment and good stable jobs. What we don't have is the home buying and renovating experience (although my GF's brother is a General Contractor whom would probably be willing to give advice during renovations).
Our main thing is that we don't want to buy like 99% of the people and pay the price that 99% of the people pay.
Again, if you made it this far thank you so much for your time in vetting this idea or at least pointing out the pot holes I may need to look out for.
