Many of you are familiar with the term “house hacking”. House hacking is where you use an FHA loan to buy a 2-4 unit building for only 3.5% down if you move into one of the units for at least a year. You can also utilize a 6% seller assist to greatly reduce your out of pocket cash required to buy the property. Getting into a moderately priced house here in Pittsburgh for less than $10,000 out of pocket is easily doable going this route. What many of you might not be aware of is that you can only have one FHA loan at a time. So what happens if you want to repeat the process and house hack another property in 1-2 years? You could refinance out of your FHA loan if you have enough equity, but often times you won’t get to that point in such a short period of time unless you did a major rehab and can refi out. So in that case you are stuck unless you want to put at least 15-25% down right? 15% down for owner occupied duplexes and 25% down for 3-4 units are currently the lowest down payments I am aware of on your standard Fannie Mae Loan Products.
This is where “portfolio lenders” or small community/regional banks or credit unions come in handy. They keep some or all of their loans in house and can get creative with the type of products they offer. When I was brainstorming on what my next investment move would be, I decided that I didn’t want to put down that much money and started reaching out to these small community banks. Eventually I got ahold of a bank and they told me that I could buy a 2-4 unit for as low as 5% down if I moved into it!! This is while still keeping my current FHA mortgage that I have on my 3 unit. They also allowed for a seller assist to help minimize closing costs. They allowed for a 3% seller assist for 5% down, and a 6% seller assist for 10% down, which is what I opted for. These loans are also amortized over 30 years, keeping the mortgage payment low and cash flow high.
As a result of utilizing this assist and having the seller pay for both sides of the transfer tax, I essentially only had to bring the down payment ($8,000) to the closing table since the 6% covered ALL of my closing costs. I walked away with a duplex that the rent from the other side would cover my mortgage while I live there, and it would be a great cash flowing property once I moved out. While utilizing this strategy every 1-2 years, one could essentially rack up a pretty sizable portfolio of homes for very little out of pocket. Think of that compared to having to put at least 25% down and not being able to get a 6% seller assist if you buy multi-units strictly as investments without moving into them. Not to mention, if you buy as an owner occupant you also get a lower interest rate than if you would have bought it as an investment without moving in. Investment properties also generally come with higher closing costs.
The kicker to this is that the loan the bank offered was an adjustable rate after 10 years. However, I was completely okay with that because by 10 years I can either refinance the property to a standard loan since it would have enough equity, or sell it and do a 1031 exchange to buy a bigger property. The 1031 exchange is what I will more than likely do.
So basically the purpose of writing this post is to help you younger folks that might not have a ton of capital to buy houses with, but still want to get in the game and build a sizable portfolio. If you utilize this strategy while in your 20’s before you decide to settle down and have kids or what not, then you can end up with a bunch of units that will be great investments for years to come. All for very little out of pocket. Moving every 1-2 years will be a hassle, but totally worth it to gain the benefits of owning real estate and securing your future. You also can get very familiar with different neighborhoods and know them like the back of your hand, a great advantage for an investor. No matter what part of the country you are in, if you ask around enough you should definitely be able to find a bank that offers something similar to this and enables you to do the same.