Hard Money Part 1: House Hacking a Duplex with an FHA Loan

I’ve been active in Real Estate since 2015, and as a small time investor trying to build wealth and a portfolio, investing in Real Estate has never been more challenging… or confusing. Rates are going up, prices continue to rise, and yet sales have gone up? Huh?

Getting Started in Real Estate Investing (REI)

While my parents did own our house growing up, I didn’t explore REI until I was well into adulthood and had saved my own money through a solid W2 sales job. I was fortunate to get into REI game when rates were around 4.5% and the median price was under the current $416,000.

I was targeting multifamily properties that had room to grow in both rent and value. I was also able to refinance as a rate and term as well as a cash-out refinance to waterfall my capital appreciation into other properties. This process is a bit more challenging especially right now, but markets do stabilize (based on historical patterns) which means properties will be within reach again if the investment companies don’t buy them all up.

Now because of the macro environment, my assumptions on the market, and other opportunities to invest, I’ve paused my investing in Real Estate properties (I’m still purchasing REITs). This just means I have more time to share what has worked in the past, techniques I’ll be using again in the future, the wins, and the losses. This will be a multi-part series to my investing journey and we’ll be getting started with my 3rd property and the creative financing done to acquire it. I also was honored to have a piece done on this property by Realtor.com and Brooke Morton.

Identifying the property & matching the budget

There are a lot of different blueprints for a lot of different ways to find a cash flowing property (if that’s even your goal for investing). This is what I looked for when searching for this property.

I had a specific budget I was trying to stay under knowing I was going to also live in this property (House Hacking as most call it). That meant I could stretch the budget a little bit because I was going to use an FHA loan allowing me to place a lower down payment (I’ll talk about the different loans later in this series).

The budget also limited the area since a Motel 8 budget isn’t going to get you the Ritz kind of properties. Through purchasing other properties I also had an idea on what year I wanted 

Financing (FHA)

I’ve used only conventional loans and FHA loans so far in my investing journey and this particular property was purchased with an FHA Loan. These are designed to help people buy their first home, but is a popular choice for investors that are going to also house hack and live in the property.

The main benefit is that it allows you to put as little as 3% down with the catch that you’ll see mortgage insurance on your payment and it has to be your primary residence for 12 months.

This made sense for this property because…

  • I was pulling this income from a cash out refinance so I had a certain amount of money I could invest.
  • I wanted to keep more cash on hand for potential repairs (which I did end up using)
  • I was going to be living in it.
  • For the price I was getting and the rate, I believed that I would have a chance to refinance to remove the mortgage insurance.

The Numbers

Purchase price: $300,000

Seller Credit: $5,000

Interest Rate: 3.75%

Mortgage Insurance: $203

Cash to close: $14,306

Mortgage Payment: $1,697

Rent for 1 unit at purchase: $1,250

That means I was paying only $447 for rent (not counting utilities) and once I could rent the unit out I would be cash flowing. My AGI for the year I purchased was $37,000 being between two jobs.

Could this work now?

The short and honest answer is yes. I would do this only if the cash flow made sense for me and that’s where this becomes an issue.

The challenge: Finding a property that does cash flow with the current rates. While rents have increased, so have average payments and the cost of a property.

Are you looking for a rental property management software? Check out DoorLoop. DoorLoop is the fastest-growing rental property management software for property managers, owners, and real estate investors. Its user-friendly platform simplifies tasks such as accepting rental applications, signing lease agreements, managing maintenance requests, and handling accounting. This is an affiliate link and it does support me if you sign up.

Related Post

Leave a Reply