Author Topic: How much to put down on your first House Hack?  (Read 1918 times)

Valley of Plenty

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How much to put down on your first House Hack?
« on: April 11, 2020, 08:23:51 AM »
I've been renting for the last couple years, but I'm planning to switch to owning before next winter. So far I've only rented, never owned a house. Following the advice I've received here and elsewhere, I'm planning to execute a house hack for my first property, both to reduce my housing costs and get me some property management experience for future real estate ventures.

What I'm unsure of is how much to put down on the property. Since it will be my primary residence, and since I will be a first time home buyer, I will qualify for extremely low down payment financing (possibly even $0 down). I know that MMM has criticized the practice of buying houses with less than a 20% down payment, but by my understanding it is best to put as little down as possible when purchasing rental properties, to leverage your returns against your initial investment. This is what I have heard in most circles of the FI community, and the advice seems sound, but I want to make sure I'm not missing something.

To be clear, this isn't an issue of how much of a down payment I can afford. I certainly save up a 20% down payment within the next year if I had to, I'm just unsure if that would be the best use of my monetary employees. Right now I'm *not* maxing out my 401k in order to set aside a down payment. If leveraging via a, say, 3.5% down payment would be the best play, then I already have more than enough, and I can start funneling money back into my tax advantaged investment vehicles.

Appreciate everyone's input on this matter.

FatFI2025

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Re: How much to put down on your first House Hack?
« Reply #1 on: April 12, 2020, 10:32:16 AM »
Probably 10% for an owner-occupied. There are two issues to consider -- 1) additional cost of low down-payment options and 2) your personal cash flow situation.

3.5% down is the threshold of FHA loans, which come with additional PMI cost. For me, personally, it's not worth it to add this cost to the loan, especially because the tax deduction for PMI has proven impermanent. But in my HCOL area my frame of reference is $500 - $1000/mo for PMI. If you're making $100K+ in a LCOL area, then the calculus could be different.

And then there's cash flow to consider. If your job is steady and high paying, then you can withstand higher monthly mortgage costs. Keep in mind though, that you'll also have to keep a higher cash reserve, which you should account for in your tradeoff analysis.

At least before COVID hit, you could get a 10% down loan with the lowest rates and no PMI, so that's why I would recommend it as the minimum.

Jeo

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Re: How much to put down on your first House Hack?
« Reply #2 on: April 13, 2020, 12:07:34 PM »
As you've outlined, there are pros and cons to either approach. The "right" answer for you will depend on your goals, timeline, and strategy.

If your goal is to acquire your second property (and 3rd and 4th) quickly to build a real estate portfolio, you may want to put as little down as possible for the first one so that future down payments don't become your bottleneck to expansion. If you plan to use the BRRRR strategy (buy, rehab, rent, refinance, repeat) then you won't have to pay PMI for long, if executed successfully.

If you want to maximize the cash flow of your first property without BRRRR and don't mind taking time to save for the down payment on property #2, then putting enough down to avoid PMI might be the better way to go.

When I bought my first house hack in 2012, my goal was just to live for free. I had no intention of buying other properties, so I put down a full 20%. It worked, but I ended up liking this whole real estate thing more than I'd anticipated and had to wait a couple years before having the cash to look for my second property. I chose the right approach for me at the time, but in retrospect wished I'd gone the other route.

To get more clarity, I'd recommend practicing financial analyses of properties in your target area through both scenarios one with with the minimum down payment but with a higher mortgage balance and PMI, and the other with enough money down to avoid PMI. It sounds like the timeframes would be different, since you'd have to save more for scenario 2, so factor in the rent you'd be paying while saving up for the larger down payment.

cosine88

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Re: How much to put down on your first House Hack?
« Reply #3 on: April 18, 2020, 11:16:07 PM »
I'll throw a couple more wrenches into the equation:

1. It's wise to keep cash reserves. The bigger the property, the bigger the possible problems. You can keep some in "liquid noncash items" like gold etfs or index funds or whatever in a tradeable brokerage account. You really don't want to throw all of your available cash into the down payment, then the furnace goes out in November and you have to put the new furnace onto a credit card.

2. When you are looking at buying your SECOND property, the lender will accept 75% of your lease rent to cover expenses and you have to have already moved out. So if you have a $1500 mortgage you need rents of $2000 for it to "cancel out" in the eyes of the lender.

3. The last point also requires you to have 25% equity!

4. If you go with 0-10% down, you're going to have to either get 1. appreciation, 2. create value with renovations or 3. throw money into a refinance.

5. You may have to refinance anyway, the loan needs to be classified as an "investment property loan" and not a "owner occupant loan" so they may force you to refinance no matter what, and you'll end up with a higher interest rate.

*This is important*
6. When you offer on the property, offer the lowest down payment you are comfortable with, then when under contract but BEFORE you are locked into a rate, make sure to review options with the lender and get the best combination of down payment and interest rate that makes sense to you. It pays to go through this headache and not have to refinance later and incur refi fees.

ingrownstudentloans

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Re: How much to put down on your first House Hack?
« Reply #4 on: April 22, 2020, 08:12:51 AM »
I don't agree with cosine88's third point re: need to have 25% down.  I bought my first duplex as OO with 3.5% down in 2012 (after seller concessions and allowed closing costs, it was more like 2% down).  This was when PMI could be paid off over time and was not for the life of the loan like it is now, so that should be taken into consideration.

I purchased my second home in 2016 but did not do anything to pay down the original home.  It was approximately 85% LTV with no real appreciation to speak of (thanks upstate NY).  I still have the mortgage on property 1.  Still live in property 2. And have bought 2 additional investment properties since.  With rates where they are, both investment properties are at 4%.  The original OO mortgage on property 1 is 4%.  The mortgage on my primary residence is 3.5%.  I am now trying to pay things down so I can qualify for mortgage number 5, which under the new rules requires significant pay-down of all of the others.

Taking into consideration the PMI issues and need to refinance to get rid of PMI now, I would probably be inclined to put as little down as a I needed to to not have PMI on the loan.  A couple hundred bucks a month is a lot when you are trying to cash flow a rental.

Dicey

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Re: How much to put down on your first House Hack?
« Reply #5 on: April 23, 2020, 06:03:58 PM »
@Valley of Plenty, will you please exactly what you mean by "house hack"? I'm not quite sure I understand you.

I don't agree with cosine88's third point re: need to have 25% down.
Unless you're the lender,  you can disagree all you want, but cosine88 is right. For non-owner occ property, 25% down is pretty standard. Typically the loan cost on a "good" loan is 50 basis points higher than the owner ocupied property rates.

My quibble with @cosine88's list is point #5. Not all lenders require this. In our case,

Rental #1 was a new build. Financing was arranged/discounted though builder. Owner occupancy was "assumed", even though I wasn't actually old enough to live in it. I am sure the builder was getting a kickback from the lender, and this was in the days when nobody cared, so I refrained from pointing it out snd they pretended not to notice (maybe this is what OP means by house hacking).

Rental #2 was purchased as a rental, but our bank insisted on writing it as a second home. It's still that way.

Rental #3 was purchased as a non-owner occ with 25% down and a +50 basis points rate premium. They also did a re-fi on rental #1 at the same time, but only because we had plenty of equity and interest rates had dropped enough that we stlll saved money. They absolutely ignored the mortgage on rental #2.

All three are insured as rentals and reported as such on our tax returns.

In between, we have flipped a couple of houses. The lenders knew they were flips. They required different insurance and 25% down.

FWIW, #2 & #3 were our version of BRRR's. We Buy, Renovate, Rent, and Repeat. We have plenty of cash (from the flips) and we DIY, so our reno costs are not high. We focus on getting a good loan in the first place, so the typical Refinance step isn't necessary.

cosine88

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Re: How much to put down on your first House Hack?
« Reply #6 on: April 29, 2020, 11:59:52 PM »
@Valley of Plenty, will you please exactly what you mean by "house hack"? I'm not quite sure I understand you.

"House Hacking" is linguo for living in one bedroom of a house and renting out the other rooms, or living in one unit of a duplex, triplex...etc and renting out the rest. Best way for young people to get started, especially if they are single.

My whole plan is to repeatedly use owner-occupant loans in tandem with house hacking to get 5-10 houses, or however many it takes.

Dicey

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Re: How much to put down on your first House Hack?
« Reply #7 on: April 30, 2020, 01:45:03 AM »
@Valley of Plenty, will you please exactly what you mean by "house hack"? I'm not quite sure I understand you.

"House Hacking" is linguo for living in one bedroom of a house and renting out the other rooms, or living in one unit of a duplex, triplex...etc and renting out the rest. Best way for young people to get started, especially if they are single.

My whole plan is to repeatedly use owner-occupant loans in tandem with house hacking to get 5-10 houses, or however many it takes.
I've used several different house hacks, and I am a huge fan of having roommates make at least part of the mortgage payment. Thank you for clarifying which house hack you intend to deploy.

Knowing your plan and the information in the last sentence above leads me to another suggestion. Now is the time to figure out which of your local lenders are landlord friendly, because many of them get wiggy when you have more than a couple of mortgages rolling. They look at your tax returns and project these crazy doomsday scenarios (Oh, wait a minute...) and then they don't want to write any more loans. A friend turned us on to a local lender who is not afraid of up to ten mortgages and doesn't resell them. They are the best lender we've ever worked with. We are constantly looking for our next project, and it's nice to know in advance that this lender is going to approve our loan, and at a good rate.. BTW, my friend who gave me the tip now has more than ten mortgages with them, so apparently even ten is just a guideline.

Best of luck to you!

ingrownstudentloans

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Re: How much to put down on your first House Hack?
« Reply #8 on: May 01, 2020, 07:58:03 AM »
@Valley of Plenty, will you please exactly what you mean by "house hack"? I'm not quite sure I understand you.
I don't agree with cosine88's third point re: need to have 25% down.
Unless you're the lender,  you can disagree all you want, but cosine88 is right. For non-owner occ property, 25% down is pretty standard. Typically the loan cost on a "good" loan is 50 basis points higher than the owner ocupied property rates.


Our experiences are different and I would be happy to introduce anyone to my lender, they don't require 25% down on SFH investment (non-OO) properties here in Middle Tennessee.

Dicey

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Re: How much to put down on your first House Hack?
« Reply #9 on: May 01, 2020, 09:16:31 AM »
@Valley of Plenty, will you please exactly what you mean by "house hack"? I'm not quite sure I understand you.
I don't agree with cosine88's third point re: need to have 25% down.
Unless you're the lender,  you can disagree all you want, but cosine88 is right. For non-owner occ property, 25% down is pretty standard. Typically the loan cost on a "good" loan is 50 basis points higher than the owner ocupied property rates.
Our experiences are different and I would be happy to introduce anyone to my lender, they don't require 25% down on SFH investment (non-OO) properties here in Middle Tennessee.
That's great! Do they write non-OO loans in California?

JLee

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Re: How much to put down on your first House Hack?
« Reply #10 on: May 01, 2020, 09:19:41 AM »
It's going to depend on your specific lender / circumstances / regional benefits as well - I was able to get a lower mortgage rate with 5% down than with 10 or 20%, and my lender's PMI was so cheap that it was better for me to put 5% down and pay PMI than it was to put another 15% down to avoid it.

Valley of Plenty

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Re: How much to put down on your first House Hack?
« Reply #11 on: May 09, 2020, 12:22:24 PM »
@Valley of Plenty, will you please exactly what you mean by "house hack"? I'm not quite sure I understand you.


For my specific situation, the plan is to buy a duplex or triplex and live in one unit with my girlfriend while renting the other(s) out. Then, if in a year or so I find that I don't hate managing one property, I'll buy a second, move into it, and repeat the process.

Dicey

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Re: How much to put down on your first House Hack?
« Reply #12 on: May 09, 2020, 12:26:45 PM »
@Valley of Plenty, will you please exactly what you mean by "house hack"? I'm not quite sure I understand you.


For my specific situation, the plan is to buy a duplex or triplex and live in one unit with my girlfriend while renting the other(s) out. Then, if in a year or so I find that I don't hate managing one property, I'll buy a second, move into it, and repeat the process.
Great plan! I've always wanted to own a duplex, and live in half. Around here they are stupidly expensive because there just weren't very many built. The few there are are either in a cluster of other super ugly buildings, on very busy streets or both.

Valley of Plenty

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Re: How much to put down on your first House Hack?
« Reply #13 on: May 18, 2020, 07:23:12 AM »

Great plan! I've always wanted to own a duplex, and live in half. Around here they are stupidly expensive because there just weren't very many built. The few there are are either in a cluster of other super ugly buildings, on very busy streets or both.

I live in a LCOL area with a bunch of old brick houses that were built in the 30s, most of which have now been converted to multi-unit rentals. Costs are dirt cheap - it's not hard to find duplexes or even triplexes for less than $100k. Most will require a good bit of work to fix up and get in good condition, but the long term gains are too good to pass up.

Dicey

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Re: How much to put down on your first House Hack?
« Reply #14 on: May 18, 2020, 10:29:16 AM »

Great plan! I've always wanted to own a duplex, and live in half. Around here they are stupidly expensive because there just weren't very many built. The few there are are either in a cluster of other super ugly buildings, on very busy streets or both.

I live in a LCOL area with a bunch of old brick houses that were built in the 30s, most of which have now been converted to multi-unit rentals. Costs are dirt cheap - it's not hard to find duplexes or even triplexes for less than $100k. Most will require a good bit of work to fix up and get in good condition, but the long term gains are too good to pass up.
Swoon.  Lucky you!

betsbillabong

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Re: How much to put down on your first House Hack?
« Reply #15 on: May 18, 2020, 11:04:08 AM »
Double swoon. Duplexes where I live are more like 1m.