For most House Hacking consists of getting an FHA loan so you can put a low down payment (usually 3-5% can be possible with FHA) down on a residential multifamily property (2-4 unit), live in one unit, and rent out the other 1-3 units. Resulting in the other units to pay for your mortgage and ideally other expenses too like utilities, insurance, and taxes.
One Challenge Starting Off With Owner-occupant Multifamily Investing
If you look on real estate listing sites and look up your local area you’ll notice there are not a large inventory of residential multifamily houses for sale, at least not anywhere you want to live. Thankfully this isn’t a show stopper for “house-hacking”. This results in high competition with the concept of supply and demand (low supply makes high demand when there is an active market continuously looking for it). It makes residential multifamily houses go high above asking and “deals” not be deals in the short term while forcing the investor to gamble on the house value appreciation.
Using Owner-Occupant Residential Multifamily Financing to Grow an Investment Portfolio
Financing a house hack has its advantages since you can do a low down payment. Repeatedly exploiting low-downpayment owner-occupant financing allows investors to grow quicker with the same amount of money or downpayment.
Owner-occupant financing requires you to move into the house within 60 days and live there for at least a year. To repeatedly use this concept you can move a little over a year to grow at scale. If you do this over and over, it can be possible to own 16 units in 4 years with four 4-unit buildings.
Why Is Owner-occupied Financing Residential Multifamily Property Important?
Owner occupy financing allows you to reach 20 times more leverage with low downpayment, while you’re limited to 4 to 5 times leverage with non-owner occupant investment properties.
As an example, a 4 unit property may have a 50% higher cap rate than a similar value of a single-family house, despite having more units. This is due to lower rents, much higher vacancies, worse tenant pool, etc. That said, once you include financing a 50% higher cap rate could easily double or triple cashflow. While this is nice, don’t be fooled into thinking this doubles or triples your return.
If you run the numbers with house hacking formulas you will generally see that an “okay deal with great financing” is better than a “good deal with mediocre financing”. Plus, there are lots of market inefficiencies to exploit in single-family homes, as the market price is largely set by people who do not have an investment mindset.
