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Use House Hacking To Overcome This Housing Market (FHA Strategies)

Certified Mortgage Advisor
NMLS 1701021
June 5, 2021

House hacking and how it works

With all the mess that's been going on with the housing market out of thought, what about house hacking as a potential to help overcome the high costs and risks of buying in this market?

3 Big Risks Caused by Bidding Wars

There are three big risks that people are considering when they're looking to buy right now. This is because these risks are caused by bidding wars due to a lack of inventory.

1. Increasing prices

So number one is increasing prices. This is not uncommon. We're not unfamiliar with the increasing prices that are happening right now. The median home value is 347, 500, and right now we're seeing a year-over-year appreciation of 13.2%. So if that increases for the next 12 months, we'll see the median home value increase to 393, 370.

So not only is this changing the price, but this is impacting your monthly payment. Your monthly payment is increasing along with the price increase.

2. Increasing down payments

So is the down payment, making it really difficult for people to just keep up with the appreciation that's going on. Because if we're looking at a conventional loan, we're looking at a down payment somewhere around 17,375 for the median home price. And if that increases, if the home price increases again by 13.2%, so does the down payment.

That means you'd have to save an extra $200 per month over the next 12 months, just to keep up with appreciation. That's on top of the savings that you're already doing to meet the minimum that you need for your closing costs and your down payment already.

3. Risk of a downturn

And this market presents the risk of a downturn. As we're seeing home prices continue to rise, no matter what your economic view is, there is a risk of a downturn. Some people are calling this a crash or a correction or a downturn or whatever you wanna call it and whatever your outlook looks like for the next one to five to 10 years, there is a potential for a market downturn.

Declining loan balance

So what this would look like is your loan balance will continue to decline over time as you pay down your loan. Then we have our price up here in blue, and this gap is positive equity. That's the value you have in your home.

When home value decreases

When you look to sell now, what happens if the home value decreases over a period of time below your loan balance, this is what people call being underwater in their mortgage.

And so what becomes really risky here is when you're looking at owning a home and living in it by yourself or with your family, your timeline changes, right? Because it tends to be something for a lot of people that they only live in their home anywhere between five to 10 years.

Healthy fear

So what ends up happening if at this point, let's say this was year three. All of a sudden you have negative equity in your home. Now you can't sell the home. This is where it can become risky if we're facing or potentially looking at a market downturn in the future.

This is a healthy fear to have, right? This is not unreasonable. Cuz you might be wondering how can I possibly afford a home and not put my family at risk when the market feels like a gamble.

So when you're only considering a home that only you live in or only you and your family live in, the risk is greater. You're responsible for the full payment, the full monthly payment, and your timeline impacts your profitability, right?

What will happen if there's a market downturn?

Because if there is a market downturn, at some point in the future, When you choose to sell the home, that's all of a sudden where you're going to realize the profitability, or you have to bring money to the table to be able to sell the home if you need to get out of it.

And maybe you've been priced out by the market. Either the monthly payment is too high as home prices increase for your budget or a lender hasn't approved you for the amount that you want house hacking could be a solution for you to explore.

What is house hacking?

So Forbes puts this really brilliantly. They say simply put house hacking is a strategy that involves renting out portions of your primary residents to generate income that's used to offset the cost of your mortgage and other expenses associated with owning a home. When done correctly, it allows people to live in expensive areas, completely free, or even generate positive income through home ownership.

So basically what we're doing is we're hacking a primary resident's loan to take advantage of the better terms that someone gets. Buy a home as a primary residence instead of as an investor. And one way that we can take advantage of this loan is the one-year occupancy rule.

One year occupancy rule

So when we get a pre-primary residence alone, we don't actually have to be, it doesn't have to be our primary residence for the entire time that we have the loan. It only has to be at primary residents for 12 months. And we can take advantage of that with different types of strategies.

You will have time to decide

See, the terrifying thing about this market is the increasing prices and the potential risk of downturns house. Hacking allows you to have a long-term view of owning a home. So you can explore being able to afford a home and a red hot market while still hedging against risk from a downturn.

Again, it takes our timeline from this shorter view, and maybe it was long for you as a primary residence, but for a lot of people, it's a shorter term view as a primary residence and extending that. So we have time for fluctuations if they happen. It's okay. It's just like holding a stock over a long period of time.

It's riskier to hold a position of stock position in a company for a shorter period of time. If we say we're only gonna be in stock for three months there might be a downturn. There might be an upturn. But if we hold it for a longer period of time, then we hedge against some of that risk. Obviously, there are some more things in there if you are familiar with stock investing, but we don't have to go into those. The analogy breaks down at that point.

Comparing House Hacking vs. Traditional Investing

So let's compare the two together. Most people are used to hearing about investing and they think of a conventional investment type of loan. However, house hacking is a little bit different because we use a primary resident loan. So if we compare these two together, we first look at rates house hacking wins because we get a primary residents rate instead of a higher investment rate.

Down payment

For down payment house hacking wins again. We can use the minimum down payments. Most of the time for these loans, FHA is 3.5%. Conventional is 3%. VA is 0%. USDA is 0%.

Ease of use, wins!

House hacking wins again, house hacking is just so much easier because it's a primary residence we're going to live there. We can just create a strategy that helps us offset some of those costs compared to traditional investing.

Now, where traditional investing wins is in the protection, right? The legal protection that we can have. If we turn this into something where we put the home into an LLC, maybe we need some additional legal protection and creativity. There are options that we can explore. With loans on the commercial side that can be a lot more creative in the ways that you're using the loan or qualifying for the loan than you can with a primary residence and house hacking.

Strategies 4 Options To Consider

So I wanna give you four strategies to consider with house hacking. There are plenty more that you can do and be creative with them, but here's just four to look at, I wanna rate these with 10 foil hat Javiers I think this is gonna be the best way for you to decide or to determine how these strategies fit into this current market at the moment. So more 10 foil Javiers is better than less 10 foil Javiers.

So, strategy one is to rent after one year, I'm gonna give this five. The second is Airbnb, I'm gonna give these two. Number three, two to four units home. I'm gonna give this four. This is classic house hacking. And then number four is the rehab flip. I'm gonna give it one. The lowest honor that we can ever give is one 10 foil hat Javiers.

1. Rent after 1 year

So let's talk about these strategies number. is to rent after one year. And I give this five, 10 foil ha Javiers because I think this is the easiest one. This is the one that's most profitable long term. I think I think it's really gonna be accessible for most people.

The plan

Use any loan with the minimum down payment or whatever down payment is more comfortable for you. You live there for one. Again, we're looking at the occupancy rule. And then we rent out without having to refinance. We can refinance if we want to, but if we refinance, we have to convert it into an investment mortgage, which increases the interest rate.

So we live there for one year. We don't have to refinance and then we can rent it out. So we rented it out and then we can go purchase another home that we live in for the minimum down payment. Take advantage of another primary residence loan. So this primary residence loan still stays there. We rent it out after we live there for a year. Go use another primary residence loan to purchase our new home.

Approval/ DTI

As far as how it affects our approval in debt-to-income ratio. It does not because we're not renting it out yet. We're renting it out a year from now. The lender can't use that rental income.

How it impacts our budget

As far as our budget, it's not going to impact our budget right now, monthly until we rent it out in the future. Then it's going to lower mortgage costs significantly. Ideally, if your mortgage payment is 1000, you likely are renting that home for maybe 1200 a month. So the rental income should be able to cover the future mortgage payment a year from now.


What the benefit is here. Again, we took our timeline from here and we stretched out a little bit longer. So this helps us gain appreciation. And whether a downturn helps us weather depreciation if it happens right, because let's say that we purchased the home now, and then let's say all hell breaks loose, and the market crashes and home values tank.

So if that were to happen, that's okay. We're planning on holding onto this loan for a long period of time and we're still collecting rental income, ideally. So it shouldn't affect us as much. We're okay with purchasing a little bit more expensive because we're collecting rental income and we can weather that depreciation because we don't realize depreciation. It doesn't actually affect us unless we sell.

Difficulty > Easy

As far as difficulty, this is super easy, right? You don't have to do anything upfront. You get a house like you normally would. And then when you choose to leave instead of selling, you're just going to rent it out and it doesn't have to be after one year. One year is a minimum. If you want to, it can be three years from now, five years from now, 10 years from now, it's just the one year is the minimum.

2. Airbnb

The second is Airbnb. I'm gonna give this two tenfold hat hobbies, and that's because I personally wouldn't like doing this I wouldn't like people coming in and out of my home. Maybe you find a home where you can lock off certain areas or maybe there's a downstairs basement that has access. You can do things like that. I just personally wouldn't like this strategy. I think it could be a little bit of a logistic nightmare.

But the plan here is to buy with any loan. Live in the home while renting a room with shorter, long-term rental with something like Airbnb, or can be whatever other site you wanna use.

DTI and budget

For the approval, the debt-to-income ratio will not impact the lender cannot use any of that. As far as your budget, it should lower your cost pretty moderately. This is gonna depend on where you live. Airbnb's aren't super hot here in Dayton, Ohio. Not a lot of people are coming here, so there's not a lot of money in the Airbnb market here, but there's a lot of money in the Airbnb market in Nashville or San Francisco or somewhere like that.

Long-term does the same thing as these other strategies help you gain an appreciation and whether depreciation and can be combined with strategy one maybe for the first year or so, we do some stuff with Airbnb and then we choose to fully rent it out and go use another primary residence loan.

When we choose to get another property if we want. And difficult to hear. I'm gonna say this is hard because this depends a lot on the market. You also have to do the upkeep of making sure that you clean and run your Airbnb, almost like a business. And you have people coming in and out which may not be favorable for what you want in a home, especially if you have a family.

2-4 Unit

Number three, this is where you purchase a two to four-unit home. And then you live in one unit and rent out the rest. I'm gonna give these four 10 foil hat Javiers. This is classic house hacking. So the plan here is you use an FHA loan. And you can use conventional, but conventional starts at a 15% down payment where FHA is 3.5% down. You live in one unit and rent out the other units.

Low DTI and increase affordability

Now, as far as your approval and debt-to-income ratio, it's going to lower your debt, and income ratio and increase affordability. And that's because you can use the rental income from those other units to offset your mortgage payment. Since that's lowered your debt to income ratio is lowered. You can increase how much purchase price you're able to qualify for.

Your budget should lower your cost significantly

Again, this is gonna depend a ton on your market, but I'd say if you have a two-unit, you're probably gonna be able to have half of your mortgage cost offset, possibly more, especially if you're looking at a three or a four-unit.

3. Long-term

Again, we're gaining appreciation and we can weather depreciation, cuz we have a longer time horizon and it can be. With strategy one now has difficulty. I think this is moderate difficulty. The hard part here is that if you think the one-unit world of buying a home or putting in offers is competitive, the two to four-unit is even more competitive because you're seeing more investors coming in and they're just fewer of them.

So it can be a lot more competitive to get a two to four-unit. Home. And then if you don't like people, I think this is gonna be hard because keep in mind, you're gonna be sharing walls with your tenants, at least with something like Airbnb, you have people coming in and out and you can turn it off if you want to, or you can, book spots where you don't have people coming in with this. You might be having one tenant or two tenants or three tenants, all living next to you. Is that something that you want and can handle? Because for a lot of people, I know that they would not be able to handle that at all. So keep that in mind.

4. Rehab Flip

Number four, this is the hardest one. I'm gonna give you this one, 10 foil hat Javiers. This is because of this is doing a rehab flip and the plan here is you can use a rehab loan, something like an FHA 203K or a Fannie Mae Homestyle to renovate a stressed home and live there for a minimum of one year.

Then you can choose to bring out or live there for as long as you want to really depends. But, and as far as distressed, it can be as little or as, yeah. Most. Does that make sense distressed as you want it to be? It could be some cosmetic work and fixing up the kitchen or it could be full renovation depending on what you're looking for.

Approval and debt to income ratio

This could increase the adaptive income ratio and lower affordability because you're not only financing the purchase price of the home, but you're also financing the rehab costs in the loan as well. That extra loan, the increased loan size is going to increase your debt-to-income ratio and lower how much you can get approved for.

How about your budget?

It doesn't affect monthly unless it's rented in the future. The same thing with if we were looking at strategy one is we're gonna be living in the home for a year. We can't rent it out for a year. So the lender can't use any of that rental income that we project 12 months from now. So in 12 months, if we do choose to rent it out, or we do Airbnb in the middle of that, then that can help offset your payment for your budget.


Long-term gaining significant appreciation this time, and this is because you're doing the rehab costs. So you should be seeing quite a bit of equity coming from you, doing the work to renovate a distressed property or a property that just needs a little bit of work to bring it up to normal market condition.

So even if the market stays flat or declines, you should see considerable equity coming from the repairs that you made. If you did them correctly, if you price them according to the market, right? You're not gonna go put in granite countertops in a neighborhood that has $40,000 homes because there are neighborhoods in Dayton, OH where they have 30 and $40,000 homes.

I'm not gonna go put granite, nice granite countertops, and things in those homes. I'm not gonna get my money back if I do that.


This is hard. Because rehab loans are just inherently difficult, especially in this market with the cost of materials and labor. I think it's going to be difficult to use this type of loan, but you could see considerable profit coming from something like this.

Is FHA the best loans to use?

So there are four main types of loans you can use FHA. This is really common in the house hacking world. You can do 3.5% down and it's best for multifamily because we can do 3.5% down anywhere from a one to four-unit property.

Conventional is another option

This is best for one unit. And the reason why is we can do 3% down primary, but as soon as we get to a two-unit, it's 15% down. Three to four-unit is 25% down. You used to be able to use Freddie Mac's Home Possible program to do I believe 5% down, but that program got a sunset, I believe, last month. So that's not available anymore, unfortunately.


USDA is only for one unit, you can do 0% down. And if you're a veteran, you can do 0% down. This is best for multifamily. If you are a veteran here as well.

Explore and talk to a lender

Explore some different strategies and get preapproved for a loan and take a look at some quotes. If you plan on collecting rental income, just to a side note, I highly advise a minimum of a three-month buffer of reserves. That means if the mortgage payment's $1,000 a month, you have $3,000 set aside in case of repairs or a vacancy. So no one's renting at the moment or you lose your primary source of income. You don't wanna have this extra cost and not be prepared for anything that, any emergency or anything unexpected comes up.

House hacking helps

So house hacking helps you take a more objective look at home rather than an emotional punch with every dollar that feels like it's slipping out of your hands as home prices continue to rise. And it also helps you stretch out your timeline to be a little bit longer. So you can stomach the price increases and weather a potential downturn.

Ask us a question →
Kyle Andrew Seagraves is Federal Mortgage Loan Originator (NMLS 1701021) licensed in all 50 states with the Dan Frio Team at Allied First Bank (NMLS 203463), an Equal Housing Lender. Separately, Kyle owns Win The House You Love LLC, an education company. Win The House You Love LLC is not a lender, does not issue loan qualifications, and does not extend credit of any kind. This website is only for educational usage. All calculations should be verified independently. This website is not an offer to lend and should not directly be used to make decisions on home offers, purchasing decisions, nor loan selections. Not guaranteed to provide accurate results, imply lending terms, qualification amounts, nor real estate advice. Seek counsel from a licensed real estate agent, loan originator, financial planner, accountant, and/or attorney for real estate, legal, and/or financial advice.

Allied First Bank is not affiliated with the VA, FHA or any other government agency. This site has not been approved by any government agency.
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