We find ourselves in a very hot real estate market, with prices rising seemingly every day. This can make homeownership or getting started in real estate seemingly impossible. Thankfully, there are strategies that still work in a hot market! In this article, I’ll outline a strategy I have used for real estate investing in a hot market: using owner-occupied loans to buy properties, especially for “house hacking.”
Whether you do something like house-hacking or have stand-alone rentals, using owner-occupied financing requires far less upfront investment than most strategies. And you can still maximize the full potential of your property over the long term.
What is House Hacking
House-hacking is when you rent out the extra space in your primary residence. This strategy allows you to subsidize your housing costs while controlling a piece of real estate.
You can rent out any extra rooms, or even extra units if you are in a multi-unit building.
By moving into a property as your primary residence, you can offset your living expenses through the rent received by your tenants, allowing you to live (almost or entirely) cost-free.
My Experience House Hacking
Shortly after graduating college, I purchased a 2-bath 2-bed condo in Chicago.
I rented out the extra bedroom and bathroom. The income from the second unit offset the living costs for my wife and I.
We can live with almost zero net housing costs while still building equity on our original investment.
Because it was my primary residence, I only brought a 12% down payment to close on the condo. Compare this to a typical investment property, which often requires 20% down.
And I got some of the best loan terms available, with low interest, fixed rate financing over 30 years. At this time, our interest rate was 4.5%. Today, mortgage rates sit closer to 3%. It’s rare to see fixed-rate loans at a lower rate than that.
The point is, by utilizing owner-occupied financing, I got fantastic terms on our mortgage that wouldn’t normally be achievable if it was a “normal” rental property.
That allowed me to be more competitive with my offers than a typical investor, since a typical investor wouldn’t be able to get such great terms to allow the deal to still work.
And I still immediately had the opportunity to offset the mortgage by renting out a room.
“Normal real estate Investing” Vs Owner Occupied Investing
In a hot market such as what we’re seeing today – thanks in no small part to huge monetary and fiscal policy moves – mounting costs and increased buyer competition can act as barriers to entering the real estate market.
When considering a “traditional” investment property, a buyer would typically pay at least 20% down towards the final value, not to mention higher interest rates compared to owner-occupied loans.
Whether you house-hack or not, when you want to move out of the property, you can turn the asset into a full-rental. You don’t lose the great owner-occupied financing. Just make sure to respect the terms of your loan – most owner occupied loans require the borrower to live in the property for around 1 year. Check with your lender if you are unsure.
Loan Options for Owner Occupants
There are many different avenues available for financing that allow you to only bring a few percentage points for a down payment.
One option is a VA loan for veterans, requiring no money for a down payment at all!
Another is an FHA loan, which require as little as 3.5% down payments.
Conventional loans are another common option, offering as low as 5% via Fannie Mae or Freddie Mac programs.
It’s important to keep in mind that, while all of this sounds great on paper, there are a plethora of other factors that go into determining your availability for these killer rates. Your credit score can raise or lower these numbers substantially. Definitely speak with a lender to figure out what your exact options are.
The point is, these options generally only exist for owner-occupants. And they can turn a so-so real estate deal into a very good one once you move out of the property and rent it out.
Insulation from Risk – What If Home Values Tank?
Now, you might be wondering: by putting so little down, doesn’t that increase my risk?
No investment comes without risk, and adding debt to any investment will increase risk.
Many people are concerned about future rates hikes. This is where mortgage loan interest rates would rise and real estate prices would fall as a result of decreased buying power.
But let’s take a look at any example.
Let’s say you buy a house with one of the low down payment options.
Since, you’ve only brought a small down payment, (we’ll say 5% in this example), even if the value of your property fall significantly by the end of your fixed 30-year mortgage term, you still should be in decent shape.
Imagine a potential scenario where property values halve over the 30 years that you own it. We’ll say the house was initially worth $100,000, and it decreases to $50,000 by the end of the term. Let’s see what happens to your return in this very simple example:
Since you only brought $5,000 to the deal, you still ended up 10x’ing your money! That equates to a 900% return, or about an 8% compounded annual growth rate over 30 years.
And that’s after the property value fell in half! If properties value stay the same or go up during that time, you’ll be in amazing shape.
Maintaining Minimum Payments and Holding for the Long Term
Keep in mind that this is only possible so long as you keep making the monthly payments on your loan. This also assumes that the income thrown off by the property covers all expenses so you can at least break even each month after you move out
You will still need to make the loan payments for your property, even if you don’t have tenants currently occupying the space. You always have to be ready for significant expenses and vacancy when owning real estate.
However, if you set aside enough reserves, you should be able to weather any financial storms without an issue.
When you hold for the long term, you can reap the benefits of bringing so little down up front, even if property values fall.
In any event, always tread carefully.
Conclusion – Real Estate Investing in a Hot Market
Low down payment loans can lower your barrier to entry into a property. Meanwhile, they can catapult your returns to extreme heights when you play your cards right. Of course, any debt is not without risk.
In particular, house hacking offers an incredible investment opportunity for those wanting to offset their living costs and get into real estate with little down. It can turn a rather poor investment into a significant moneymaker in many cases.
It’s certainly worked for me, and I would highly recommend keeping this concept in mind when considering your next (or first!) home purchase.
And even if you don’t want to house hack, you can still take advantage of the many low down payment options out there, at least if you’re willing to live in the property for a little while.
If you want more info on house hacking be sure to check out my YouTube channel and blog for videos and more articles. You can also check out househackhelp.com for more information on the house hacking strategy.
This website, and any communication stemming from it, while hopefully informative, should not be taken as financial or legal advice. Assume all links are affiliate links. I am an Amazon affiliate.