I love hearing about and learning new investment strategies. Two strategies I have been hearing a lot about these days are House Hacking and Nomad.
These are both strategies to begin or to expand your rental portfolio. The interesting twist here, though, is they both involve being an owner-occupant! This may seem contrary to most folk’s perception of buying or owning investment properties, but there is a very specific reason for doing Owner Occupied Financing.
Advantages Of Buying Owner-Occupied Investment Properties
There are a few distinct advantages of buying investment properties with owner-occupied financing.
- First off, the down payments can be lower. Like a lot lower! If you got an FHA loan, you could put as little as 3.5% down. There are conventional loans that require as little as 5% and I’ve even heard of loans with as little as 3% down. Compare this to investment loans where you typically must put 15% or more down. On a $400,000 purchase, that could be a difference of $48,000! How much faster could you be buying an investment property if you only needed to put $12,000 down instead of taking the time to save up $60,000? How many more properties could you buy, or how many improvements could you make with those savings?
- Owner-occupied financing typically comes with better interest rates. There is usually a 0.5% difference in the interest rate between owner-occupied and investment loans. Over the 30 years of a loan, that could be a substantial difference. If we add in buying down the interest rate at closing with some of the money we saved on the down payment, we could potentially be getting a much better interest rate and look to maximizing the monthly cash flow.
Negatives Of Owner-Occupied Financing
Owner-occupied financing does come with a few negatives. There is the standard one-year occupancy requirement if you’re calling the home your primary residence, and typically mortgage insurance will be required. In terms of the one-year occupancy requirement…beware of the consequences for toeing the line on this requirement., it is not advised! There are some circumstances where you can move out in under one year, like a job transfer to another part of the country, but if you are simply trying to move across the street to get another rental, you could be committing mortgage fraud!
Related to mortgage insurance, lenders will require mortgage insurance if they are over 80% loan-to-value (LTV). Mortgage insurance is insurance that protects the lender, but of course you, the borrower, will have to pay for it. If the lender is over 80% LTV, that means the borrower would be putting less than 20% down. Understandably, to maximize this strategy, you will most likely be putting less than 20% down, so always consider this extra expense with running your numbers and calculating the monthly mortgage payment and your cash flow.
What Is House Hacking?
House Hacking generally refers to the concept of buying real estate, living in the property, and having roommates/tenants that pay you rent. This concept of others paying rent in the same house you are living in can be a great way to live for free or to reduce your monthly expenses.
This can take many different shapes and styles. The most prolific might be the strategy of buying a multi-unit, like a duplex, triplex or four-plex, living in one unit and renting out the others. The other variations of house hacking include:
- Buying a single-family home and renting out the bedrooms.
- Owning any type of real estate and renting out the garages.
- AirBNB’ing the property when you are not home.
- AirBNB’ing the rooms in the property.
- Taking a multi-generational approach by having your parents, kids, grandparents, in-laws, etc., live with you and chip in on the mortgage and monthly expenses.
Benefits Of House Hacking
House hacking can be a great introduction to owning and managing real estate. This is a strategy that allows you to buy real estate and take on debt, but not take on the full burden on the monthly payments. Yes, if all your roommates or tenants move out, you are still personally responsible for the full payment, but by having folks paying you rent each month, you should have extra capital available for the purchase of another property. The extra income will also help with the unexpected (and expected!) costs of owning and maintaining a home. You will have the income to help pay for that new furnace or roof when they need replacing. House hacking is also a great way to learn how to be a property manager. Some folks find it easier to ask and follow up with their friends and roommates for the rent each month and can get comfortable with maintenance requests when the neighbor can simply knock on your door to tell you the garbage disposal is not working…again.
If being a property manager doesn’t interest you, you can certainly hire a property manager to help. There may be a shortage of property managers that can help manage house hacks if you are renting by the room, but there is no lacking of property managers that would love to help manage the other units in a multi-unit property. You could also take a hybrid approach and simply have everyone send their rents to a PO Box that you own so you don’t have folks asking favors every time they see you outside your front door.
What Is Nomad?
Nomad is the concept of buying a primary residence, living there for at least one year, then moving into a new home and keeping the old property as a rental. This was how my wife and I got our first rental property! I love it when an investor coins a name for a strategy or concept that has seemingly been around forever. And what a simple and genius name this one has! You are literally becoming a Nomad, always on the move! My friend in Northern Colorado, James Orr, came up with the name and he has spent countless hours digging deeper and deeper into creating trainings and analysis for folks that are wanting to follow this strategy.
Benefits Of Nomad
Nomad’ing really allows you to maximize the power of owner-occupied financing by moving every year. With the lower down payments required, it is typically easier to save up the down payments. While this strategy isn’t for all, it can be great for a variety of folks like single folks that have been used to moving apartments each year, young couples that are not quite ready to lay down some roots for their growing family or folks that feel behind on retirement planning.
House Hacking And Nomad Strategies Could Be The Key To Financial Freedom
One of the things I love most about these two strategies is the ability to combine them. If we could use the power of owner-occupied financing to get the best interest rates and lowest down payments, have roommates or tenants help cover the monthly mortgage payments and expenses, and then move and repeat this process next year, and over and over again as many times as we want, how quickly could we hit our goals? How soon might we be able to reach financial freedom?
I was talking to my Mom the other day as my parents are getting ready to move to Denver to be close to us. She was amazed at how many times I have moved in my life. I think we counted 12! In her case, the move to Denver would be her 5th move ever in her 70-something years. There is certainly a potential level of discomfort or practice that you may go through with these strategies. I know my wife and I have dealt with a lot of change with all of those moves both before we met and together, but by doing so, we have opened up the possibility of having more wealth and freedom than both of our parents combined. These strategies are not for everyone, but it is certainly worth looking into more if you are compelled and are in the right stage of your life.