Today’s question comes from Martin. But before I get to his question, just as a reminder, this is going to be a quick five-minute episode. And if you like these short Ask Marco episodes, remember to subscribe to the show. That way I can keep getting these out to you and keep recording them. And you will be notified when they come out and you’ll just see it in your stream. All right, Martin asks, is it a good idea to buy a multi-unit, live in one unit, and rent the others?
So he says, hi, Marco, I’ve listened to you for about four of your episodes. And I really appreciate how informative and quick your episodes are. My question to you is me and my wife are getting rid of some loans that we’ve carried ever since we got married and we are about three to four months out to pay them off. We are planning to move from central California to central Oregon, currently renting and planning to get our first property as we move to central Oregon. Is it a good idea to acquire a duplex or triplex through an FHA loan as a primary residence, due to the low-interest rate, live in one of the units and rent the others? Then after a year, turn it into a rental property, move out and acquire another residential property?
Thank you again and best regards- Martin
Martin. This is a great question. And it comes up often because many people think about purchasing a property, specifically, a multiunit like a duplex triplex or fourplex, and living in one of the units and renting out the others in an effort to help cover the cost of the property, especially the mortgage, and essentially subsidized their housing, or in many cases create a rent-free or mortgage-free living environment.
So what essentially you’re doing here is what many people or some people refer to as house hacking. And it’s really just a hack to buy and own property and create a rental property at the same time. And sometimes it may not be a rental property immediately, but ultimately becomes a rental property. And so people just call it house hacking. So let’s first of all, start off by talking about what FHA is just real quick. So FHA is the largest insurer of residential mortgages in the world. They are not a lender themselves, but lenders become F H a approved, and then they will offer you loans at a very low, low rate of interest. And they’re comfortable in doing that because that mortgage will be insured by FHA. So they have very little to no risk in offering you a very aggressive loan. You probably know this, but for our listeners, you can get an FHA loan with a FICO score as low as 500 points.
So think about that. I mean, it doesn’t get that much lower. I mean, it actually drops down to 350, but I mean that that’s basically no credit it’s below bad credit. Anyway, generally speaking, you know, you can qualify with 500 and above and think about this. If you have a credit score of only five 80, you can get a 3.5% down payment. Think about that three and a half percent. So on a hundred thousand dollar property, hypothetically that’s $3,500 on a $200,000 property. That’s $7,000 as a down payment. So if you can control a good property in a good area, and it’s a duplex or triplex, and you’re living in one of the units and you’re into this thing for anywhere from 3,500 to $7,000, maybe a little more, whatever, that’s pretty attractive, that’s very compelling. And it’s very doable. So back to your question, the short answer to your question is, heck yeah, it is a great idea.
In fact, in many cases, it can be a great idea to have a duplex or triplex or even a fourplex and living one of the units rent out the others, collect the rental income. Essentially you manage the property yourself and done right in the right area. You can essentially live there for free because your expenses and your debt service is being covered by the tenants, your tenants, living in your property, in those other units. So this gives you a great experience in owning a rental property, managing rental property, going through the process of purchasing and holding, and really just taking care of and growing with that property. So it’s like free housing, but here’s the beautiful thing about that when you do it right? And if you do it right, if you’re in the right market, and I know that many parts of Oregon have been a strong growth market and appreciating very well, it’s been a healthy market for many years.
If you can capture some equity growth over that year or a couple of years, however long you’re in this property, well guess what, you’re living rent-free or mortgage-free well, let’s just call it free. You’re living free for a period of time a year or two, maybe more while at the same time, possibly getting some cashflow because your collected rents exceed what your overall expenses and debt service are. And you’re gaining equity from the amortization of the loan. Although it’s not going to be very much in the beginning, but you’re getting some equity and you are hopefully, and potentially gaining some appreciation in that market that you’re in assuming you’re in the right market. So now you’re building your net worth and you’re building wealth in a property that you own and control that other people are paying for you. You just happened to be living in one of the units.
How fantastic is that? But here’s the thing you need to run your numbers, make sure that you are factoring in and budgeting for everything. Also just like any other rental property, you budget for a vacancy, because it will happen maybe not every year, but budget and forecast the future and budget for vacancy and budget for maintenance and repairs. Because again, you own this property. Things will happen in time. It has moving parts. So you need to budget for fixing and replacing those items, but run your numbers carefully and be a little conservative. And if the numbers make sense, then let those numbers help drive your decision. And guess what? You may have a great winner on your hands and a year or two down the road, whenever you feel it’s right. You can move out, rent that other unit, the unit you were living in.
Now you have a great rental property. That’s generating positive cash flow and continuing to grow in value or create more equity and down the road, you’ll be able to use that equity to purchase even more property. So this is a great way to start for someone who has not started, or at least has started, but doesn’t have their own principal residence. If you’re able to buy your own property, using an FHA loan with a very, very, very low-interest rate, it makes a very, very compelling argument. So both mathematically and fundamentally in the right places. Anyway, that’s the answer to your question. I hope that helps. Yeah, it can be a good idea. It can be a great idea. So I don’t know where you’re moving to, but I know a lot of the markets in Oregon have been pretty strong. So if you can do it, they’re fantastic.
And congratulations, and Hey, great thinking about this. I’m actually very happy to hear that you’re newly married and you’re laminating your bad consumer debt. I assume that’s what it is. And you’re looking to get into property ownership right away. So you can be a model for so many other people and, and hopefully for many millennials out there listening to this. So congratulations Martin, and that’s it for everyone else. If you have a question about real estate or investing or finance that you’d like me to try to tackle on the show, I’ll do my best to get to it. And my best to answer it, just go to passiverealestateinvesting.com or just type in AskMarco.com in your browser. It’ll take you straight there and I will do my best to get your question as soon as possible, if you haven’t already subscribed, remember to do so, share the show with your friends and family and other likeminded people that you know, visit us on iTunes. If you can leave us a rating review, I greatly appreciate it. So I’m going to say thank you in advance and that’s it for today. Thanks for listening. I will see you on our next step.
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