I’m sure by now you’ve heard of the term house hacking. If not, house hacking is a life hack where you purchase either a large single family home with multiple bedrooms, or a multi-unit property and rent out the extra rooms and/or units to pay towards your housing expense, and sometimes you can live rent/mortgage free!

My husband and I house hacked a duplex back in 2009, and while we were not able to get the entire mortgage paid for, our total payment was $500 per month, much less than what our rent would have been.

We still own this property, and it’s not only paid back the initial investment, and also pays us roughly $10k a year in cash flow.
I have another friend who saw the benefit of house hacking, and she found a more interesting way to go about it.

Introducing the FHA 203k renovation loan

You may or may not be familiar with the different renovation loans that are available to owner occupants, but Margaret Smith is.
In fact, she has used the FHA 203k loan to renovate not one…. but two different duplexes!

Before we dive into Margaret’s story, I want to share with you a fun few facts about the FHA 203k renovation loan:

• Available to owner occupants (must live in the property for 12 months) of 1-4 unit properties
• It allows you to finance the property, and the associated repairs (wanted or needed) into one loan
• You can borrow up to 110% of the property’s proposed future value (determined by an appraisal based on your spec list)
• There are two types of 203k rehab loans
  • 1) the streamline: maxing out at $35,000 in total repair costs for non-structural renovations
  • 2) the standard: no maximum for repairs, though you do need to keep in mind you’ll be limited to the FHA loan limits in your area. The standard allows pretty much anything, with the exception of luxury additions (think pools, tennis courts etc)
• Using the 203k loan can help you build equity without putting a ton of money out of pocket, and the down payment minimum is 3.5% of the purchase price + renovation total ($200k purchase price + $40k renovation = $240k x 3.5% = $8400)

There are some downsides to the FHA 203k loan, such as:

• The interest rate is higher for this type of loan
• Private Mortgage Insurance (PMI) is required for any loan with a down payment of less than 20% for SFR, or 25% for 2-4 units
• You are not able to do any of the work yourself, everything has to be completed by a contractor who has been approved with HUD
• There is quite a bit of paperwork involved, you’ll need to get several bids, and they must be very accurate as the appraisal will use them to determine the end value

Margaret’s Story of house hacking – Duplex # 1

Margaret purchased her first duplex in August of 2014 for $296,000 and included a $22,000 renovation using the FHA 203k loan. She moved in October 2014, and her first tenant moved in November of that year.

Her total down payment was $10,000 and the rent from her roommate and the tenant downstairs paid her mortgage payment.
Here’s a few before & after interior photos:

The renovation of this property included new:

• Bathrooms in both units
• Appliances
• Kitchen in the lower unit
• Flooring in the lower unit
• Front door in the lower unit

Margaret lived in this duplex for almost 3 years, and she really wanted to do another project. So she ended up selling this duplex for $436,000 in April 2017.

Better yet, she was an owner occupant this entire time, which means she was able to claim the homeowner capital gains exclusion.

By choosing to house hack a duplex (which was newly renovated), she netted close to $90,000 on a $10,000 investment all the while living rent free, and she didn’t have to pay any capital gains!

Margaret’s story of househacking – Duplex #2

After a huge success on her first house hacking duplex, Margaret decided to go for an even bigger challenge.

Her next project was a half-finished/mess of a property with multiple code violations and problems around every corner. It was so bad that even her home inspector said it wasn’t worth having a full inspection done because pretty much everything needed to be repaired.

The seller was not willing to accept a slightly longer close on this property, so she instead had to use a hard money loan for the initial acquisition.

Hard money loans are often used by real estate investors as a last ditch effort to acquire a property that otherwise wouldn’t qualify for financing. Usually hard money lenders will not lend to owner occupants, but in this case, it would be a long time before Margaret could move in to this property.

She ended up refinancing the hard money lender and using the FHA 203k refinance loan, following the same process as before.

To renovate the entire duplex it took almost 10 months, and the final renovation costs ended up at $237,700. The final product is one that Margaret is very proud of, and she likely has over $50,000 in equity!

While Margaret isn’t able to get her entire mortgage payment covered with this property, she is still paying several hundred dollars less than what she would if she were renting, and she gets to take all of the tax advantages of owning real estate.

Also, if Margaret were to move out and rent her unit out, she would earn roughly $350 per month (assuming rents stay the same as they are now).

Recap on house hacking

The FHA 203K loan is a fantastic way to purchase properties that need some renovations, and it allows you to put less down than if you were to use a regular FHA loan and pay for all of the repairs out of pocket.

There are some downsides to the FHA 203K loan, so definitely speak with a qualified mortgage professional and weigh all of your options before tackling a big project.

It’s important to run projections on what you believe rents will be after the renovation is complete. A property manager would be a great resource for you, and it would be worth exploring options for adding bedrooms and bathrooms to achieve a higher potential rent.

A great contractor is going to be extremely important when using the 203k loan. Margaret received 7 different bids on her second duplex project, with bids ranging from $80k – $250k. If your contractors bid ends up being too low, you may have to pay more than you anticipated.

I’d love to hear your thoughts on the FHA 203K loan, and your house hacking experiences in the comments below!