Intro

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Welcome to the 5 Minute Prime Podcast. Quick actionable tips to master personal finance and real estate investing. In just five minutes a day, we'll help you build wealth and achieve financial freedom. Hey Prime Investors, Martin Maxwell here. Welcome back to the 5-Minute Prime Podcast.

$40,000 and a 7.4% rate

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$40,000. Three years of saving. And the same week it's finally enough, the mortgage rate hits $740, the highest it's been since November 2023. Say you're 31. You rent a one bedroom for $1,700 a month, and you put away about a thousand more. The plan was always a first rental. And the plan was always to wait for rates to come down first. In late August, Freddie Mac's weekly survey had the 30-year fixed at 665. Then it rose seven weeks in a row to 740 in the week of October 8th. So you ask your lender to price it two ways.

01 · Two quotes

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Quote 1: An investor loan on a three-bedroom house an hour away in a cheaper market, $180,000. 15% down plus closing costs is $32,400. That leaves you $7,600. The house rents for $13.50. After mortgage insurance and a normal expense load, it runs about $559 a month in the red. Quote 2: An FHA loan on a $340,000 duplex. You live in one side, you rent the other for $1,500. $22,100 to close, which leaves you $17,900. Your own housing cost goes from $1,700 to about $1782. Sit with those two for a second. The cheaper house is the one that costs you more every month. Then a coworker leans over and says, rates have to come back down. You'd be crazy to buy at the top.

02 · Three options

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So, three options. Take one before I tell you mine. Option one, buy the rental now on the investor loan. 15% down, a higher rate because it's an investment property, call it 815. Mortgage insurance at 15% down, and lenders typically require six months of the payment in reserve for an investment property. But from day one, you own a real rental, and the tenant pays most of the loan. Option two, house hack with FHA. 3.5% down on anything from 1 to 4 units, and you live there at least a year. On a triplex or a fourplex, FHA makes the rents pass a self-sufficiency test. On a duplex, it doesn't. Option three, keep renting and keep saving. Another year puts you at $52,000, with a bigger cushion and a shot at a lower rate. Three options. Hit pause, decide, then come back.

03 · The breakdown

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Start with the number you've been watching for three years, the rate. That move from $665 to $740 costs about $168 a month on the duplex loan. Half a point in either direction from here is about $115. That's real money. Now look at the gap between your two quotes. With option one, you still pay your own $1,700 in rent, plus about $559 to keep the rental running. $22.59 out of your pocket every month. With option two, your whole housing cost is about $1,782. That's $477 a month. And the rate you've been watching had nothing to do with it. The path is the big number. The rate is the small one. Take option one apart. Half the rent goes to expenses. Taxes, insurance, repairs, vacancy. That's the 50% rule. And that's generous. IRS data puts small landlords nearer 53. That leaves $675 to cover a mortgage and its insurance of $1,234. That insurance depends on your credit score. Roughly $70 to $120 a month on this loan, by the insurer's own published rates. We use 96%. The house earns 4.5% on its price. The loans rate is $815, and once you count the principal you pay back each month, it costs closer to $9. So the debt is working against you either way you measure it. In plain terms, the house earns less than the loan costs. And when we ran the cash by itself, that's negative two. About $6,700 a year leaves your pocket, with $7,600 behind it. That $7,600 is about five months of the rental's own payment. That's under the six months a lender usually wants, so they'd count your emergency fund too. And your own rent is still due on the first of every month. Now option three. Waiting isn't wrong, but it has to deliver something specific. If prices stay flat for a year, any drop in the rate wins. If prices rise the way the typical US home did last year, about 1% on our national index, the rate has to fall below about 7.25 within the year, just for that same duplex to cost the same each month. Prices up 3%, it has to get to about 7. Up 5, about 6.8. Whatever the Fed did yesterday, the bar's the same. Those aren't forecasts. They're the bar. And nobody can tell you whether you'll clear it. Not me, not your coworker. Meanwhile, $20,400 in rent goes out, and none of it comes back as equity. We priced a weight like this once on a credit score, a $680 credit score against a $740, and it came to under $70 a month. A rate weight is the same kind of money, except nothing you do moves it. Option

The verdict

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two is the call. If three things are true. House hacking just means you live in one unit and rent out the rest, so a tenant pays part of your mortgage. In the book, I make the case that for a first-timer, house hacking is the lowest risk way in, because it cuts your housing cost even if the deal disappoints. Here's why it works at $7.40. 3.5% down means your $40,000 covers the closing and still leaves about six months of the full payment, $29.24 with the FHA mortgage insurance in it, sitting in the bank. The tenant's $1,500 covers about half. In year one, you pay roughly $82 a month more than your rent, and you pay down about $3,100 of principal. The three things. One, you'd live there anyway, for years. FHA requires at least one. And this is a home first. Move out and rent both sides, and the duplex takes in $3,000, keeps $1,500 after expenses, and owes $2,462 in principal, interest, and mortgage insurance. That's about minus $962 a month. At these numbers, moving out is not the plan. 2. It survives a stress test. Add half a point, $790, and your cost goes to about $1,897. Add three-quarters, about the size of the move from late August to early October, and it's about $19.55. If that breaks your budget, you're not ready, and that's useful to know now. 3. The reserves stay reserves. We looked at a house hack once with about two months of cushion, and the real question wasn't the deal, it was whether you were the risk. That's $17.9 is for the vacant month and the water heater, not the couch. In a recent episode, we went through what has to be in place before a first offer. This is the same idea, with a price tag on it. And if any of the three fails, then option three is right. But as a plan, not a wait. Pick the savings number, pick the reserve number, and buy at whatever the rate is when you hit them. Pick the path first. The rate is just the price of the path you picked. Here's

Your three numbers

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your challenge. Tonight, write down three numbers. What you've saved that isn't your emergency fund, what you pay in rent, and what a lender would quote you on both loans, investor and FHA. Then put the duplex you'd actually live in through the calculator at both units rent. That's your move out number. Rerun it when the rate moves. If the house hack cost lands within about $100 of your rent, still fits at three-quarters of a point higher, leaves six months in the bank, and you'd live there for years, start touring duplexes this month. If it doesn't, write down your savings target and a date and stop checking the rate every Thursday. The full write up, all three options side by side, is linked in the show notes. I'm Martin Maxwell. This has been the Five Minute Prime Podcast. I'll see you next episode.