The Baker House Newsletter Issue VIII
Live in One, Rent the Rest
Buy a building of two to four units, live in one, and let the rent on the others carry the mortgage. This issue covers the financing rules that make it work, the numbers, and what the first year really involves.
THE LEAD
The Most Common First Deal in America
The strategy has a modern nickname, house hacking, and a history much older than the name. Buy a building of two to four units, live in one, and rent the others, so the tenants’ rent carries most of the mortgage. The triple-deckers of New England and the two-flats of Chicago were built for exactly this a century ago, and families have climbed this ladder ever since. What has changed is the financing.
The mortgage system draws its line at four units. A building with two, three, or four units counts as a home, so an owner who lives in it qualifies for the same loans as a house buyer. FHA lends at 3.5 percent down. And in November 2023, Fannie Mae dropped the conventional down payment on owner-occupied two-to-four-unit homes to 5 percent, from the 15 to 25 percent it had required for decades. Loan limits rise with unit count too: the 2026 conforming limit on a four-unit building is nearly double the single-family limit.
The building even helps you buy it. Lenders count expected rent from the other units toward your qualifying income, discounted 25 percent for vacancy, which is how a renter with a normal salary can qualify for a fourplex they could never afford as a single house. The rules attached are real, and the biggest one is simple: you must actually live there, and this issue takes that seriously below.
KEEP READING
The rest of this issue is yours for an email
Enter your email to finish reading — and get each new issue the morning it goes out. Free, and one issue a week.
No pitch. Unsubscribe whenever you like.
CHART
Typical 25 percent investment requirement versus the 5 percent owner-occupied minimum under Fannie Mae guidelines effective November 2023. FHA allows 3.5 percent, or $14,000.
THE TURN
The sellers make this work as much as the loans do. Individuals own 70 percent of the units in America’s small residential buildings, per Census data, and many have held for decades: rents drifted under market, utilities were never separated, and management ran on habit. A tired duplex from a long-held owner is the natural first purchase, because a buyer who lives on site can fix what decades deferred, one repair and one lease renewal at a time, while the building pays them back in lowered living costs.
The year of living there is worth more than the discount on the loan. Every skill this series keeps pointing toward, reading tenants, pricing repairs, papering leases, knowing when a rent is under market and when a raise is unfair, gets learned thirty feet from your own kitchen, with your housing costs subsidized while you learn. Many people repeat the move: after the required year, they rent their old unit, buy the next building the same way, and arrive at their thirties with a small portfolio built one address at a time. Each fits the pattern this series keeps returning to: valuable rights attached to ordinary-looking property, waiting for a buyer who checks.
Four units, one address, financed like a house.
THE FRAME
One Property, Two Ways to See It
| WHAT THE MARKET SEES | WHAT A DISCIPLINED BUYER SEES |
|---|---|
| A starter home with a mortgage to fear | A building where tenants carry most of the payment |
| Landlord problems living next door | The whole business, learned from thirty feet away |
| A 25 percent down payment wall | A 5 percent door that opened in late 2023 |
WHAT TO LOOK FOR
The financing before the building. Get a full pre-approval specifically for an owner-occupied two-to-four-unit purchase, and compare FHA and conventional side by side. FHA wins on entry cost at 3.5 percent down but carries its own mortgage insurance. Conventional at 5 percent skips the FHA insurance structure, and on three and four unit buildings it skips something bigger: the FHA self-sufficiency test, which requires 75 percent of appraised rents to cover the entire payment and fails many buildings in expensive markets.
The building. Separate utility meters, or a realistic plan to get there. Unit condition you can live with for a year. Rents versus market, because a long-held owner’s under-market rents are where the value sits. And enough parking and storage that four households can actually share the address.
The numbers, the lender’s way. Count rent from the other units at 75 percent of appraised market rent, added to your income. Budget closing costs of roughly 3 to 4 percent and keep about three months of full payments in reserve. If the deal only works at 100 percent of rents with zero repairs, it does not work.
The rules, taken seriously. Move in within 60 days and live there one full year. Signing the occupancy certification without meaning it is mortgage fraud, and this issue will not dress that up. Short-term rental income does not count toward qualifying on these loans, so underwrite on ordinary leases.
HOW THE MATH WORKS
A fourplex costs 400,000 dollars in a mid-priced market, using round numbers. Five percent down is 20,000, plus closing costs. The three rented units bring 1,100 dollars each, 3,300 a month, and the owner’s full monthly payment with taxes and insurance runs about 3,400. On paper the owner lives for about 100 dollars a month. In practice, vacancies happen and roofs leak, so budget honestly and the owner still houses themselves for a fraction of local rent while three tenants build their equity alongside them. Compare the renter down the street paying 1,100 with nothing to show for it. The math is three households sharing the cost of one building, with the owner doing the work and keeping the upside. After the required year, the owner’s old unit rents for 1,100 too, the building carries itself, and the 20,000 dollars is free to do it again.
THE RISKS, TOLD STRAIGHT
Start with the honest name for the strategy: it is a job with a housing discount attached, sold too often as free living. You will collect rent from people who know where you sleep, raise it on a neighbor when the market says so, and take the 2am call because the burst pipe is in your own basement too. The one-year occupancy rule is non-negotiable, and lenders check. Three and four unit FHA deals fail the self-sufficiency test in many expensive markets, so know which loan fits before falling for a building. The stock is old, and separate meters, tired roofs, and knob-and-tube wiring are common, so inspect like every issue in this series has taught. A vacancy hurts twice when the building is also your home. And the 25 percent haircut lenders apply to rental income exists because rents miss sometimes. The category is the most proven first deal there is, and the individual building is earned through diligence, the same as every issue in this series.
THE WIRE
The quiet rule change. The 5 percent conventional option is barely two years old, and most renters who could use it have never heard of it, because it arrived as a Fannie Mae guideline update, and guideline updates make no headlines. Families climbed this ladder for a century when the down payment wall was far higher. The wall just dropped, the buildings are still mostly owned by long-held individual owners, and the advantage, as usual in this series, goes to whoever reads the rules first.
OFFICE HOURS
This issue covered the case, the checklist, the math, and the risks. The judgment, which building, which loan, and whether you are ready to live next to your tenants, is where the real questions start. Richard takes them every Wednesday at 2pm ET in his free office hours. He answers whatever attendees ask, live, for an hour. If this issue raised a question for you, bring it.
SOURCES
- Fannie Mae Selling Guide, owner-occupied 2-4 unit provisions effective November 2023: 5 percent minimum down, previously 15 to 25 percent; no self-sufficiency test on conventional 3-4 unit loans. Via National Mortgage Professional and The Mortgage Reports.
- HUD FHA guidelines: 3.5 percent minimum down; occupancy within 60 days for at least one year; self-sufficiency test on 3-4 unit properties at 75 percent of appraised rents.
- FHFA 2026 conforming loan limits: $832,750 for one unit; $1,066,250, $1,288,800, and $1,601,750 for two, three, and four units.
- U.S. Census Bureau, Rental Housing Finance Survey, via the Congressional Research Service: individuals own 70 percent of units in properties of four or fewer units. Rental income qualification and 25 percent vacancy adjustment per agency underwriting guidelines; buyers should confirm specifics with their lender.