2nd Multi-Family

[Mike Hoefling]

Last year I bought my first multi-family (4-Unit) with an FHA loan only putting down 3.5%. I am looking to buy my 2nd Multi-Family but the lenders want me to put down 25% and on purchase prices around $200,000 thats $50,000 down. Is this really what I need to buy my 2nd multi-family? I guess what I am asking is this what other people are doing? or is there anyway I can get into my 2nd rental? If so I am ok saving money but it will take me some time. I am just trying to figure out another way to get into my 2nd Multi-Family faster.

[Shawn Mcenteer]

@Mike Hoefling Are you looking to owner occupy your second unit?  

I recently ran into a few lending situations that I was not expecting. Recently you could move from one FHA home to another after 1 year of living in your initial purchase. Now underwriting is starting to clamp down on this and is getting tighter on people with FHA loans., by requiring 20-25%.

[Mike Hoefling]

I would be willing to owner occupy if the downpayment was less however I have not found a lender who would go down from 20-25%.

[Gualter Amarelo]

I am currently in the same situation. I believe this is likely to become one of those pivot points in your career where you must start developing a more complex strategy. Although I have yet to close a deal using one of these strategies I have them in my arsenal and intend to use them should the opportunity arise.

1. Raise investor capital. You already have proof that you can manage and make money on an investment property so develop an investor portfolio to show at REIA's and family events, lol.

2. Assume someones existing mortgage. This works on other peoples VA and FHA loans. Also you could buy a house "subject to" existing financing. Some sellers are open to this, keep an eye out for "seller financing available" on the MLS posting and always ask the agent.

You may want to read this article that Brandon Turner put together. It's called<"

How to Make a Million Dollars from Real Estate: A Step By Step Path"

 You've already taken the first step and if you bought this deal with good positive cashflow it may work well for you:

http://www.biggerpockets.com/renewsblog/2012/12/12...

[Mike Hoefling]

@Gualter Amarelo

Thank you for the link to that article. I think in MA we would spend a bit more for multi-families than in that article ($100k) but I get the idea. Right now I just don't have enough to get into my 2nd multi. I would be willing to go into a deal with another investor but I have not started to work with anyone yet. I recently took a class to get my real estate license so I could potentially sell RE on the side to until I have enough capital.

[Anthony Gayden]

@Mike Hoefling That is the way I did it. My first with a conventional mortgage 25% down, and my second with an FHA loan and 3.5% down. I will probably go the 25% down route again even though it takes a long time to save that kind of money at this point. Spending 2-3 years saving up for my next purchase might seem too slow to some, but this is a marathon, not a sprint.

There is another option if you want to owner occupy. My mortgage provider told me that if you are owner occupying and don't want to use an FHA loan, they require 10% down for a 2-4 unit property. The benefit of going that route is that you don't have to go through the FHA process again. The cost of the PMI will be lower for a non-FHA loan, also you don't have to have PMI for the life of the loan.

[Gualter Amarelo]

@Mike Hoefling You can say that again! Every time I listen to one of the podcasts I have to laugh at how cheap these guys can pick up houses! I think a great deal is paying $50k PER UNIT if you can find it, let alone $100k for a whole 4 family! I've also started taking the classes to attain my realtors license. Great minds think alike! You should check out your local REIA's. They are full of wholesalers and investors, among other useful people and connections.

Worcester is a great city to invest in. I met an investor up there while buying a coin-op washer off of craig's list. The city is full of multi's that are in need of new ownership and great deals do pop up pretty regularly. Although the Boston market has definitely recovered 100% I am glad our outlying markets still provide some opportunity to get into this business (even if it is still more expensive than most other markets).

[Mike Hoefling]

@Anthony Gayden It looks like I will have to wait 2-3 years until I have enough capital to get into another.

@Gualter Amarelo Haha, I listen to so many podcasts and they are always like I buy property for $30k or a 3-4 unit for $100k and I am like not in my market. Maybe they will do a podcast for someone investing in a more expensive area like ours. And you are absolutely right, I need to start attending the local REIA meetings. For the next few months I am working in Los Angeles, CA so all I can do is save my money.

[Shaun Weekes]

Hello Mike,

If it's a 2 unit property you can put down 15% ( Fannie Mae ) and if you have 2 years of experience you can put down 20% on any type of unit with Freddie Mac. 

The only other way is to refinance your current loan out of an FHA loan and then move into the new unit property with an FHA loan.

If you have any other questions please feel free to ask or PM me. 

Take care and have a good one. 

[Qulia Brunson]

I'm trying to purchase a duplex with FHA financing. After getting approved the loan officer said I could purchase a duplex with FHA financing. However the duplex I want is two parcels so now the LO says I need two different loans, FHA for the owner occupied side and Conventional for the tenant occupied side. On top of that if I find a duplex with one parcel I would have to do a 20% down conventional loan. None of this sounds right or makes sense. Is this something new or has anyone else experienced this?

[Anthony Gayden]

@Mike Hoefling  2-3 years seems like a long time, but it really isn't that long. I'm in the same boat where I will have to wait quite a while, but it's not like I will be doing nothing for that whole time. I will spend that time researching making connections, and of course taking care of the two properties that I already own. 

[Philip Williams]

Check out the podcasts on creative financing! Heloc private lending partnering are all great options.

[Shaun Reilly]

Are they telling you that you need 25% down if you are going to live in one of the units?

If that is the case I'd talk to some other lenders.

If you don't refi the existing FHA you won't be able to use that again, but that should not keep you from using a conventional program that would allow for a lower DP. At a minimum you shouldn't have to put down more than 20% if you occupy.

When you bought your current one did you get a deal or did you pay retail? Have you done any improvements that would push the value up? Are you in a place that might have had really good appreciation since you bought? If any combination of these things are true you can try to refi out of the FHA loan now with the equity in the place and then can use the FHA to buy the next place again.

Of course you need to have enough equity to do that and even if you do make sure that it will cash flow with the new loan.  But if both of those things come together that would be the easiest way to have a low down payment option on your next one.

[Joshua McGinnis]

@Mike Hoefling 

I'm in the middle of closing on a duplex property, after exhausting all other options, there was no way around 25% down. I even took the advice of everyone here and called every single local / regional / community bank (about 8 of them) in the area I'm investing and they all sang the same tune: 20% down on an investment property, 25% if it is more than one unit, and no portfolio loans.

If you have an IRA, you might be able to tap that to fund the downpayment. If I recall correctly, any cash flow will need to go back into the IRA until you've paid it back, but that's not necessarily a bad thing - it just depends on your strategy.

[Matt Faircloth]

My first multi family deal was in 2006 - we bought (2) 4 unit apartment buildings with 3% down each plus a seller's assist.  Those were the days! 

@Mike Hoefling , it really goes back to a question of your long term goals.  Do you want to keep a day job and grow slowly, do it full time and grow quickly to supplement income...  Either of these will dictate what type of funding you need to look at.  For the slow and steady approach there are some good comments here on working around your bank's requirements, just be prepared to do this every time you look to buy a new property.

I am doing it full time and can tell you that you will need to (sooner or later) look towards a more complex strategy.  Here's the one we use...

1.  Buy Multi Families in distress - either financial or mechanical, the building you buy should need some type of improvement so you can increase it's value.  This could be as simple as raising rents, filling some vacancies, or making physical improvements.

2.  Use short term private lenders or equity - We buy the buildings either with private lenders willing to fund the purchase and some rehab costs, or we give some ownership to a private equity partner (it depends on the deal).  Either way we look to get the bulk of the funding required to stabilize the building from one of these people.

3.  Once the building is stable, go for a long term refinance from a bank.  They will still require around 25% equity but that now depends on the appraisal, not cash out of your pocket.  If you can add enough value during your improvements you will be able to get the financing to completely take out the short term money.  You just need to find a bank that will not require a certain amount of "seasoning" of the property. These banks are out there, you just need to shop.

I hope that helps!!

Matt Faircloth

[Albert Bui]

Originally posted by @Mike Hoefling:

Last year I bought my first multi-family (4-Unit) with an FHA loan only putting down 3.5%. I am looking to buy my 2nd Multi-Family but the lenders want me to put down 25% and on purchase prices around $200,000 thats $50,000 down. Is this really what I need to buy my 2nd multi-family? I guess what I am asking is this what other people are doing? or is there anyway I can get into my 2nd rental? If so I am ok saving money but it will take me some time. I am just trying to figure out another way to get into my 2nd Multi-Family faster.

This is because in the underwriter's mind you are not planning to live there as a primary but rather the implication is that you'll be using the FHA vehicle to become a landlord and your stay will be temporary.

If the file is structured correctly and depending on your circumstances you could buy another mult-family with little down (2nd FHA).

Some implications you may have to consider is that most borrowers will not qualify for a 2nd FHA loan unless they refinance/payoff their current FHA loan and an FHA loan is needed because conventional is a min 25% down whether its owner occupied or not.

The other issue is do you have enough equity in your current FHA financed 4plex to refinance into conventional?

The other huge issue is you'll need a heck of a good LOE - letter of explanation to sell the UW (underwriter) on why this is ideal to be  your primary residence using factors the UW deems as variables that make sense for a primary occupant (larger family, location, schools, sob story, etc, etc). I wrote an article about how Letters of Explanation and How it can make or break your loan file.

4 exceptions to obtaining a 2nd FHA if you pursue this path is 1) larger family size 2) divorce separation 3) you were a non occupying cosignor on another person's FHA loan and 4)relocation. If you dont have a scenario that pertains to any of these 4 then you'll need to refinance out your current FHA loan subject to qualifying for a conventional loan (credit, income, assets/value, etc) in order to be eligible for FHA financing again with low money down and red hot smokin letter of explanation.

Hope that helps (above - this is why shopping for .125% in rate can cost you major opportunity cost)

[Albert Bui]

Originally posted by @Gualter Amarelo:

I am currently in the same situation. I believe this is likely to become one of those pivot points in your career where you must start developing a more complex strategy. Although I have yet to close a deal using one of these strategies I have them in my arsenal and intend to use them should the opportunity arise.

1. Raise investor capital. You already have proof that you can manage and make money on an investment property so develop an investor portfolio to show at REIA's and family events, lol.

2. Assume someones existing mortgage. This works on other peoples VA and FHA loans. Also you could buy a house "subject to" existing financing. Some sellers are open to this, keep an eye out for "seller financing available" on the MLS posting and always ask the agent.

You may want to read this article that Brandon Turner put together. It's called<"

How to Make a Million Dollars from Real Estate: A Step By Step Path"

 You've already taken the first step and if you bought this deal with good positive cashflow it may work well for you:

http://www.biggerpockets.com/renewsblog/2012/12/12...

 This is true Gualter or you find someone who can help you plan your scenario strategically including all conventional and non conventional but ethical strategies. There are many options out there structuring a loan correctly is one way, subject-to, assumptions, private equity, land contract, seller carried 2nd's, you can slice and dice it many ways.

[Albert Bui]

Originally posted by @Qulia Brunson:

I'm trying to purchase a duplex with FHA financing. After getting approved the loan officer said I could purchase a duplex with FHA financing. However the duplex I want is two parcels so now the LO says I need two different loans, FHA for the owner occupied side and Conventional for the tenant occupied side. On top of that if I find a duplex with one parcel I would have to do a 20% down conventional loan. None of this sounds right or makes sense. Is this something new or has anyone else experienced this?

This is true Qulia, the answer to your question is a very advanced area of the guidelines but if the adjacent lot is an ancillary lot then it can be included in the FHA/Conv loan the problem when the adjacent lot is capable of being developed or has an existing structure in your case is that its considered separate marketable lots. I've had homes that I've financed with conventional or FHA loans that have had 5 plots that were a part of 3 parcels in which the home only touched or covered 3 of the plots (mostly on one plot) but the remaining 2 plots were land for the garage or back/side yard. In my case these lots were just ancillary lots that were too small to be developed into separate homes or structures so it was okay within the guidelines. You may find unique areas like this in some markets. In my case this canyon area used to be a mining town so small lots were sold off in the late 1800 to early 1900's. The land plots were very small but as the area became more residential these plots were combined into parcels and homes were constructed.

The bank probably only allowed you to obtain FHA on one home and required a non owner occupied conventional loan on the second home which was min 15-20% down right? Just a guess.

[Richelle T.]

Try Evolve Bank and Trust. They are a national bank. For an owner occupied multi you can put 15% down. It's not as low as a FHA but it is better than 25% down.

[Anna Markowski]

Have you looked at this loan product? http://www.freddiemac.com/homepossible/

I haven't found many loan officers that are aware of it. Only 5% down. I'm using it to buy a MF property. Not sure if you could use it to buy a second, but worth looking into. 

[Richard Copeland]

Mike:  Anything less than 5 units is consider residential from a financing standpoint.  Once you cross to 5 units or more you enter the commercial/multifamily financing world.  If your second deal is 5 or more units, then 25% down is a common ask, although there are lenders willing to do 20%.   The days of low down payment are scarce at best.  As long as you are 4 or less, you can get a lower down payment and a longer amortizations.

How many units is the property you are seeking to buy?

[Joseph Gozlan]

did you try reading the BP book: The Book on Investing in Real Estate with No (and Low) Money Down.

It has some good options for you there.