New Investor Strategy: How to Buy Your First Multi-Family Investment Property & Live Rent Free
If you’re like me, the bad news is that you’ve spent too much time running across cheesy late night get rich quick schemes like the one below:
Give Me 10 Minutes And I’ll Tell You How To Buy Your First Investment Property (With Virtually No Money Down)
The good news is that unlike those late night gurus, I fully plan to deliver on my promise and explain how you can buy your first investment property with very little money down. I'm currently a real estate agent in Center City Philadelphia and many of my clients are young professionals who are eager to get started investing in real estate. Some come to me looking for condos, others single family homes and my advice to them is always the same:
Use an FHA loan to purchase a multifamily property that generates enough income to allow you to live for free while you occupy the property, and healthy cash flow when you eventually move out.
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What’s An FHA Loan And How Does It Work?
The FHA loan is a federally insured loan that requires the buyer to put down a minimum of 3.5% of the purchase price and allows up to a 6% sellers assist. Without getting overly technical this means the buyer is required to bring 3.5% of the purchase price to the settlement table and can wrap his or her closing costs into the loan.
So for example if you purchase a $250,000 property using an FHA loan with a full seller's assist you would only need $8,750 to purchase the home. FHA loans are readily available for single family homes, duplexes, triplexes and quads but the loan amount limits vary by county and the limits for each state/county are available here: http://www.fha.com/lending_limits.cfm.
A Real World Example of a FHA Financed Multifamily Investment
A recent example of executing this strategy is a duplex that an investor client recently purchased in Manayunk, a small section of Philadelphia comprised largely of college students and young professionals. This investor purchased a duplex that had two identical units that each had two bedrooms, one bath and one parking space. I’ve rented several apartments on that street so I knew that a 2-bed apartment with parking rented for $1100/month plus utilities.
The investor paid $250,000, which included a seller’s assist that covered all of his closing costs and his monthly payment for principal; interest and PMI came to about $1,250/month. All in, his monthly total with taxes and insurance came to approximately $1,550/month. The investor was able to rent the first floor apartment for $1,100/month plus utilities and then occupied the top floor apartment with a roommate who pays $550/month plus utilities.
So the investor is currently getting $1,650/month plus utilities in rent and spends only $1,550 per month for principal, interest, taxes and insurance. The additional $100/month surplus goes into a reserve account to cover repairs or future capital improvements and the investor currently has virtually no monthly housing expense!
When this investor inevitably moves out, he will generate $2,300/month plus utilities and will still have the same $1,550 per month payment for principal, interest, PMI, taxes and insurance. His monthly surplus will be $750 per month which will easily cover his operating expenses and still allow for a healthy cash flow.
So to recap, it's possible to use an FHA loan to purchase your first investment property for very little cash, allowing you to live virtually rent free while you occupy the property, and to make generous cash flows after you move out. This scenario is low risk because as long as the property is 50% occupied the majority of the debt and expenses are covered and the second unit is largely profit. The ROI on an investment like this is can be quite good and there are significant tax deductions that the investor can take advantage of. Hopefully now you can see how using an FHA loan to purchase a multifamily property is a smart way to buy your first investment property with very little money down.
Photo: Richard Eriksson