New Investor Strategy: How to Buy Your First Multi-Family Investment Property & Live Rent Free

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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.

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:

e.g. For Philadelphia County the FHA loan limits are $420,000, $537,650, $649,900, and $807,700 respectively, which is high enough to allow the buyer the opportunity to afford a multifamily home.

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

About Author

Frank L. DeFazio sells Philadelphia Real Estate and Philadelphia Condos for Prudential Fox & Roach in Center City Philadelphia. Frank is a real estate agent, investor, developer, and founder of the CenterCityTeam. Read more from Frank at his Philadelphia Real Estate Blog


      • Frank – You’ve outlined a good basic strategy for a new investor to follow to get their feet wet in the world of investing. Now there are certainly downsides of living in such close proximity to your tenants, but there are ways to shield yourself, which we’ve talked to many times on the forums and here on the blog.

        Thanks for the post and welcome to the blog.

        • Hi there,

          Quick question: how would you go about protecting yourself when living so close to tenants? My business partner and I are both gearing up to buy our first investment property and we’re trying to be as thorough as possible. We want to use the FHA loan strategy outlined above, but we’re less sure about how it would function on a day to day basis, let alone how we’d legally protect ourselves. Any help or guidance you could offer would be greatly appreciated.


      • Sharon Mack

        Hi, I’m now reading this and it great advice which I will pass on to me 28 year old son and his wife as I’m now learning about real estate investing trying to encourage my children to make wise financial decision now as I didn’t have that opportunity when I was their age and no internet. BiggerPockets has been enlightening me tremendously. Thanks again for sharing your advice and knowledge.

    • This strategy does require scouting out neighborhoods but my guess is that you can find a safe, reasonable neighborhood near most major metropolitan cities where it would work. The FHA loan limits do vary by county so FHA takes into account the cost of living/buying in each locality.

  1. Great post Frank! I have recently executed this strategy,as of June, and had a question for you. What is my exit strategy? My understanding is that, legally, the owner must occupy the property per FHA guidelines. So, when the owner is ready to “move on”, how do you normally suggest doing so? In my case, I plan to keep the property as an investment and owner occupy another investment. How and when do you advise moving on?

    • To the best of my knowledge FHA does not have a specific time limit and you are not required to refinance when you move out. The do require that you intend to purchase the property as a primary residence and you must occupy the property w/in 60 days of settlement but there is no requirement for how long you have to live there. Most of the mortgage guys I’ve asked have said they would recommend one year at a minimum of occupying the property as a primary residence. I would change the insurance policy to reflect the change from owner occupant to investment property so you have the right amount of liability coverage and such.

  2. Great Idea, this is how I started also , and did again several years later. For serial multiplex buyers, remember that you must get out of your FHA loan before you do it again – so you have to refi after a time so that you free up your ability to do another FHA loan , since you cannot have more than one government backed loan out at once.

    • Certainly. Right now the main deductions for real estate investors are mortgage interest, depreciation, repairs, travel, home office, insurance, and legal/accounting. You can also team up with an accountant or tax attorney to strategically use losses to offset income on a year to year basis. Tax laws change frequently and are certainly a hot topic in Washington right now so keep an eye on the fiscal cliff negotiations and make sure you’re getting advice from a full time professional.

  3. It sounds almost too good to be true. We do not have an FHA loan, but choose to live onsite to better keep a finger on the day-to-day operations. It can make a huge difference in your bottom line. FHA & HUD are pretty much alike – had a HUD loan once and it is something that I would not wish on any other investor!

  4. Bad experience with HUD?:

    1. Rate supposed to be 7.5% but with all their withholding = 9.5%. 2-years Taxes & Insurance kept in reserves. $20K kept in repair reserve that never got reimbursements from.
    2. Repairs reserve – do repairs and be reimbursed – took 5-years to get a partial payment.
    3. Annual inspection – 1/3 of all apartment units inspected so 17 of 43 units selected. If a light switch cover plate was cracked – deducted 50% from your 100% start point. I did not operate a 50% property.
    4. Annual reporting of income & expenses. If you enter real numbers – system online did not accept them so needed to make up additional expenses or other areas to make the system balance. Once it was balanced – you met their annual reporting requirement but data was all bogus.
    5. Took $90K of my principal to put in their own pocket to make the loan.

    Never again!

    • That’s true but initially it’s a hybrid investment/owner occupied property and any owner occupant is going to have annual expenses for the upkeep of their home. You could get a home warranty that covers roof, heating system (possibly paid for by seller) at settlement to cover you in year 1 and then purchase subsequent years on your own.

  5. I can’t tell you how much I wish someone drilled this into my head when I was just starting out, it would have saved me and everybody else a butt load of trouble. Especially if you have the ability to invest in multiple properties. Places like Indianapolis in a working class area that isn’t run down, you can spend $30k-$40k per unit in a market/economy where rents can be near double PITI, with tons of multifamily property. Buying a couple of fourplexes or duplexes in a few miles of one another isn’t difficult and allows the investor/owner to take care of everything. Especially with today’s interest rates.

    Worse case scenario, if crap hits the fan, that’s my fall back plan.

    Pick a place where you are comfortable living. I wasn’t born “affluent”, so I am comfortable with lower income neighborhoods.

  6. FYI, if you can utilize some slave labor. Invest in the properties and “teach” your kid how to make this their career.

    It might even work better if you have discretionary income you don’t mind losing so they can live with a real life example of what happens all around them as a result of their negligence. That might be a bit too much tough love for some, but if the kid know’s they got it good, they’ll try.

  7. Frank,
    Does FHA allow loan underwriters to consider current leases as income to allow a higher financed amount than if you were to be considered on your personal income alone? While I’m pre-approved high enough for some, others are out of range if not for rental income to be factored in.

  8. Thank you very much for this Frank (and Brandon, I was directed here from his previous blog). I am looking forward to using this strategy to purchase a multi family property. Question though, I plan to invest in a property with a business partner of mine, how does that work in the case of getting a FHA loan, are we able to co-sign the loan together?

  9. jeffrey gordon on

    What kind of a HUD loan was Dale Osborn talking about? HUD would be FHA or RURAL USDA or something? I have never heard of two years of reserves and annual reporting? I hate to mention it but, FHA, Fannie, Freddie, VA, FHLB’s etc. are all government owned entities these days, there are no private investors in US residential Mortgages today for all intents and purposes!


  10. This is also how I got started 10 years ago. Worked out great. My tenant paid the entire PITI. I lived in one side for a few years. During the time I lived there I did a refi to get out of the FHA loan. A couple of years later I bought another duplex using an FHA loan and moved into the new duplex. I eventually sold the original duplex for twice what I paid for it.

  11. Well what coincidence! I have been progressively getting close to getting my feet wet in real estate investing. The funny part is I was looking into the Conshohocken/Manayunk areas before stumbling upon this article. This the exact strategy that I plan on implementing when I find the right property, which at this point has become the hardest part. Thanks for the tips Frank! Don’t hesitate to give me a heads up if you see anything in the area!

  12. This would be a tough decision to live in one unit, and rent out the other (s) without having your tenants call you and pester you 24/7.

    I would welcome any suggestions/advice to possibly go this route. Currently, I am planning to buy SFR to rent out, after I purchase my own residence (SFR)

    Mark Gould

  13. jeffrey gordon on

    Mark Gould, I have lived in a triplex with renters next door and it does have some issues when you get a troublesome tenant–I may never forget the two young college ladies that seemed to have a steady stream of guys and their buddies coming over for parties–they kept apologizing for the noise and promised to never have another party, but then a couple days later off we would go again.

    Like any tenant, advertise and promote the vacancy as much as you can and then be very careful in who you select as your new neighbors. I would always choose a duplex or triplex over a single family rental property all other issues being equal, but that is just me.


  14. I loved reading your blog Frank, this is exactly how I plan on getting started in real estate investing.

    A couple of you left comments about refinancing your FHA loans so that you could buy another property with an FHA. Do any of you care to go in to more detail about that? Like how you decided to refinance. I’m new to real estate so I’m not familiar with all of the methods yet.


  15. Would it be smart to invest in a property in an area where rent prices are going up? I live in San Francisco and am interested in buying here but am afraid of the high cost risk

  16. RE: Would it be smart to invest in a property in an area where rent prices are going up? I live in San Francisco and am interested in buying here but am afraid of the high cost risk

    Look at historical rent trends for your market area/zipcode. There are some good web sites out there that compile asking rent information that would be able to help you get an idea of where the rents are in the supply/demand cycle. Also look for new development projects in the area that would possibly depress the rental rates after you invest. Also pay close attention to the particular ordinances and governmental influences on rent/rent control etc… This would effect the ratio between the maximum amount of rent you can set and your fixed expenses. Make sure there are no variable expenses tied to your gross rental income. (hence the problem of periodic reporting)

  17. Great information! My partner and I are looking to invest in our first investment property. We currently each own a home, one that is currently being rented. My question is what do they consider living in the dwelling? Can we split our time between both homes? We don’t really want to move into the investment property but we also can’t afford that 20% down that comes with just using it as a rental. So we need to purchase it as an owner/occupy. Thanks up front for any information you can provide!

  18. Hi Frank:

    This information is awesome! My business partner and I have been looking for a way to obtain our first deal, and I think this is it. Your timing is impeccable. Thank you.

  19. Frank, a lot of good info, that strategy was how I got my start back in 1981… Right now my daughter and her new husband are trying to buy a 3 unit in Philly that their current landlord is willing to sell that they would live in. Either myself or my son are willing to co-sign to help if necessary, but we have been told a lot of conflicting info re: whether a non-occupant related co borrower is allowed or not , that the mortgage payment must be covered by only 75% of the income from the other 2 units that they won’t be living in, rather than the rental income of all 3 … Is there a good place to find all the FHA loan requirements to see if this will work … I did a quick scan of the FHA gov site and wasn’t able to find anything helpful… Thanks for any insight you can provide.


  20. I’m interested in getting a FHA loan. I have been pre-approved for up to 70,000 loan with 3.5% down. Only thing is, I can’t seem to find anything decent for 70,000. I can’t even seem to find a good duplex. I’m not sure what to do.

  21. Great article! I am new to the world of REI. I have however made the decision that investing in a multifamily property and living in one of the units might be the best way for me to start investing. One of my goals is to get involved in property management as well.

  22. Hi Frank,
    Thanks for the post, I have a question, I am interested in starting a business and I found a property that I would love to make it into a partial living space and income property however, the the property is not multi-family as you described in your post. How can I find information or grants/loans for something of the nature? Can you send me your contact information for further advice or contact via email?

    Thanks Again Jen

  23. hi just starting out my investment venture. My plan is to live in one unit and rent out the unit(s). But the ultimate goal is to live under my means and pay off the property as soon as possible (less than 5 years). Then to sell the property and use that money as a down payment on a larger commercial or apartment buildings. Is this a solid idea or would you advise to just not rush into paying the current multi-unit property off and instead use that money to look into additional smaller properties. To make my question less complicated, is it a good idea to go for a home run, or just score runs hitting singles?

  24. If you do this, how do you keep the expenses separate for tax purposes? Can you count mileage if you go to Home Depot and buy stuff for your unit AND the other units? Do you need to pay for them separately? What if the unit only has one electrical meter or water meter? How do you know which expenses are deductible? What about improvements that benefit all the units, like a new roof?

    I just bought my first triplex and am getting it ready to move in. Wanting to do what I can to keep my finances correct from the start! Thanks!

  25. Great post. I’m currently in the process of my first purchase. It’s a multifamily, using fha 203k financing to both purchase and improve the property. What I’m finding is that it is a great program, but as a newbie with no prior experience, it is also really daunting. Understanding whether the financials work, what is the cap rate, cash on cash analysis, etc is a huge challenge for a first time buyer. I think there are great benefits to the fha programs (which I hope to realize), but also big risks in depending on revenue from rent to cover mortgage costs, etc. thanks for the interesting and relevant topic. Glad to see others in philadelphia recommending and using this approach.

  26. I’m currently speculating a duplex that I can pay cash for but would rather finance a majority of it as I have a sfr in an adjoining town that will be available in a few months at a ridiculously low price (fix & flip). So I want to keep some cash available to purchase the house later.
    question: How do I get FHA financing, if I don’t have a verifiable income? Will they look at the cash flow on the property?
    I have flipped a few fixer uppers over the last few years, but they were all funded in full by me. I would like to work on having a monthy cash flow while still flipping.

  27. I hope I’m not duplicating this question.
    My understanding you have to reside in the FHA rental home. Will you still be able to get the loan if you already own a single family home?
    Thank you

  28. Years later and I still find this blog to be extremely helpful. As I read up on real estate investing I am falling more and more in love with the idea of buying and holding, particularly small multifamily properties. Thank you for opening my eyes to this option of financing.

  29. Gloria Dulan-Wilson

    Thanks for this info Frank – I’m new to the Philadelphia market, and am finding it rather difficult to find knowledgeable realtors. I’ve helped others obtain FHA loans in the past, but didn’t think in terms of it for investment properties, even though I do plan to start out as an owner occupant. If there are any upcoming REIA – Philly Meet Ups, I would appreciate it if you would please let me know. I also got a great deal of insight from your entire overview. Again – thanks so much –
    Gloria Dulan-Wilson

  30. Ricky Shepherd

    I apologize I breezed through a bit of the comments. I am a neophyte real estate investor and a fourplex is my first prospective purchase for investment. The concept of receiving rents from tenants is still a bit hazy? How would you collect rent from tenant on a fourplex or multifamily property if using a FHA 203 as your your first initial form of financing? Can you report it? And I would assume if you are an investor it wouldn’t wise to report earnings on this matter. Please elaborate, thanks in advance!

  31. Trae Swofford

    I love this scenario! Maybe this has been talked about (there are so much comments to go through): If I were to purchase a tri-plex with an FHA loan, would I have to permanently maintain residence there or could I eventually move out to turn it all profit? If leaving would I have to change the loan?

  32. nicholas williams

    Great post Frank, i am also interested in the potential tax breaks in this deal. Can you count repair cost for the owner occupied unit as tax deductible also? I have also read that if you do the labor on your property you can use this a a deductible also but you also have to use it as pay on your income, i don’t see the benefit of doing the labor yourself besides using the cost of tools as deductible. Am i missing something here on why you would count the labor as deductible and income?

  33. Thanks for much for the great information. Can you give me some insight on this scenario: We own a house free and clear, its value may appraise around $240,000. We want to invest in a second house and we will live in the second house and rent out the existing house. I assume this would be considered “owner occupied” and allow us to go for a low-down loan on house #2? Would having the free and clear first house be a help in looking financially healthy for approval purposes?

  34. Tony L.

    Great Article, I actually just got an accepted offer to purchase a Duplex. I am financing owner occupied and one side will cover the entire monthly PITI. I have the 20% to put down, should I try for FHA anyway or stick with the 20% down to have the lower monthly payment?

  35. Eddy Franco

    Thank you Frank, Great amount of information, I’ll keep reading thru the future posts in this subject since there is valuable questions that haven’t received an answer. (Example: If you own a primary residence free and clear, can you qualify for an FHA loan?.

  36. George Glass

    As soon as I read the article I started researching more into FHA Loans, and multifamily homes in my area. I found a, group of apartments, nine in all, on a nine acre lot. They need some work, but I would be able to get it if I obtained an FHA Loan. My question is, would an FHA Loan cover multiple apartments like the place I want to get? Or is there another type of loan I should research?

  37. I am looking to purchase investment property using an FHA loan. The investment property won’t be in an ideal neighborhood so I don’t want to live there long. Is there anything I should look out for that might interfere with me taking out a second mortgage? Will I be able to get a second FHA loan for a home? If not, will I be able to qualify for a traditional loan right away? Would you recommend doing a traditional loan first and then an FHA loan?

  38. Joe Burns

    I’ve recently been entertaining the idea of buying a 4-plex myself and living in one of the units. One of the hang ups I have is what do you guys suggest after its time to move on?

    For example, if I wanted to move on and repeat would refinancing the initial property to a conventional loan cause any problems?

    Do you guys suggest that it would be smarter to go conventional on the 2nd loan with 20% down?

    Let me know what you guys have done in the passed or think would work best!
    Thanks bp!

  39. Jeff Prather

    Im looking to employ the strategy to get started in Nashville. What are my best resources to find a multi family deal? So far I’ve used zillow and a Keller Williams app that a new networking contact shared. Neither has turned up a deal where the numbers worked for rent to cover my PITI. Does it make sense to buy a place if you can cover most of your PITI? I’m living in a nice part of town paying $1,700 in rent currently so even if I still pay $300 using this strategy, it feels like a win. My worry is that it’s not a cash flowing deal when I move out.

  40. Jen V.

    Great article, am looking into this myself to get started. Looking forward to reading more in the forums and podcast on the topic.

    One word of caution though, I would NOT recommend click through to the website linked in the article on FHA lending limits ( It is not a government-affiliated site; it is a private company that ultimately takes you through to for paid credit score services (you know the type, $29.95 a month after a free 7-day trial unless they cancel).

  41. Phillip Kim

    Does anyone know how serious the banks or mortgage companies care if you buy a rental property and decide not to live in it at all? Does anyone know of any friends or experiences about this? Do they actually check if you live there and how will they know?

  42. Melissa Kee

    I am new to Bigger Pockets and this is my very first post! yay me.
    I loved this article. Actually, I am currently working on getting pre-approval for funding while I look for a multi-unit property in my area. However, as a working single mother, my credit and income will only approve me for $88,000. Anything in that price range are cash only deals or are run down pieces of crap that would need a ton of money to rehab. Any suggestions?

  43. Sean Burgoyne

    Great article!
    My first property was a 3-unit apartment building. The seller was motivated and no longer wanted the property.
    Bought the property for $89,900 with seasoned tenants occupying all units, one unit being behind on rent.
    Moved in as owner/occupant with FHA loan. At the time (~ year 2000), FHA required living at the property for minimum of 2 years. Combined rents from both units was $1050. The FHA mortgage PITI plus MIP came to $850 which left $200 NOI/mo less a water bill. A perfect rent-free scenario.

    I decided to screen my own tenants once a vacany arised, checked references etc…, and went against my own personal policy and decided to rent to a family who, to make a long story short, set me up with the board of health and forced me to claim chapter 13 bankruptcy to prevent a foreclosure.
    Word to the wise: Screen your tenants, check landlord references older than the tenant’s present landlord (who may lie just to get them off his/her hair) but above all, only rent to working-class tenants!
    Tenants who are on disabilty and “supposedly” disabled, tend to have waaay too much time on their hands.
    Purchasing multi-family properties as an owner/occupant with FHA financing is still an excellent way to build passive income and to start out as an investor. But if you experience a vacancy, I would suggest renting only to blue-collar working class tenants and not to family or friends either (tough to raise rents when your family or friend is struggling to meet rent and you are comfortably driving a new car).
    Although ultimately while in bankruptcy, I sold the house for a quick sale price of $225K, it took 10 years to recover from bankruptcy. An LLC may be a better way to go than to potentially jeopardize your own finances!

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