Real Estate Investing Basics

Your First Investment: How to Use Future Rental Income to Qualify for a Duplex Loan

Expertise: Personal Development, Real Estate Deal Analysis & Advice, Real Estate Investing Basics, Business Management
42 Articles Written
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If you're like me, you've read hundreds of articles just like this one and quite a few books — and none of them explained how to invest without a lot of money. Let's face it; the less money you have, the harder it will be to invest in real estate. You'll just have to be more creative and work smarter. But what you learn along the way will make you unstoppable.

Your knowledge is like a penny that doubles every day. One day one you have a penny. At day ten you have $5. By the end of the first month, you are left with $5,300,000. It’s what you learn along the way that makes your success double. Did you know Warren Buffet made 99% of his wealth after his 50th birthday? He made his first investment at age 11. He started with little and learned a lot over the years — and that’s what paid off.

Owner Occupied Loans

Investing with other people's money is expensive. Investment loans require 25% down and have high interest rates. Because of this, many first time investors are buying houses with owner occupied loans and renting them out later. Before we go any further, let's get a better understanding of how this actually work so you don't make mistakes or break the law.

Related: Your Tax Write-Offs Could Affect Your Ability to Get a Loan: Here’s How

If you buy a house with an owner occupied loan and want to rent it out later and buy another, you will have to:

  • Live in the house for at least a year. If you move out and make it a rental any sooner, you will be committing fraud. After a year of living there, you are allowed to rent it out because you have met the owner occupied commitment.
  • To be able to qualify for a second loan while renting out the first house you will need either:
    • Have 25-30% equity (own 25-30% of the current value of the home) in the first house to use the rental income to help qualify for a second loan. OR
    • Have at least 2 years of landlording experience and proof of income from your tax returns. This will allow you to use the rental income to help qualify for another loan. This also means you will have to live somewhere else for 2 years while you gain this experience. OR
    • Be able to qualify for the first loan and the second loan at the same time.

This is what most people don’t know when they think about buying an owner occupied house and renting it out later. It’s legal to do it, but there are a lot of restrictions that make it difficult.

The Solution

There is a way to beat a lot of these restrictions by using an FHA owner-occupied duplex loan. Keep in mind this is only for duplexes.

All of the above still apply, but:

  • You only need a 3.5% down payment.
  • You can start renting one side right away and bring in income.
  • You will gain landlord experience while living there. You won't need to move after a year and live somewhere else for another 2 years to get enough landlord experience to count your rental income.
  • You can use the future rental income from one side of the duplex to help you qualify for the loan on the duplex.

An added benefit of duplexes over single-family houses is that they are cheaper and tend to bring in more income than a similar sized home. Let’s look at what the loan offers.

When using an owner occupied FHA loan for a duplex, you can use 75% of the estimated rental income from the other half of the duplex to help you qualify for the loan. This enables you to get a bigger loan than you can afford because your income has increased from being a future landlord. You don't need landlord experience to qualify. However, it can be tough to find a lender willing to give you the loan if you only have the minimum 3.5% down, and some add more restrictions. Talk to a few lenders and find one who will give you the loan before you get too far. Keep in mind, it's free to ask questions and get pre-approved for a loan.

Related: 8 In-Depth Questions You Should Be Prepared to Answer When Applying for a Loan

Example: If you were able to find a duplex with a $2,000 a month mortgage and you could rent one side for $1,200 a month, the lender would subtract 75% of that rental income (=$900) from the monthly mortgage payment and you would now only need to qualify for $1,100 a month.

The big drawback to FHA loans is that they have mortgage insurance for the life of the loan, which can cut profits. However, if you pay off 20-25% of the value of the property (or its value increases due to rehab and/or appreciation so that you own 20-25% of its current value), you can refinance later into a loan without mortgage insurance.

If the house is an investment, you will have to refinance into an investment loan with a higher than average interest rate, but it might be cheaper than paying mortgage insurance. Keep in mind, refinancing isn’t free and you never know what interest rates are going to do in the future so don’t get into a bad deal hoping it will get better later.

“Today, knowledge has power. It controls access to opportunity and advancement.” – Peter Drucker

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Have you ever used this strategy to qualify for a duplex loan? What advice would you give to newbies looking to find financing starting out?

Leave a comment, and let’s talk!

Brett Lee is a licensed Real Estate Broker in Portland Oregon where he helps people achieve a better future so they can do the things that truly make them happy. Brett is also a buy-and-hold invest...
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    Sean Barrett Investor from Milwaukee, Wisconsin
    Replied over 5 years ago
    Great article Brett!! This strategy for using the FHA owner-occupied duplex loan is exactly what I did to purchase my first property a few months ago and it’s been great so far! The mortgage insurance is a pain, but for the time being I am renting to a roommate to cover that cost with some extra leftover. The last two paragraphs involving changing into an investment property and getting rid of the mortgage insurance really hit home because in the future I want to keep this property and I need to consider all those factors when doing so. Very informative!
    Account Closed Investor from Houston, Texas
    Replied over 5 years ago
    Great article!
    Jeff Bentivoglio
    Replied over 5 years ago
    I thought that they ended the practice of loaning based on future rent projections a couple of years back. Is there a source somewhere online that I can reference? Maybe this was just at Chase when I posed the question last year. What types of banks are doing these loans? Credit unions and small local banks I would assume? Thanks!
    Sean Barrett Investor from Milwaukee, Wisconsin
    Replied over 5 years ago
    I used Waterstone Mortgage Corporation in Wisconsin (Milwaukee area); however the company is national. They used 75% potential rents from the occupied unit to finalize the loan with 3.5% down. The loan was then sold to Wells Fargo 2 months in, but that shouldn’t have any bearing on acquiring the loan. I would shop around for the right lender that can do this for you, this strategy worked for me.
    Jay Sechowicz Investor from Philadelphia , Pa
    Replied over 5 years ago
    If you get an FHA loan but put more like 10-15% down. When you go forms new loan 1-2 years later does that count towards the equity you have in the house?
    Brett Lee from Portland, Oregon
    Replied over 5 years ago
    Your equity will be the difference between the current market value and how much the loan is that you are refinancing into. If you put 10% down and the value of your home went up 10% and you paid down 5% then you would own 25%. If the value went down you might not have 10% equity anymore.
    Elliot Smith Investor from Vancouver, Washington
    Replied over 5 years ago
    Thanks Brett! Great article. My wife and I are in our second house on 5% down owner occupied. We closed the 2nd one 366 days after the first one! Enjoy the sun today! Your neighbor to the north.
    Brett Lee from Portland, Oregon
    Replied over 5 years ago
    When it comes to the specifics of loans you’ll have to talk with different lenders. FHA, or any loan program, puts out guidelines on loans and lenders can add to the requirements before giving out those loans but they can’t take away requirements. Therefore, one lender may give you one thing and another lender something different. It comes down to finding a lender willing to help you out and not all can do it. I wish there was only one way and one set of standards. If you’re in Oregon or California I know a lender that doesn’t add anything to loans. You’ll do a lot better finding a local lender that you can sit down with and ask questions on how their company works and what they can do for you. Sean Barrett in the comments above just did this a few months ago. He may be able to give you his lenders name.
    Tom Waddell from Portland, OR
    Replied over 5 years ago
    Wonderful article, Brett! I’m relocating back to Portland next month. Do you mind sending me the info on the lender that doesn’t add anything to loans?
    Daniel Mohnkern Investor from Titusville, Pennsylvania
    Replied over 5 years ago
    This is a great strategy. Thank you for writing about it. I actually had a great little regional bank that helped me out on my first duplex. They used my future income from that duplex as a means for establishing ability to pay even though I had no rental experience. This was before the big RE upset though. They were very helpful. (also let me use a car’s equity as part of my down payment).
    Daniel Mohnkern Investor from Titusville, Pennsylvania
    Replied over 5 years ago
    This is a great strategy. Thank you for writing about it. I actually had a great little regional bank that helped me out on my first duplex. They used my future income from that duplex as a means for establishing ability to pay even though I had no rental experience. This was before the big RE upset though. They were very helpful. (also let me use a car’s equity as part of my down payment).
    William Byrd Investor from Greensboro, North Carolina
    Replied over 5 years ago
    Thank you for taking the time to write such an informative article
    Eric D. Investor from Eagan, Minnesota
    Replied over 5 years ago
    Great points. If the duplex is in an HOA, such as a twin home, be sure to play by the rules in regards to rentals. It is a great way to get into a duplex, or a 4-plex, with minimal down. If you already have a house, it may not work. Banks often do not believe you will leave your 2500 sq ft suburban home to move to a 1000 sq ft duplex…
    Brett Lee from Portland, Oregon
    Replied over 5 years ago
    Great point.
    Daniel Morgan Real Estate Investor from Springfield, Massachusetts
    Replied over 5 years ago
    great post, very informative
    Jules Dominguez from Los Angeles, California
    Replied over 5 years ago
    Hi, I’m a first time buyer and I’m looking to buy a duplex or a triplex and rent out the second one. Can you tell me a little more about the programs you’ve heard of in California? I live in Los Angeles and would like to do 10% down. Is this a viable option for me? Also, can repairs be incorporated in to the loan? I’m hoping to buy a distressed property and make repairs. Do LLC or INC qualify for these loans?
    Andrew Mohr
    Replied over 5 years ago
    Similar to the post above I am a first time home buyer and wanting to get into investing with real estate. I do like my day job and have seen a few friends who have properties who seem to do well, so not looking to get real crazy. I really like the idea of buying a duplex and renting the other unit out. I am confused as to what happens when you want to move out of the duplex? I understand you have to have built up enough equity in the duplex to secure another loan and you can refinance on the duplex to avoid the mortgage. If you want to just rent both units out is that then considered an “investment” in which you would have to secure the investment loan with a higher interest rate?
    Brett Lee from Portland, Oregon
    Replied over 5 years ago
    When you have a chance give me a call and I will explain how to do it. My contact info is in my profile.
    Yenyen Tang
    Replied over 5 years ago
    This is invaluable information! Thanks, Brett! I would also like to get the CA lender information if you please. Unlike Andrew, I would really like to be able to get out of my day job in the media industry. I just got my real estate salesperson license and I want to start real estate investing as soon as possible. Would love some guidance and coaching from you if possible.
    Yenyen Tang
    Replied over 5 years ago
    This is invaluable information! Thanks, Brett! I would also like to get the CA lender information if you please. Unlike Andrew, I would really like to be able to get out of my day job in the media industry. I just got my real estate salesperson license and I want to start real estate investing as soon as possible. Would love some guidance and coaching from you if possible.
    Yenyen Tang
    Replied over 5 years ago
    This is invaluable information! Thanks, Brett! I would also like to get the CA lender information if you please. Unlike Andrew, I would really like to be able to get out of my day job in the media industry. I just got my real estate salesperson license and I want to start real estate investing as soon as possible. Would love some guidance and coaching from you if possible.
    Matthew Jones from Moreno Valley, California
    Replied about 5 years ago
    Great post Brett, thanks.
    Brandon Shealy from Sunland, California
    Replied about 5 years ago
    Fantastic article, Brett. My fiance and I are planning on doing this. We live in the Los Angeles area. What mortgage company were you speaking of in California? Thanks!
    Steve Hoghe Real Estate Appraiser from Santa Monica, California
    Replied almost 5 years ago
    Brett, thank you for the great tip with this strategy. You mentioned it can only be used with duplexes. Am I safe to assume that doing this with a triplex would not be allowed?
    Xavier Martinez from Folsom, California
    Replied over 4 years ago
    Had no idea about the equity requirement for obtaining a second loan or refinancing. Thanks!
    Eric Zdanowski from Cheshire, Connecticut
    Replied over 4 years ago
    Super informative Brett thank you! I was wondering if and how future rental income was factored into calculating DTI ratios so this helped clear that up. Now its just a matter of finding that right lender who will agree to the right terms.
    Theodore(ted) Fields Wholesaler from Sacramento, California
    Replied almost 4 years ago
    Brett, you are the man, I too would like a lender n my area of Northern California, if you have one Bravo
    Candice
    Replied almost 4 years ago
    Great article, can you recommend lenders in the Portland Area for a construction build on a duplex, thanks.
    Scott Trench President of BiggerPockets from Denver, CO
    Replied over 3 years ago
    Brett – Are you sure about this: “You can use the future rental income from one side of the duplex to help you qualify for the loan on the duplex.” I believe this was not true for me. It is NOW, as I have several years of tax returns proving my experience as a landlord and my ability to collect rent. Can we get a lender to confirm this? My understanding is that newbies may NOT use expected future rent from a duplex, triplex, or quad to help them qualify for conventional financing. Much the same way that a commissioned salesperson may not use their commissions to help them qualify for financing until their history has been documented for several years.
    Bo S. from Seattle, Washington
    Replied about 3 years ago
    Would like to know about this too..
    James Dempsey from Atlanta, GA
    Replied almost 3 years ago
    Any word on this, @brett
    Eliseo Medrano
    Replied almost 3 years ago
    Thanks for the blog post Brett! It’s peeps like you who make all those hazy things like loans and physics easier to understand to us non math brain people. Like ME! haha
    Jesse Quintanilla
    Replied almost 3 years ago
    Yes! Brett’s article is correct. I am a lender in CA and have done this loans quite often.
    Kylan Philbert-Richardson
    Replied about 1 year ago
    Very helpful article, Brett!
    Soddee R. Knight Investor from Oklahoma City, OK
    Replied 4 months ago
    Doing this soon!
    Theresa Savoy
    Replied 3 months ago
    Great article, Brett! Would you happen to know of any lenders in the Nashville area?