Mortgages & Creative Financing

5 Ways to Build a Real Estate Empire With FHA Lending

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Disclaimer: This is designed to provide general information regarding the subject matter covered. It is not intended to serve as loan, legal, tax, or other financial advice related to individual situations. Consult with your own lending professional, attorney, CPA, and/or other advisor regarding your specific situation.

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Oftentimes, first-time real estate investors struggle with finding enough capital to make their first rental or flip purchase, thinking they must have a down payment of 20 percent or more to get into a property.  

What if you could drop your price of entry to 3.5 percent down by using an FHA loan?

Sound too good to be true?  

Let me explain…

What Is an FHA Loan?

Let’s start with some facts. FHA loans are a mortgage issued by the Federal Housing Association (FHA), which is a U.S. government agency. These loans are insured by the FHA and have smaller down payments than conventional loans.

man and woman looking at each other

Like any loan, they come with lender qualifications (1), such as:

  • FICO score 580+ for 3.5% down payment 
  • FICO score between 500-579 for a 10% down payment 
  • 2 years of steady income and proof of employment
  • 43% or less debt to income ratio (DBTI)

And if you were to ask the FHA, they would say you cannot use an FHA loan to buy a rental property due to the last qualification that the home must be owner-occupied.

Related: What’s Great (& Not So Great) About FHA Loans

So, you might be asking yourself, “I thought you said you could buy a rental with an FHA loan?”  

Hang with me here. 🙂

Why Would Using an FHA Loan Make Sense for an Investment Property?

If you are just starting out in real estate investing, leveraging your own primary home (or living situation) is a great place to start while you save for larger down payments on future properties. Since you can put an FHA loan on a primary home, why not make your primary your first real estate investment?!

The pros of using an FHA loan are:

  1. Great interest rate (As of today, rates are hovering close to 4%.)
  2. High loan to value (96.5%)
  3. You can buy up to a fourplex

The drawbacks of using an FHA loan are:

  1. You must move into the property in under 60 days and live in it for up to 1 year
  2. You can only by up to a fourplex
  3. You will owe mortgage insurance, in most instances for the life of the loan
  4. You cannot do short-term rentals

How Can You Invest in a Rental With an FHA Loan?

Now that we have covered what an FHA loan is, plus the pros and drawbacks of using an FHA loan, let’s put the puzzle pieces together. 

Close up view of bookkeeper or financial inspector hands making report, calculating or checking balance. Home finances, investment, economy, saving money or insurance concept

Below are a few ways one could use an FHA loan to invest in a real estate property.

  1. The live-in flip: Buy a single family house as a primary, live in it one year, fix it up as needed, sell it. Then, find another single family primary and get another FHA loan!
  2. The rental: Buy a single family house as a primary, live in it one year, move out, and rent it. Then, find another single family primary and get another FHA loan!
  3. The single family house hack to rental: Buy a single family house as a primary, pack it full of roommates, fix it up as needed, live in it one year (hopefully for close to free), move out, and rent it. Then, find another single family primary and get another FHA loan!
  4. The multifamily house hack to rental: Buy a multifamily, live in one unit, rent the remaining units, have renters help pay your mortgage, move out, and rent your unit. Then, find another multifamily primary and get another FHA loan!
  5. The BRRRR hack to rental: Buy a single family house that needs a considerable rehab as a primary, do a special type of FHA loan called a 203K loan (2) to cover your rehab costs, live in it one year, move out, and then sell it or rent it. Then, find another single family primary and get another FHA loan!

Related: An FHA-Financed Duplex is an Ideal First Investment Property: Here’s Why

As you can see, we can keep going for quite a while on the different ways you can combine investing tactics. And we haven’t even talked about using a cash-out refinance or HELOC to access your equity to go do your next deal!

Case Study

In 2002, I purchased my first primary home with an FHA loan. The home needed a cosmetic rehab, and I was willing to put in much of the sweat equity over the next few months. I also was able to rent the additional rooms to people who didn’t mind a little construction dust. 

Fast forward one year later, $8K in materials costs, and some elbow grease, I netted the following:

  • $300/month after all monthly expenses were paid
  • I was living for free!
  • I pushed the value of the property, and sold it 1 year later for $52,000 more than I put into it

Here was my only mistake: In hindsight, I wish I hadn’t sold it. Rather, I wish I’d done a tax-free cash-out refinance to pull equity from the property for my next down payment and kept a cash-flowing rental. Lesson learned!

Conclusion

Clearly, there are several ways you can leverage FHA loans. Combine this powerful lending tool with a little time and hustle, and nearly anyone can build a real estate empire.

Sources:

  1. https://www.fha.com/fha_loan_requirements
  2. https://www.hud.gov/program_offices/housing/sfh/203k/203k–df

Disclaimer: This is designed to provide general information regarding the subject matter covered. It is not intended to serve as loan, legal, tax, or other financial advice related to individual situations. Consult with your own lending professional, attorney, CPA, and/or other advisor regarding your specific situation.

Have you heard about other creative ways to leverage FHA loans? Do any of the above methods appeal to you? Why or why not? 

Let’s talk in the comment section below!

Whitney is a real estate investor and personal finance trainer whose vision is to launch ten thousand families on the path towards financial independence. After purchasing her first rental in 2002, and hitting a homerun, then nearly losing it all on her second deal, Whitney took control and figured out how to invest in real estate the right way. She realized that success must leave clues. So, she studied and replicated the very personal finance and wealth creation strategies the wealthy use to create financial freedom. Today, Whitney is a partner in $300M+ of real estate assets, including 2,500+ residential units (MF, MHP, SFR, and assisted living) and 1,430+ self-storage. Additionally, she has flipped over $1.7M in residential real estate and a solid portfolio of commercial notes. (Don’t tell anyone, though—BRRR investing is still one of her favorite ways to invest—26 units and counting!) In 2018, Whitney founded ASH Wealth, where she helps you develop the mindsets, skills, and strategies you need in order to take consistent and persistent action and drive massive progress towards your real estate and financial goals.

    Paul Defngin Lender from Gaithersburg, Maryland
    Replied 24 days ago
    I enjoyed reading article. Just one minor correction “You will owe mortgage insurance until the loan to value reaches 78-80%”; that is no longer the case since June 2013 unless you put down 10% or more and pay minimum of 11 years.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 23 days ago
    Interesting! I still see MIP all the time even with larger down payments. A great question to ask! I know you can buydown the MIP at the time of purchase (my husband I did that on our primary).
    Paul Defngin Lender from Gaithersburg, Maryland
    Replied 24 days ago
    ...-and apologies for any grammatical errors as I typed on a tiny wireless device.
    John Sellers Flipper/Rehabber from Columbus, OH
    Replied 23 days ago
    In Ohio you can't rent out a FHA loan home.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 23 days ago
    Tell us more! The FHA loan program is a federal program. Would this be a different loan program?
    Chand King from Arizona
    Replied 23 days ago
    Excellent read! I plan to do this for my first property. Just looking for the fourplex that will net more income.
    John Wright Real Estate Agent from Cincinnati, OH
    Replied 21 days ago
    You may run into an issue with the underwriter wanting you to have "landlord experience" for a fourplex. They workaround is to get a duplex and show that the property has good rental history. Then of course you can use the rental history and income from the duplex to qualify for the quad. Good Luck my friend!
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 23 days ago
    Go, Chand!
    Nathan Richmond Rental Property Investor from Visalia, CA
    Replied 23 days ago
    One other item I like to add. You mention living in a unit or house for a year, moving out, renting that unit, then buying another. But you can only have one FHA loan. I order to buy another property using an FHA loan again, you must refinance out of the FHA loan on the first property. Once you do that, then you are eligible to purchase with another FHA loan. If the property hasn't appreciated in value, then refinancing could be a little tricky.
    Jared D. Lambrecht Rental Property Investor from Montana
    Replied 23 days ago
    I am currently about a year into the multifamily house hack to rental and right now am just trying to gain enough equity to refinance so I can move out and do it all over again with the next one!
    Shabi Ogunlano
    Replied 22 days ago
    Hi Whitney I'm in Orlando FL I have everything ready to make a move on my first property I've been doing some studying. Would you be able to help on my journey to purchasing my first home?
    Hugo Moreno
    Replied 22 days ago
    Great article, Whitney. I just have a question. Where can I find information about not doing short term rentals, since I'm about to buy a duplex using FHA loan, and my plan was to live in one unit, but doing short term rentals in the other rooms. Thank you!
    Jeanette Jamison
    Replied 21 days ago
    Short-term rentals only mean under 1 year. If they are under a year they are considered transient tenants and that’s no bueno.
    Shirley Jean-Louis from West Palm Beach, Florida
    Replied 15 days ago
    You have heard of AirBnb right?
    Takenya R. Clark
    Replied 22 days ago
    Great read!! I am in the process of doing just that. I bought my single family with an FHA. I am refinancing out of the FHA loan to a conventional and looking for a multi-family to leverage with FHA again, preferably 203K. Then I will rent out my single family and move into the multi. If you put down 10% or more of a down payment, PMI will fall off after 11 years. If less than 10%, PMI will remain for the life of the loan. You can always refinance to conventional so that once you get to 78-80% LTV, PMI will fall off.
    Noreen Eddy from Bergen County, NJ
    Replied 22 days ago
    We did an FHA 203k on a HUD home and refinanced out of PMI/FHA a year later by having renovated the property. It's a wonderful loan for people just trying to get started!!
    Andrew Santana Realtor from Union, NJ
    Replied 20 days ago
    So awesome, and in Bergen County! Good stuff.
    Brad Taylor from Chicago, IL
    Replied 22 days ago
    Great summary and reminder of pros/cons! Just completed your number 4 above with my first MF purchase. Very happy, especially given the abundance of beautiful Chicago 2, 3, and 4-flats! Brick homes that last forever with a little love. Had expert guidance from @JohnWarren, who helped me navigate a purchase with constant advice along the way.
    Connor Maloney Real Estate Investor from Anchorage, Alaska
    Replied 21 days ago
    Can you please provide more details on getting the second FHA loan? From what I have been told by several lenders, you need to purchase a property that is 100 miles away from your current property that you have an FHA loan for in order to be approved for a second FHA loan.
    Mark Boyd from Lakewood Ranch, FL
    Replied 21 days ago
    I’d love to take advantage of the low downpayment with an FHA loan but my wife won’t be too happy with me temporarily living in another house for a year. What type of proof does an owner need to show they’re living in the property for a year? Why not buy a multiplex and rent out all but 1 unit, then fill the last unit after a year?
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 11 days ago
    I would talk to your lender about that. Just note, not complying with lending guidelines is fraud and could mean steep fines and/or jail time. Know your facts before you execute!
    David Krulac from Mechanicsburg, Pennsylvania
    Replied 21 days ago
    Whitney, I have bought and sold over 965 properties for my personal inventory, some have been FHA. One of the limitations of the FHA 203K program is that all the rehab covered by the mortgage must be done by licensed contractors and with their written bids on letterhead, and they will be paid on draws and inspections by a representative of the mortgage holder. so the owner can NOT do the rehab, which is a serious down fall. At one property that we were selling, the home was broken into and the cooper pipes stolen. I this two story house the only bath was on the first floor next to the kitchen (close to the former plumbing). At first the buyers agent proposed FHA 203 K rehab mortgage but the buyers wanted to do the work themselves at lower costs than a contractor. We ended up letting the buyer into the property BEFORE settlement and before the appraisal so that they could reconstruct the missing plumbing and rough in plumbing for a second floor bath. Then the regular FHA appraisal (No 203K)) and they settled and moved in. In most of the cases we deal with the buyers want to do the work, at lower costs, and opt not to used FHA 203k. David Krulac Bigger Pockets Podcast Guest #82
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 11 days ago
    Very true! We went through that experience when we rehab our primary. Thank you for pointing out that nuance.
    Paris Williford Rental Property Investor from Winston Salem, NC
    Replied 21 days ago
    Thanks so much for this article! I'm looking to BRRRR hack a 2 - 4 unit with a 203K and had been wondering if I could BRRRR with an FHA loan. This made my day!
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 11 days ago
    Nice, Paris! Happy to help!
    Eric Carr Real Estate Broker from Los Angeles, CA
    Replied 21 days ago
    Or lived in it for two years and received part or all of the exemption! Great work, great creativity.
    Natash Niku
    Replied 21 days ago
    Great read, thank you! FHA is going to be my first choice when purchasing my 1st property (MF) but I'm going to have to wait to show 2 years of steady income.
    Hyacinth Dolor Investor from Bridgeport, Connecticut
    Replied 18 days ago
    Good article but you only pay mortgage insurance till you’ve earned (improvements/market uptick) 20% equity. I’ve eliminated mortgage insurance within 1 year with some improvements. Also, you do not need 3.5% down to buy. I have a program you can buy with $1,000 down and it’s FHA. Only available in a few states. Also, guaranteed rate qualify you with fha Less than 1 yr. Just had my wife purchased in October of 2018 and closing on next one
    Dawn Vought Buy and Hold Investor from Commack, New York
    Replied 13 days ago
    Great strategy! I'd be interested in this, assuming the 100 miles mentioned above is not a requirement.