FHA Owner-Occupied<\/h2>\n
Now, I know what some of you may be thinking: “FHA is the most expensive way to buy, especially with MIP (Mortgage Insurance Premium). Isn\u2019t 5 percent down on a conventional mortgage better?”<\/p>\n
Well, not really, and here\u2019s why.<\/p>\n
With FHA, they not only allow seller assists, as do most mortgages, but you can purchase with as little as a 3 percent down payment. You are also able to count up to 90 percent of the current rents (as opposed to 75 percent with conventional mortgages), provided that they have a one-year lease agreement signed, and they\u2019ll count this towards the buyer\u2019s monthly income. This can dramatically increase one\u2019s buying power, especially since you can purchase up to a four-unit dwelling with FHA financing. Keep in mind, you can normally only have one FHA mortgage at any given time.<\/p>\n
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Related:<\/strong> The Achievable 5-Step Process For Getting That First Property Under Your Belt<\/a><\/em><\/p>\n So, instead of my guy buying, say, a $100,000 single-family rental property FHA, he could possibly buy a $200,000 quadraplex, live in one unit, and count 90 percent of the $750\/month per unit rent of the other three units toward his monthly income, enabling him to live in this building almost completely free.<\/p>\n This will enable him to buy the next property in a year or two much more easily, since he\u2019ll be able to save up more money that would have been spent on higher housing expenses.<\/p>\n Just think, he\u2019ll have almost double the write-offs because you can\u2019t depreciate your primary residence nor write off any repairs or maintenance.<\/p>\n When it comes to buying the second property, if he rents out his apartment (the fourth unit of the quadraplex) that would help him pay the second property\u2019s mortgage, thus enabling him to save even more money for the third property, which he could purchase owner-occupied a year or two later. The best thing you can do here is to buy conventional, owner-occupied with 5 percent down payment and utilize another seller assist.<\/p>\n The trick here is to only buy a house where the mortgage payment is less than rent. By purchasing these first several properties owner-occupied, he\u2019ll get much more favorable interest rates and terms, such as lower down payment requirements.<\/p>\n Also, if he keeps all of the properties he\u2019s ever lived in without selling any of them, he would not be wasting the past settlement costs he\u2019s already spent. (See \u201cPlan to Sell Your Primary Residence? STOP\u2026And Consider This First.<\/a>\u201d)<\/p>\n A big error in judgment when young and starting out in real estate is buying as much house as possible in the best area possible (usually to impress family and friends), with the highest payment possible (usually one that\u2019s much higher than rent).<\/p>\n By doing this, it\u2019s much harder to save for the next property. Often, the investor then has to sell this owner-occupied property prior to buying the next one since it doesn\u2019t make sense as a rental.<\/p>\n Even if the person is doing well later in life and their accountant is telling them they should buy an investment property for the write-offs, now it\u2019s going to cost them big time\u00a0because\u00a0they already could have had an investment property if they had used the right buying strategy when starting out to really accelerate their real estate investing portfolio.<\/p>\n Let\u2019s say you bought a $100,000 property owner-occupied, with a 5 percent down payment on a 30-year mortgage of $95,000 (4.5 percent interest, with approximately $3,000\/year in taxes and $700\/year in homeowner\u2019s insurance). With a monthly payment of around $789.68 or so toward the mortgage, it rents for $1,000\/month and you live there for five years before renting it out. With this strategy, you acquired the property owner-occupied with a great rate and little down, and you\u2019re five years into your 30-year loan before making it a rental property.<\/p>\n If you waited until later in life to get a property (not owner-occupied), now you\u2019ll need a 25 to 30 percent down payment, you\u2019ll pay a higher investor interest rate, and you\u2019ll have around 8 percent in closing costs. In this scenario, you would need a whopping $38,000 to purchase an average $100,000 SFR ($663.011 monthly PITI), as opposed to approximately $13,000 on a conventional, owner-occupied deal.<\/p>\n Now you might say, “Yeah, I\u2019ll have more cash flow since I put more money down.” But the truth is, your yield went down.<\/p>\n Let\u2019s look at the numbers\u2026<\/p>\n FHA owner occupied 5% down payment:<\/strong><\/em><\/p>\n $210.32\/mo. cash flow x 12 mos. = $2,524\/yr. \u00f7 $13,000 total invested = 19% return before expenses (i.e., management, maintenance, and vacancies, etc.)<\/p>\n Conventional mortgage non-owner occupied 30% down payment:<\/strong><\/em><\/p>\n $336.99\/mo. cash flow x 12 mos. = $4,044\/yr. \u00f7 $38,000 total invested = 10.6% return before expenses<\/p><\/blockquote>\n As long as you\u2019re cash flowing, the less money that you put down, the higher your yield.<\/p>\nBuying the Second Property<\/h2>\n
Errors in Judgment<\/h2>\n
Let Me Illustrate<\/h2>\n
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