Best way to finance your first investment property

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Best way to finance your first investment property

Account Closed
Brunswick, MD · Member since 2014 · 36 posts · 13 votes

Much of the advice I read says the best way to start investing is to live in your first home so that you can go FHA, making it a little easier to get started (lower down payment).

My situation is unique in that my boyfriend just bought a house and I am living there with him, so purchasing and living in my own investment property full-time is not an option. As far as I can tell I have just a few options:

1. Go FHA and use that home as my current address, while essentially going back and forth between the two homes (risky, but I do work form home so this is doable). If I understand correctly, this will only be an option until we are married, since as a married couple we couldn't purchase a second home FHA due to the owner occupant rule. If we were married and I wanted to purchase a home myself with an FHA loan, would that be possible? Under the FHA guidelines, could I use a different address than my spouse's?

2. Wait and save for a conventional loan, but for me saving a 20% down payment on homes in my area will take possibly several years.

3. Save and get a conventional loan and purchase a property in an area where prices are much cheaper. The problem here is I will need to use a property manager, thus reducing my monthly profit.

I'm interested in the FHA route, but it seems tricky since I'm unmarried but not planning to live separate from my boyfriend full-time. Any thoughts or tips for how to pursue an initial investment property in this scenario?

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Will BarnardPro Member
Moderator
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
12y

This is a fantastic example of why BP members should be careful when taking advice from other BP members. Particularly when legal or accounting issues are involved, some members seem to spit out answers that are completely wrong and in some cases, are reiterating bad info they received from someone else who is NOT in the know.

As far as your questions, the majority consensus here at BP Nation has spoken (one of the greatest assets to any BP member for sure!), if you get an FHA loan, abide by your contractual obligations.

Now, for what to do as an investor: I disagree (respectfully) that buying your first investment via FHA is the "best way to start". In my opinion, as an investor, use your mind and skills and get creative. You have more than just one or two options. You can direct market for a great deal, contract with a motivated seller and have them carry back owner financing, you can buy subject to the existing mortgage (sub2), you can bring in a partner with money and JV, you can build private money lenders to fund your deal, and the list goes on. You can find a good flip deal and use the profits from that to fund a conventional mortgage for a buy and hold. You can buy a multifamily building with a partner which will likely have better cash flow, you can get involved in a syndication and learn, you can find a good deal, wholesale it and use profits from that for a down on another.

Get the drift? Get out of the tunnel and into the light . . . . you will see much more clearly. I'm guessing this info is worth a few hundred dollars - or at least a few hundred votes :)

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  • Andres Rossini
    Investor · Phoenix, AZ · Member since 2014 · 51 posts · 14 votes
    12y

    @Account Closed 

    I am in the same boat, trying to buy the first. I believe the majority of the properties for sale on HomePath.com are a 5% down system. Then at Auction the down payment goes up to 10%.

    But if you are tight with a down payment make sure to have some other money for any repairs needed or emergencies.

    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    12y

    This is a fantastic example of why BP members should be careful when taking advice from other BP members. Particularly when legal or accounting issues are involved, some members seem to spit out answers that are completely wrong and in some cases, are reiterating bad info they received from someone else who is NOT in the know.

    As far as your questions, the majority consensus here at BP Nation has spoken (one of the greatest assets to any BP member for sure!), if you get an FHA loan, abide by your contractual obligations.

    Now, for what to do as an investor: I disagree (respectfully) that buying your first investment via FHA is the "best way to start". In my opinion, as an investor, use your mind and skills and get creative. You have more than just one or two options. You can direct market for a great deal, contract with a motivated seller and have them carry back owner financing, you can buy subject to the existing mortgage (sub2), you can bring in a partner with money and JV, you can build private money lenders to fund your deal, and the list goes on. You can find a good flip deal and use the profits from that to fund a conventional mortgage for a buy and hold. You can buy a multifamily building with a partner which will likely have better cash flow, you can get involved in a syndication and learn, you can find a good deal, wholesale it and use profits from that for a down on another.

    Get the drift? Get out of the tunnel and into the light . . . . you will see much more clearly. I'm guessing this info is worth a few hundred dollars - or at least a few hundred votes :)

    Podcast Guest on Show #130
    8Reply
  • Jerry W.Pro Member
    Moderator
    Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
    12y

    @Account Closed it appears you have decided to abide by your contract if you go with a FHA loan. Just to emphasize the point however signing the affidavit saying you will live in it when in fact you plan to live elsewhere is a felony. Thinking that no one will notice or no one will care has put many, many folks in prison. I have seen it happen many times. There are too many correct ways to do a deal without needing to stoop to that kind of tactic anyway. Good luck in your investing.

    0Reply
  • Frankie Woods
    Investor · Arlington, VA · Member since 2012 · 1k+ posts · 491 votes
    12y

    Excellent advise as always @Will Barnard !

    1Reply
  • Paul HoeppnerPro Member
    Investor · Las Vegas, NV · Member since 2014 · 39 posts · 17 votes
    12y

    @Andres Rossini The best way to find out if a Homepath home is eligible for a 5% down payment is if the home is eligible for Homepath financing.  You can just go to the homeopath website, and there will be a note on the house that says whether or not that property is eligible for Homepath financing.  Depending on the market, there are less and less homepath homes that are eligible for homepath financing and a %5 down payment.  However, the website also tells you which banks offer homepath financing.

    One local bank I spoke with in an area I just started investing in has started doing a loan type similar to a homepath loan with less money down, but you eat the costs in the other areas.

    @Account Closed I think it's better to avoid an FHA loan at first, because you should try to avoid PMI as an additional expense. It's just going to make your 1st investment property that much harder to cash flow. I ran into this same scenario and it was rather discouraging.

    1Reply
  • Bill S.Pro Member
    Moderator
    Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
    12y

    Listen to @Will Barnard . It would make terrible financial sense to buy a house and let it sit, not making income for first year. Getting creative and securing money from other sources is a much better financial approach than the conventional FHA. It takes more work to find the deal and the deal won't be on the MLS where an agent can hold your hand through it but with some reading and learning you can get a good start then if need be pay someone local to come along side and help you along.

    1Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y
    Originally posted by @Account Closed:

    Much of the advice I read says the best way to start investing is to live in your first home so that you can go FHA, making it a little easier to get started (lower down payment).

    My situation is unique in that my boyfriend just bought a house and I am living there with him, so purchasing and living in my own investment property full-time is not an option. As far as I can tell I have just a few options:

    1. Go FHA and use that home as my current address, while essentially going back and forth between the two homes (risky, but I do work form home so this is doable). If I understand correctly, this will only be an option until we are married, since as a married couple we couldn't purchase a second home FHA due to the owner occupant rule. If we were married and I wanted to purchase a home myself with an FHA loan, would that be possible? Under the FHA guidelines, could I use a different address than my spouse's?

    2. Wait and save for a conventional loan, but for me saving a 20% down payment on homes in my area will take possibly several years.

    3. Save and get a conventional loan and purchase a property in an area where prices are much cheaper. The problem here is I will need to use a property manager, thus reducing my monthly profit.

    I'm interested in the FHA route, but it seems tricky since I'm unmarried but not planning to live separate from my boyfriend full-time. Any thoughts or tips for how to pursue an initial investment property in this scenario?

    1. Lying or misleading a lender as to occupancy is mortgage fraud!

     2. Save your money, look to some seller financing as a 10% second or just a seller financed deal, look to the Dodd-Frank concerns. I don't like partnering, but that's an option getting into a better property.

    3. I suggest you begin by sticking to an area you know and that you can check on yourself. Be very careful in any "turnkey project" and buying low valued homes as financing can be impossible on the secondary and with conventional or bank loans.

    You buy a property with FHA and move in, stay over a year, then rent it! Anything else will be tricky and don't think they can't catch you, especially in the first year as loans are audited. :)

    0Reply
  • William Hochstedler
    Broker · Logan, UT · Member since 2013 · 1k+ posts · 1k+ votes
    12y

    I just recently ran some cash-flow scenarios on 4-plexes for a client.

    I was surprised that the cash-on-cash return with 3.5% down was lower than the COC for a conventional loan with 30% down. The PMI on FHA loans kills cash flow (particularly for multis). Because of this, FHA loans only make sense if you are using it for your primary residence and aren't paying rent or a mortgage somewhere else and assume this premium as a personal cost of living expense. The PMI is very hard to get out of any time soon without a refi based on equity or additional cash.

    In other words, FHA loans are among the worst for non-owner occupants from a financial perspective. Then there's the fraud problem...

    Wm

    0Reply
  • Account Closed
    OP
    Brunswick, MD · Member since 2014 · 36 posts · 13 votes
    12y

    All great advice everyone, thank you.

    I think I was misinterpreted (and I do understand how that could happen) as saying that I wanted to intentionally skirt the FHA owner occupancy law. I am not married and could certainly purchase and live in my own home, using it as my primary residence, and that's what I would do. I am not and will not be paying on the mortgage on my boyfriend's home, so it would be feasible. That being said, it would be an awkward first year traveling back and forth to spend time with him in the home he purchased with us both in mind.

    A few people made great points about an FHA loan not being financially smart as a first investment. I think I will take the excellent advice of @Will Barnard and start getting creative :)

    2Reply
  • Kevin Klein
    Chicago, IL · Member since 2014 · 7 posts · 2 votes
    12y

    @Account Closed I've been looking into this as well. I'm in a similar situation to you in that I have a so who I will likely be moving in with in a year or so. My understanding is that you need to say you intend to live there for a year, but a change in your life circumstances (marriage, unemployment, etc) would make it okay for you to move out. 

    From the site linked to below: Applicants must submit written requests for such leniency, explaining circumstances which might prevent the buyer from taking immediate ownership of the property or having a break in the occupancy of the home.

    http://www.fhanewsblog.com/2011/07/fha-loan-reside...

    So I would think that marriage qualifies if you say that the place is suitable or big enough for your family.   In my case I was going to go the route of "living" there and not actually being there, just leaving my unit sit empty. 

    1Reply
  • Andres Rossini
    Investor · Phoenix, AZ · Member since 2014 · 51 posts · 14 votes
    12y

    Thanks @Account Closed  for the great tip. I would of never thought of that.

    0Reply
  • Kobus De Villiers
    Real Estate Investor · Chicago, IL · Member since 2011 · 44 posts · 12 votes
    12y

    FHA is not a bad way to go but I'm almost convinced that having the 20 to 30% cash for downpayment is worth the wait before jumping into your first deal. Even if it comes down to a FHA loan then at least you have cash in hand for some of the unforeseen expenses.

    One of the biggest mistakes I've seen is from investors that can't respond to the initial costs because of the lack in liquid funds. Set yourself up so that cash isn't the driving factor and then more options will be available that could turn an okay deal into a great deal.

    0Reply
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