Analyzing a property using 2% 50% Rule using an FHA Loan

4 Replies

How do you analyze a rental property if you know you are going to use an FHA loan for your first deal, while using the 2% and 50% rule? I know how to do the rules but how do you incorporate the right numbers If you know you are going to use an FHA loan on your first deal.

Example: 123 Carter street is a triplex on Zillow.com. Property costs $100,000. All the rentals are $650 a month. Mortgage for a 20% down 30 year fixed loan is $325.

50% rule: $650*3=  $1950 Total Income

$1950* .5= $975

$975-325= $650 Cashflow

2% Rule: $650*3= $1950 Total Income

$1950/$100,000= .0195= 1.95%

Question: How do I use these rules if I know I will be using an FHA loan for my first deal? or How do I set up the numbers if I will be using an FHA loan for my first deal?

(I know these are just rules that should not play into the final factor on buying the property, I am just trying to get through the first part in analyzing a deal seeing if I should do more analyzing on it or not using these two rules.)

@Dev Why , you seem to have a good grasp of the "rules."  As you said, they are just for quick, at a glance decisions about whether something should be a good investment.  

Since your property basically meets the 2% rule, it should/could be a good investment based on that "rule."

The type of debt service comes into play with the 50% rule when you estimate what cashflow could/should be, again according to that "rule."  You just have to ask yourself, "is the potential cashflow estimated by the 50% rule sufficient for me to investigate this property further?"  If so, get more details, if not, move on.

A few issues I see: I'm not sure what interest rate you are using to calculate the mortgage payment, but it looks like the monthly payment will be higher than you state in your post. More importantly, since you are talking of doing FHA many people end up putting less than 20% down which will increase the payment and you also have to account for mortgage insurance. Even more importantly, your income won't be $1950, it will only be $13000 since you'll be occupying a unit. So, there probably won't be cashflow (until the future when you might move out and fill that unit), but it could provide a great "house hacking" setup where your housing costs will be very low allowing you to put money into the next investment.

Good luck.

Originally posted by @Dev Why :

Question: How do I use these rules if I know I will be using an FHA loan for my first deal? or How do I set up the numbers if I will be using an FHA loan for my first deal?

Using "50%" and "2%" rules doesn't have anything to do with the way how you are going to finance your deal. Financing your deal is only important to predict Cash flow and overall Rate of return on investment. Calculate how much is your Debt service payment and subtract it from NOI (50% rule) and you will get your Cash flow.

Thank you for the information. Both of you have answered my questions.

What about property taxes ? Are they on the 50% side or will they further reduce cashflow.

$975 - (325 + 150 taxes)

Updated over 2 years ago

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