Real Estate Investor · Medford, OR · Member since 2016 · 13 posts · 91 votes
For anyone looking to buy their first piece of real estate, STOP (unless it is a four-plex with an FHA loan). I did this 2 years ago and it was the best financial move I have ever made. If you start buying other properties you can say goodbye to this opportunity. Use the FHA loan and buy a four-plex with only 3.5% down. It is so much better than putting 25% down (typical for multi-unit buildings). It is the boost that every first time home buyer should take advantage of while starting their real estate portfolio. I purchased mine in 2014 and just helped my girlfriend purchase one this year (2016). If you have questions or input regarding FHA loans for multi-unit buildings for first time buyers post them here.
I always highly recommend all my clients start with a four unit from a financial point of view however some people value lifestyle over their financial freedom so I find that often times families will pick SFR's or duplexes still over 3-4 units.
Additionally, 3-4 units have more stipulations now than they did when @Ryan Hurd bought his fourplex. Currently, FHA requires a self sufficiency rule that is much more conservative. Prior the SS rule requires that current rents on all units had to equal at a "min," be equal or greater than the total monthly PITIA (prin/interest/tax/insurance/assessments - includes monthly MI too). Today the rule requires that 75% of this gross monthly income must be equal or greater than to your entire monthly PITIA which makes this fourplex dream much more difficult especially in higher priced areas where the rent to price ratio (gross rents monthly of all units divided by sales price) is higher than .90%.
Some will ask, can I increase rents so that I have a better chance going into a FHA fourplex? The answer is yes but these rental increases are a double edged sword because if the seller realizes that rents could be this much higher there may be a chance he/she may want more money or may not want to sell any more so working with the seller to get the leases higher prior to entering into contract may be a bit difficult.
Ryan bought for 260k at a time where 100% of gross rents had to be higher than his 1880 monthly PITIA which that was easy since all of his units were 625 X 4 = 2500 per month no big deal right? This was a good enough deal that even with today's guidelines of 75% X 2500 = 1875 may still have worked too (a smidge off).
So while the post is all rosey and rah rah there are somethings to consider in today's environment when utilizing FHA 3.5% down to purchase a 4 plex.
I also bought a triplex FHA 4.5 years ago. I am just about to do a refi to conventional, and pull out enough money to do it again. We are also about to do our refi on a BRRRR four plex. My wife and I are planning to get at least four cash flowing multifamily buildings before we hop into a single family. Right now between our fourplex and triplex we take in $1300/mo (plus free rent in a 3/2 unit) after expenses, before maintenance and repairs. I echo what others have said: this is an excellent path to financial freedom.
@Albert Bui I am aware of the self sufficiency rule but underwriters do not always apply it or they are not aware of it.
@Ryan Hurd very good post and thanks for clarifying that you can in fact have more than one FHA loan at a time. If you buy multifamily you can use the FHA loan on single Family a years after. I just closed a 4 unit for my client in West LA and with seller concessions and closing credit he paid about $40k total for down payment and closing to close a building with a $1,065,000 purchase price.
@Zachary M. Get approved and then find the property. Only use 203k fund to make properties finance-able that otherwise would not be. I advise not to use them for aesthetic repairs.
@Account Closed Definitely sacrifice for the year. FHA has a one year owner occupant requirement but if you look up the rule there a several grey areas that would allow you to vacate prior to the year. Also, if you don't default the chances of someone knocking on your door to do an occupancy check is slim.
A lot of times through careless or lack of knowledge of the guidelines from the underwriter a borrower can get by with a funding that they would not have otherwise been able to. Hey, I've witnessed many of these.
The loan may even be sold and the error may not be caught till down the line. This is not a fault of the borrower since the borrower just cares if their loan got approved and the loan was funded.
Whether its ethical or not to mention that is up to the reader of the article. I just hope some newer investor on this thread does not think that they can just find an "ignorant underwriter," who will bypass some of the rules to fund their loan. My concern is that a newer investor may risk their earnest money or may be on the hook on a deal (liquidiated damages up to 3% max on CAR RPA's) because they passed their contingencies or other while being lead to believe they could have qualified.
Its like banking on a hail mary...
As for FHA second use, the above sounds all woo woo and easy but I just did one of these recently and the underwriter wanted 25% equity on the vacating property (first FHA property) in order to qualify at "all," using one of the four exceptions for a 2nd FHA loan ( 1) larger family, 2)separation/divorce, 3) cosignor, 4) relocation because of employment). This value was to be documented by a second appraisal paid by the borrower. So if you have the equity on your vacating primary property and you meet one of the exceptions above, great, but if not then maybe plan for plan B.
So its not as easy to get two FHA loans as it may seem, but is it possible? sure it is just beware of what you might have to go through so you don't waste any time or money.
What do you mean by only using 203k to make a property "finance-able"?
He means that some properties are not in financeable shape like there is no stove, the kitchens are ripped out, health & safety issues, mold, the bathroom is not operable, etc etc.
203k is a rehab loan program for FHA that combines the rehab money and the 30 year fixed FHA loan component into one product.
What do you mean by only using 203k to make a property "finance-able"?
Some repairs are asthetic, while others are required to update the property condition so banks will give you a loan on it. FHA will not lend on a full POS property so you would use the FHA loan with repair funds.
@Albert Bui good point re the underwriter guidelines and the possibility of risking the buyers deposit. I never released the loan contingency for the 4 unit I just sold for that reason. I always try to keep a parachute.
Also a good point re the FHA second use but what is the plan B you referenced?
@Albert Bui good point re the underwriter guidelines and the possibility of risking the buyers deposit. I never released the loan contingency for the 4 unit I just sold for that reason. I always try to keep a parachute.
Also a good point re the FHA second use but what is the plan B you referenced?
You can:
- pay down your loan on your first FHA property to 75% LTV
- shift equity from another property and to bring down the 1st FHA loan down to 75% LTV based on market value
- (more complex/better option) refinance out the FHA loan into conventional 75% LTV and get a line of credit up to 90-95% on the 1st FHA property (penfed.org will go to 90%, BECU.org will go to 95%). You'll be able to do this because currently this property is assumed to be your primary residence right now.
Now that the FHA capability is freed up you can then use the FHA loan again on the new fourplex acquisition. The second FHA use for a fourplex may be a bit more difficult as you'll probably have to prove this property is superior or more suitable as a primary residence then the one you're leaving to convince the underwriter that it will be in fact be a primary residence.
This way you still have access to the equity from the first fourplex via the line of credit and still achieve your acquisition of the new fourplex with FHA. This strategy obviously requires the first property to have 25% equity or the borrower would have the funds to pay the 1st FHA property to 75% and refinance out of FHA. Sometimes you dont have the cash you can reposition equity from another property to accomplish this similar to option 2 above, 401k loan up to 50k, cash value life insurance, savings/cash, sell stocks, use OPM/private money/bridge money,etc or other to accomplish this as well.
The only caveat to the above is that you'll have to wait a min 6-7 months after the first primary refinance is done (what underwriters like to see) on the first property to avoid running two primary residence refinances/purchases within such a short period of time.
I had a borrower who didnt listen to me and went out and applied at another bank for a second primary residence after 2 months from funding the first one (unbeknownst to me) and short to say he got a call by fannie mae fraud department....
@Ryan Hurd we just did this, but couldn't use the fha loan because of the new self sufficiency requirement. We sold our house for the down payment. Definitely the way to go, especially in an expensive market where it's hard to break in. Even if you can't go fha you have the advantage of an owner occupied loan.
@Ryan Hurd we just did this, but couldn't use the fha loan because of the new self sufficiency requirement. We sold our house for the down payment. Definitely the way to go, especially in an expensive market where it's hard to break in. Even if you can't go fha you have the advantage of an owner occupied loan.
HI Sarah,
Good to hear you were still able to make the situation work out well even despite dealing with the pesky FHA Self Sufficiency rule.
Thanks everyone, this is one of the best post that I have read here on BP. I learned a few things about FHA loans that I was not aware of. Unfortunately, I have already used FHA financing on my primary home and have about 6 months left in order to meet the owner occupancy requirement. My market is very expensive and the numbers don't make a lot of sense on the few fourplexes that I have seen listed on the MLS. I am considering investing in other areas where prices are a little more reasonable( San Antonio, El Paso) but instead of a fourplex looking at 5+ units and commercial real estate.
What about reserves? How much did you guys have to save up in order to show the lender you can afford the multi unit in case of an unfortunate circumstance.
Can FHA loan be used to build a fourplex? I'm having difficulty finding builders in the north Houston, TX area that will take on project. I do not own property there. So ideally, the builder will get property, build 4plex, then I buy package deal. Is this possible? Or am I living in a fantasy world??
@Ryan Hurd Congratulations on the four-plex! I am a first-time buyer looking to invest in a triplex or four-plex in Indiana in the next year. I intend to pursue the same route that you did: FHA loan and negotiate to have closing costs covered.
How did you approach the conversation about the closing costs? From what I've read, people have used large down payments as leverages to negotiate having the closing costs covered, but with an FHA loan, you're only providing 3.5% down. Was it difficult to negotiate? Any other advice would be helpful!
After many false starts and restarts with mobile home investing I am looking to get into multi unit. I will be spending the next year getting my credit rating out of the gutter and saving up for the down payment for real estate investing. My goal is to use a FHA lone on a 4plex in Florida in the next 3 years. I saw Turners book 7 years to 7 figures and I figure if it takes me 20 years it's still worth doing. Well done Ryan.
I'm curious why you went FHA compared to just throwing a similar down payment at it and paying PMI. From my experience, the PMI drops off at 20% LTV and can be written off if you make under a certain amount (I believe 100k). I know you can write off MIP as well, but it doesn't drop off until 70% or something around there. So essentially you're putting down less in both situations, but realistically paying more in the long run (if it's a buy and hold).
Not necessarily fha rates even with monthly MI factored in is often times still lower than putting a down payment of 25% (20% is for a single family not 3-4 unit).
The simple answer is that 3.5% down payment is a lot less than 25% down payment, about 7x less.
@Ryan Hurd Sometimes the most simple advise is the best. I didn't see anyone mention this yet but buying a 4 or 3 to start is very advantages if you are house hacking and want to house hack property #2 as well.
-For this main reason. Lenders are strict when buying a second multi family to owner occupy. You need to have good reasons to do this.
- It is much easier to go from 4 fam to 2 fam than it is the other way around for this reason.
Damn underwriters just give us our loans! Good luck everyone!!
Are there tax benefits for doing the 4plex? Are you able to do like kind exchanges on this in the future?
Does this require primary residence for two years?
I'm curious why you went FHA compared to just throwing a similar down payment at it and paying PMI. From my experience, the PMI drops off at 20% LTV and can be written off if you make under a certain amount (I believe 100k). I know you can write off MIP as well, but it doesn't drop off until 70% or something around there. So essentially you're putting down less in both situations, but realistically paying more in the long run (if it's a buy and hold).
My mortgage banker has told me he can't do a conventional loan on a fourplex with less than 25% down even if it's owner occupied. So it appears if someone wants to do a loan down payment option on a fourplex they have to do FHA, then refinance to conventional when it hits 25% to 30% equity.