Don't buy a house, just buy a four-plex

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.

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Albert Bui

Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes

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.

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Ben Dao
Rental Property Investor · Saint Louis, MO · Member since 2016 · 123 posts · 84 votes
9y
I agree to start with a 4-plex.
0 Reply
Bruce L.
Kings Park, NY · Member since 2016 · 19 posts · 3 votes
9y
Paul Cleveland do you have links to this information? I was unable to find any official documents. Thanks.
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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
9y
I would love to go this route and I'm trying to with owner financing.
Unfortunately there's no 3/4 plexes for sale within 2 hours of me.
And when they do come on market they're over $500k. Even that 3.5% down becomes a fair chunk of monies.
Stupid Seattle.
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Bruce L.
Kings Park, NY · Member since 2016 · 19 posts · 3 votes
9y
Can anyone recommend an FHA approved lender in Long Island, NY that is knowledgeable?
0 Reply
Ju Padilla
Schererville, IN · Member since 2016 · 4 posts · 1 vote
9y
Who's your lender?
0 Reply
Rami Shahmram
Fort Lauderdale , FL · Member since 2016 · 21 posts · 11 votes
9y
Thank you great tip!
0 Reply
Ciro Affronti
Investor · Scottsdale, AZ · Member since 2014 · 52 posts · 23 votes
9y
@Ryan Hurd
Great post! I did something similar but used my FHA loan for a duplex. Still though I'm able to live in the property and have a roommate pay me rent as well as the other unit, resulting in me living for free and making a profit every month! Great way to start as an investor and It worked out for me.
2 Reply
Mack Perez
Realtor · Boston, MA · Member since 2016 · 19 posts · 10 votes
9y
Ryan Hurd hey quick question, if I were interested in getting an FHA loan for a quad plex, would I have to find the deal first and bring it to them ? Or apply and see if I get approved first and for how much I get approved for, also do you recommend going to a big name bank or small local one ? Thanks in advance
1 Reply
Nick Ferguson
Investor · Parma, OH · Member since 2016 · 101 posts · 46 votes
9y
@Mack Perez I'm no expert on FHA but did buy my first property (not a quad) through FHA and it was really pretty much the same as a traditional loan. Go to a bank and get pre-approved. Go find your house. Come back and apply for the loan, etc. Because FHA is for owner-occupants, they don't care about the deal (obviously, the house must appraise and pass inspections like with any loan) as long as you can qualify for the loan based on your income and credit report.
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Jonathan Johnson
Rental Property Investor · Charleston, WV · Member since 2013 · 262 posts · 109 votes
9y
What if I'm not a first time homebuyer?
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Ryan Hurd
OP
Real Estate Investor · Medford, OR · Member since 2016 · 13 posts · 91 votes
9y
Gabrielle Maestas I just asked the seller to pay the closing costs. I actually told them it was the only way I could make the deal happen. I explained that I only had so much cash available and that if I had to pay closing costs I wouldn't qualify. Side note: I lived in Evansville, IN for about 6 months back in 2013 and other than the freezing rain I experienced it was okay. Market there is probably pretty good since Toyota and other manufacturing companies have a large presence.
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Gabrielle Maestas
Fort Wayne, IN · Member since 2016 · 2 posts · 1 vote
9y
@Ryan Hurd Thanks for the advice! I will try to use that on my deal, as well.
It's nice to see another Hoosier. My bf and I just moved to Fort Wayne for a job in the orthopedic industry. Between Toyota and the medical device companies, Indiana's market is definitely growing. If you're ever back in the area, please let me know. I would love to meet up and learn some more about your experience in multi-family property investing.
1 Reply
Tyron McDaniel
Flipper/Rehabber · Sugar Land, TX · Member since 2015 · 142 posts · 64 votes
9y
Originally posted by @Ryan Hurd:

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.
Way to go Ryan! I can't tell you HOW MANY new investors I recommend do that especially those who don't own a home currently!
0 Reply
David Kang
Fullerton, CA · Member since 2016 · 7 posts · 0 votes
9y
Is it possible to have positive cashflow with a 3.5% downpayment? I'd imagine the debt service would result in negative cashflows, especially since you are also living in the unit. From my limited knowledge, I generally thought the benefits of FHA were from a lower interest rate and tax exemptions after selling.
I also wondered why some consider 4 plexes more appealing. Wouldn't a 5-8 unit be better because a vacancy wouldn't affect you as much? This is assuming both apartments generate equal cashflows and are equally priced. (I am leaning more toward purchasing a 4plex but this question has always came to mind)
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Paul Cleveland
Jeffersonville, IN · Member since 2016 · 8 posts · 15 votes
9y
@Bruce L. You can find information on all FHA programs via the FHA Resource Center:
https://portal.hud.gov/hudportal/HUD?src=/program_...
Follow the link above and you'll see links for the Single Family handbook. I think the reason that it's so difficult to find 'official' documentation about FHA programs is that it isn't in HTML format anywhere. It took me a while to recall that they like to bury all of their information in PDFs or web accessible software. Anyway, if you search the handbook for "construction to permanent" you'll find more than you really wanted to know.
1 Reply
Ash Patel
Full time investor · Cincinnati, OH · Member since 2013 · 405 posts · 312 votes
9y
Great advice! Hopefully you inspire a lot of younger people on this board to do the same! I will add, hold off on buying a new car until after you buy your quad. I've seen so many people pre-approved for homes then denied because they took a loan out for a new vehicle. In one case, a couple was pre-approved, they put money down with a builder and when it came time to close they were denied because of the new car purchase. But the new car but after you purchase the real estate! Good luck everyone!
1 Reply
Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
9y
@David Kang You need to spend like...5 minutes reading things on this forum buddy.
A. If it wouldn't cash flow @ 3.5% down..you wouldn't buy it.
B. I'd say one of the main reasons people go FHA Is the lower out of pocket up front. The name of investing is having cash to do it with, less cash tied up, more deals to do.
C. A 5-8 unit is a commercial loan. You need to come up with 25% down minimum and can't purchase it with FHA financing.
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David Kang
Fullerton, CA · Member since 2016 · 7 posts · 0 votes
9y
@Natalie Kolodij thanks for answering! Possibly it's because I live in LA, a 3.5% downpayment with positive cashflows sounds too good to be true, or Im just not looking in the right areas. I did know that 5+ units are considered commercial and don't qualify for FHA but I'll definitely read up on the forums more as you suggested. (certified RE newbie here)
If I may ask a follow up question, if you had two properties priced the same, with equal cashflow, etc, but one was a four-plex and the other was a 8 unit in which you had to put 25% down on both, would you choose the fourplex or the 8 unit. I know I'm making a lot of assumptions, but any info on the subject would help me out a lot.
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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
9y
@David Kang I'm in a really similar market- you've got to either FIND something that will cash flow or invest in another market. MLS multi family won't cut it.
If I could buy an 8 plex for the price of a 4 plex? This isn't a very likely scenario, at all.
You choose the 4 plex again, mostly people choose it because it keeps you out of commercial, insurance may be lower, maybe you can still self manage. More doors generally cash flows better but it takes a while for many people to be able to afford commercial MFH.
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David Kang
Fullerton, CA · Member since 2016 · 7 posts · 0 votes
9y
@Natalie Kolodij got it, thanks again for sharing!
0 Reply
Alvin Milton
Brooklyn, NY · Member since 2016 · 15 posts · 0 votes
9y
Came across a four family deal in NYC only to find out it is in contract.
I was so excited... at first.
http://www.corcoran.com/nyc/Listings/Display/37972...
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Shawn Crawley
Wholesaler · Roanoke, VA · Member since 2015 · 277 posts · 95 votes
9y
Can someone give a scenario where it would be ok not to buy at 70%?
0 Reply
Ken Powell
Lender · Lusby, MD · Member since 2014 · 60 posts · 38 votes
9y
I meet several investors who do not take the time to learn about the various type of loans that are available to help them buy small multi-family properties. There are lending sources other than private money and conventional lenders that can finance your deals. At $200k loan for a single family home is the same as a $200k loan for a 4-plex but a 4plex will provide much more cash flow.
1 Reply
Shawn Crawley
Wholesaler · Roanoke, VA · Member since 2015 · 277 posts · 95 votes
9y
Ken Powell What are these sources?
0 Reply
Daniel Rines
Westfield, MA · Member since 2016 · 16 posts · 0 votes
9y
Hey Ryan, I'm a first time home buyer and was thinking duplex for my first real estate investment but could you fill me in on some specifics of an FHA loan and the advantages of a fourex because getting that 20-25% down payment in savings has been rough! Thanks!
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