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.
David Wayman it works for duplexes and triplexes too. I'm looking to do this as well next year when my wife and I move out of or current home to be able to start investing!
@Albert Bui Wow that new restriction is margin killer. Would you continue to recommend seeking this strategy especially with increasing interest rates ? I'm totally new to real estate and always thought of a FHA four plex as my entry to the game. Finding a good deal is the name of the game but obviously there is a cyclical component to the market with the tightening and loosening of regulations to consider. I ran these numbers above given the new SS rules, I wouldn't pursue this deal in this new environment. Thoughts?
@Albert Bui Wow that new restriction is margin killer. Would you continue to recommend seeking this strategy especially with increasing interest rates ? I'm totally new to real estate and always thought of a FHA four plex as my entry to the game. Finding a good deal is the name of the game but obviously there is a cyclical component to the market with the tightening and loosening of regulations to consider. I ran these numbers above given the new SS rules, I wouldn't pursue this deal in this new environment. Thoughts?
HI Pierre,
As long as you can obtain the necessary margin between rental income and your costs to achieve your desired return then it could make sense. Obviously, higher rates are going to make your monthly PITIA payment higher and if rental income doesnt increase in tandem it can definitely squeeze your margins.
At the end of the day you'll have to analyze to make sure if the return is high enough to pass your own sniff test.
I find a lot of people have different criteria whether its equity/value or cash flow, or a combination of both, or some other metric.
I'm loving all of this great information! Just a thought. Pretty sure for those who are eligible you can do this with a VA loan as well with 100% financing. Check with your lender for specific rules.
Just picked up my first property last week! 4 unit using FHA and had all of the closing costs covered in seller assist! Little money down (relatively... still a ton of money to me lol), and I was able to keep money in my pocket for reserves. So far i'm loving this strategy!
That's what I did 3 months ago and I'm enjoying every second of it. I increased the rents and everything is working out real nicely. I bought myself a truck because I needed to fix some stuff and I'm now thinking of getting some investors to take advantage of my local phoenix real estate market. I want to create an LLC so investors lend me money to acquire more multifamily but I need a partner so we can do the due diligence and work better and more efficiently. If you live in the phoenix market and is interested in becoming my partner why don't you send me a note.
The issue I come across a lot of the quads in my area is that they aren't listed on the MLS, and therefore usually sold by wholesalers which require cash. I could seek out a Hard Money Lender but then I won't be able to take advantage of the FHA at that point.
I don't think someone can refinance into an FHA can they?
@Edward Pulido I am no expert here but don't see a reason why you would not be able to refinance into FHA after using HM to purchase the quad initially. I think some lenders require a seasoning period before you can refinance and obviously you will still need to qualify for the FHA loan (12 month owner occupancy, DTI, cash reserves etc). The property will also have to be in livable condition before you refinance.
@Ryan Hurd - I just completed going through the NACA process to buy a 4-unit. No downpayment, bank paid closing costs and even seller's title/survey costs, and I closed at 3% interest. The program also doesn't require PMI, which further reduces my borrowing costs. The NACA program also doesn't have income or credit limits. That said, the actual process of going through the program was time consuming and frustrating at times (poor staff management), but my closing costs were over $30k and my down payment would have been almost $8k. For that kind of money, it was worth the extra time (3 additional months due to also getting the rehab costs included in the financing) and worth the occasional frustration which I minimized by personally staying on top of my file. The loan does stipulate that it has to remain owner occupied or be refinanced.
For me, this was the best financial decision. I have 4 units that rent for $700 each, I occupy one of them, and my PITI payment is $1289. The surplus goes to a repair escrow for now (eventual replumb/rewire) but I'm hoping to go solar within the next 5 years and increase the rents to include solar electric.
Hi @Carley M. - I've read a lot about NACA requirements of attending classes, volunteering for their cause, etc. Did you have to complete any of these requirements? What did they consist of and how long is the commitment? Thanks so much!
Hi @Carley M. - I've read a lot about NACA requirements of attending classes, volunteering for their cause, etc. Did you have to complete any of these requirements? What did they consist of and how long is the commitment? Thanks so much!
You have to attend a class to learn about the program and you have to attend a class to learn about the buying process/working with realtors, etc. You're required to do 6 acts of volunteering during the year for the life of your loan, but acts of volunteering includes telling other people about the program, not just going to activist events or volunteering in the administrative offices. There's absolutely no way for them to track it.
NACA is not-for-profit and the funding is all provided by banks (Citibank and Bank of America right now) as part of their required participation in the Community Reinvestment Act.
@Brandon Reed It's a national program and the only requirement is that you can't own more than one property, it has to be your principal residence, and you can't have delinquent payments on your credit report for a year before you can buy. They base the amount of loan that you qualify for on how much you pay or can afford to pay for rent/housing. In my case, I was renting below what I could afford, so I had to demonstrate that I could save an additional $1,000 a month to qualify for the property value I wanted to buy. It didn't matter anyway since the 4-unit pays for itself and my required owner contribution is negative.
The NACA office here was not used to doing 4-units and I had to learn some of the financing nuances on my own. For example, no one brought up the fact that I would need a Certificate of Occupancy or were concerned that the current owners didn't have one. I pushed the sellers to contact the City to square up and wound up having to negotiate directly with the City on what repairs would be required for them to issue me a COO after the sale. The City inspector really looked out for me and proactively requested a Conditional COO be issued so that I could close. I found out just before closing that I wouldn't have been able to close without the Conditional COO. No one at NACA knew to tell me about the requirement because it's a City ordinance. The real estate attorney for the bank didn't even know because she lives somewhere else in New York and isn't from Buffalo. If I had gone with a traditional or local lender, I may have gotten more of a heads up instead of the mad scramble. I just keep reminding myself of how much money the NACA program saved me and how much I love my new money maker. :-)
I'm loving all of this great information! Just a thought. Pretty sure for those who are eligible you can do this with a VA loan as well with 100% financing. Check with your lender for specific rules.
It in fact works better with a VA Loan since there is no monthly MI so your cash flow is much higher along with the fact that VA does not have restrictive features like the self sufficiency rule like FHA does. This is also a pro and a con because the self sufficiency rule while it sounds like its restrictive actually is pretty good in a way too since its a protection against buying a bad deal. FHA basically said hey if you guys can figure out a good deal on your own we'll mandate rules that will protect us and ensure you're buying a deal that can pay for it self monthly in the event we (HUD/FHA) need to take back this property as a REO - bank owned.
@Edward Pulido I am no expert here but don't see a reason why you would not be able to refinance into FHA after using HM to purchase the quad initially. I think some lenders require a seasoning period before you can refinance and obviously you will still need to qualify for the FHA loan (12 month owner occupancy, DTI, cash reserves etc). The property will also have to be in livable condition before you refinance.
HI Ramon,
FHA requires 12 months to use market value in a refinance if you're looking at a cash out refinance but on a regular rate/term refinance you could refinance out from HML into FHA no prob as long as you owner occupy and given you qualify of course (credit/income/assets/etc).
That's what I did 3 months ago and I'm enjoying every second of it. I increased the rents and everything is working out real nicely. I bought myself a truck because I needed to fix some stuff and I'm now thinking of getting some investors to take advantage of my local phoenix real estate market. I want to create an LLC so investors lend me money to acquire more multifamily but I need a partner so we can do the due diligence and work better and more efficiently. If you live in the phoenix market and is interested in becoming my partner why don't you send me a note.
Just make sure you dont get tagged for creating securities then you might have to talk to a SEC attorney about certain filings =D. Other then that yeah Maricopa county has a lot of opportunity Chandler has definitely been growing pretty decently.
Question - I have an LLC with a partner (my son). Can we purchase an FHA 4 plex and "he" be the one to move in? Are there stipulations on who and how these properties are purchased?
Isn't it a FHA requirement to live in one of the properties? If you already have a primary residence FHA financing would be a problem unless you were willing to move.
@Carley M. Congrats on successfully utilizing NACA! I know a bunch of people who have gone through the classes but nobody has closed on a property yet. Sounds like you hit it out of the park with your purchase!