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.
Albert will Benfed and BECU do $ standalone heloc for a duplex at a high LTV as you mentioned they would for single fam res?
As far as I know (from my own experience as a borrower) they will do them but they do have limits in loan amount depending on which LTV you're at. So as an example it may be max 400k loan amount on the line of credit up to 80-85% but at 90-95% LTV they may limit this to 100k or so, so that means you'll need a first loan to cash out first then add their HELOC for the remainder if you want to go all the way up to 90-95% depending on what value your property is at (primary residence).
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?
sure if you're both on the loan personally on title and the note (mortgage), so basically no LLC.
Hey Albert Bui, do I have to keep the HML for a year to qualify for a FHA loan?
Thats a pretty broad question because, if you have a HML or hard money loan then that assumes this property is not probably not an owner occupied property since HML's dont typically lend to owner occupants, only investors.
So the assumption for the above is you bought it as an investment at first with a HML and now you want to take advantage of FHA financing so you move into one of the units to use FHA right? Im just going to create the narrative since none was provided. In this case you can start the refinance right away (day 1) given:
- you're doing a rate/term refinance (a refi where you do not net more than 2k cash back at close)
- this is a primary residence transaction and you will occupy and will be in one of the units when the appraiser comes to inspect the property during the FHA appraisal
- you qualify with regards to credit, income, assets (3 months reserves required for 4 unit properties) and other requirements like self sufficiency rule
The only circumstance where you'd need to wait 12 months is if you want to use market value and do a cash out refinance to 85% today's current market value (FHA's limit on owner occupied cash out refinances).
I probably won't get out of my FHA loan unless I someday do a cash out refinance to reinvest in another deal or unless interest rates go down quite a bit.
You might be waiting a very long time for interest rates to "go down quite a bit". Rates have been at historic lows for a long time and are only headed up.
Does it have to be a four-plex to get this type of loan, or will a duplex/triplex do?
David, just remember, in order to use FHA financing with 3.5% down, it has to be owner-occupied.
Owning rental property seems too risky. Read this article and tell me your thoughts....
Does anyone know of a website that has MLS listings where you can search for triplex or quadplex? I know some have a multi-family option, but most are 2 unit properties; just wondering if there's anything out there to search for 3 or 4 unit properties?
@Albert Bui, sorry I'm a nebbie! That's exactly what I meant. I wanted to buy the 4 plex and fix it up then in a sense buy it from myself with the FHA loan. I thought it would be a great way to get started?
Yeah that would be a sweet way to maximize your returns.
Buying at market, if you're in a market that can cash flow, is great but if you can buy below market, put in sweat equity yourself, and keep all that equity then its pretty sweet. Using HML takes a lot more risk but if you plan correctly with a lender who sets you up for success it can greatly reduce your risk of removing that HML to FHA (higher chance of success and realizing your cashflow and equity goals).
I just bought an fha home this year, but now I am thinking about selling it to get into a quad deal. What do I need to know about this strategy now that I already have a home I'm living in on an FHA (bought June 2016).
Owning rental property seems too risky. Read this article and tell me your thoughts....
That article is back from 2012.
I would say the current stock market is very "expensive" given the most recent highs that have been hit.
In the end stocks vs rental properties are apples vs oranges. Do you want to have an investment that you have no control over, has less of an upside, is less involved, and has minimal tax advantages? Pick stocks.
If you want an investment that is more involved, provides tax benefits, has multiple avenues for growth, and you have some control over? Pick rentals.
You could write a book on the differences in these two investment strategies. If you want less work...pick stocks and ride the stock market roller coaster.
@Ryan Hurd I hear you but here's my situation.
My plan is to purchase a multi-family with an FHA loan. Multi-families in my area are priced 400-600k. I was speaking with one of the listing agents and she said seller puts offers with FHA in fourth place after cash, conventional and 203k loans because its got a lot of compliance strings attached to it. So if I submit an offer with an FHA my chances are already lower than others. So what's the next best for me as the buyer? Do all conventional and 203k loans require 20% down payment? I can stretch out and put 15% down but 20% is out of my range. Any advice?
@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.
Clarence,
Today, I just missed out on a 2-unit incredible deal in San Diego less than 5 minutes from the beach. I am currently looking again and I am interested in finding a 4-unit property like your client in West LA. Was there any issue with that property and FHA's self-sufficiency requirement?
Thanks for any insight you are willing to provide.
@Bill E. I purchased my four plex for $260K and my payment is $1880 which includes taxes, property insurance, mortgage insurance, principle, and interest. I also pay HOA fee of $180/month which covers garbage, landscaping, outside lighting, and parking lot maintenance. My water bill/city street fees are around $140/month. So my total outgoing is $2200 per month not including maintenance. I purchased a decent property and I have remodeled two units. Current rents are $850, $850, $700, and the unit I live in is very nice and would rent for $950. Total income is $2400 plus I live for free or a total value of $3350. $3350 - $2200 = $1150. The $1150 per month profit does not account for repairs but so far nothing too bad that wasn't planned.
Side note: When I purchased the building the rent was $625 for each unit. Which only cleared $300 per month.
Hate to rain on your parade, but with those numbers your profit is skewed considering you don't calculate maintenance and probably not capex or vacancy. Also, who pays all the water and electricity for the other units? Surely it's not $140 a month for all four units....This is one of the cases where your emotions and your bias make you rationalize your decision and numbers. No doubt those numbers don't factor in capex and vacancy. "I make 1K a month (not including all utilities and expenses)" is more like "I think I'm doing really well but I leave out all kinds of expenses so that it seems like a genius deal". In reality when you add all the actual expenses it's probably more like $200 a month profit...Hardly anything to write home about for all the time and headaches involved managing 3 units, at least if you are a high income earner making 100+K a year...Plus the median house in my area is over 500K. MF is far more expensive and doesn't cash flow at all. That's why people are selling them left and right with cap rates of 2%, lol. Please, don't tout something you don't understand as the be all end all on questionable math...
Jack B. I pay $140 total for city street fees/water for the building (four units). I don't pay for electricity for any units other than the one that I live in ($35-$65 per month) but that is something that I would pay anywhere I lived so it shouldn't be counted against the performance of the building. I didn't include vacancies because I haven't had any other than that tenants I evicted at the purchase of the building and remodeled the units. I have had 2 solid years of no empty units. The market in this area has 1% vacancy rate so renting a place out is never a problem. If you would like to subtract an unrealistic maintenance of 10% of rental income then subtract $335 from my $1150 I clear and the property still performs well clearing $815 per month or $9,780 per year on my small investment (down payment and remodels total about $22,000). I would say that is a really good return on investment (45% annually). So I hate to rain on your parade but you don't know what you are talking about. This is a case of a person being smart with their money and not putting it into a 401K.
This is Sweet Ryan, Yeah in WA up here water/trash/sewer is very expensive it can range around 100-150 per SFR per month or more on 2-4 units I'm averaging 100-125 per door per month (tenants pay electricity and gas (if applicable) themselves. On 5+ units it goes down considerably per unit.
I charge a RUBS - ratio utility billing system of $65 for household of 2 and +10 for each additional household member when it comes to water/sewer/trash and this usually comes out to 60-80% of actual costs (some markets you can get 100% back, but its not legal to get more than 100%). In the seattle market it can be hard to sub charge back all of the utilites unless the rent is much lower than market and the RUBs charge is making up for the difference.
At the end of the day your lower utilities costs in Medford allows you to buy a deal at a higher % of ARV and still cashflow nicely.