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.
Brett Sorenson
Is there a reason you didn't buy during college? I'm currently taking a gap year between high school and college and I have become very interested in real estate. Would you recommend buying duplex or quad plex during college or waiting until after?
It really depends on the financing. I played college basketball and did not have enough income to support such a purchase. Buying in college would work assuming you have financial backing in case something happened and dollars were needed. I also had friends living with me in my duplex and I wouldn't recommend doing that while in college. Friends and business don't always go hand in hand. Rates are going up so sooner the better most likely.
@Denny Robert
Sorry for the delay computer gave out on me and I'm not the biggest fan of the BP app.
The only downside is the fact that MIP disappears after a higher LTV ratio and has different tax implications right?
Not sure on MIP tax implications. Best to ask an accountant. MIP does not go away on FHA after getting to 20% equity. You have to refinance to conventional.
Still, for someone starting out you can't beat 3.5% down on 4 units, with 2 or 3 of them paying the mortgage.
@Denny Robert
I definitely will. That makes sense completely.
I was under the assumption MIP did go away like PMI, but I must have misunderstood the conversation.
Learn what a definition of a security is and when you're creating one and stay clear of it if you dont want to venture in that direction. Its neither good nor bad depending on what you're doing.
@Denny Robert
I definitely will. That makes sense completely.
I was under the assumption MIP did go away like PMI, but I must have misunderstood the conversation.
Currently, fha monthly mortgage insurance or MMI does not go away till a min of it being paid for 11 years or longer (if you put down 10% or more or have 10% of equity or more at the time of purchase or refinance since people can refi into fha as well as use fha to purchase.
Since only a tiny fraction of borrowers who use fha put down 10% or more their monthly MI will go on for the life of the loan or till they pay it off or refinance out of fha.
On conventional financing the monthly MI can also be automatically removed when you pay down the loan to 78% of your purchase price. If you want to remove it earlier with conventional financing Because you believe you have sufficient equity then you can order an appraisal to prove your equity or you can payoff or refinance out of MI.
Brett Sorenson
Is there a reason you didn't buy during college? I'm currently taking a gap year between high school and college and I have become very interested in real estate. Would you recommend buying duplex or quad plex during college or waiting until after?
There are dozens of reasons NOT to do such a purchase in college. Unless you are living in the area you grew up in and plan on being a commuter anyway and there are a few schools life is just not stable at 18-21 years old to make that decision. Unless RE is a career choice, there are dozens of other things you can do with your youth.
Join the Military, Peace Corps, Open a Business, take a semester abroad, take a risk on a job at a startup 800 Miles from home. All things you can do before you decide to become a property owner. Once you buy a property you are tied to that area and your money if tied up for 2-4 years.
People ask me how do I transition into do this so easily. Because of life experience. I spent lots of time in court(unfortunately) never for anything serious, but I know what type of documents to ask for when dealing with certain people. Someone says they work for the FEDS, State/Local but don't start work for 5 weeks but need Housing ask for an "Appointment Letter", Private Industry calls it an offer letter/sheet/package but Govts call it an Appointment. Thats a front-line screening question. I would not have known that if I hadn't did time in the Military(Also someone saying their Military better say they have an LES and BAH, if someone says I'm in the ARMY and I have pay stubs, immediate Red Flag).
Someone says they get child support, or they get alimony because they are recently divorced thats why they haven't worked in 8 years. Where is your Divorce Decree, all payments and settlements are spelled out in it.
A foreign student claims they are in country to take their MCATs(Medical School Entrance Exam), so they want a short-term rental paying cash. Where are you taking the exam? In my Metro Area, all those sort of test are taken at maybe three locations. I know where they take the test because I ran the Med School Basketball League for 2 years at my college, so I know 100s of Medical Students/Residents, I know the processes.
The local Corporate Community brings in "Fellows" in various industries. These people are relocating from across the USA. Someone says they are in the running for a fellowship, my employer is a Charter Member, our Companies Rep on the Board office is next to my bosses. I can ask what are the timelines they are working with right now in general for bringing Fellows versus what some person on the street saying blowing smoke.
Knowing what to ask based on what people say, is a huge part of the screening process. I care about finances and credit too of course. But things like income, why your looking, why you leaving your previous home should be easy to verify/explain.
A lot of great information in these comments! Most likely will use this route, if I can find a deal within the next year.
Following it so I can read through when I have more time.
I introduce my investors to hedge fund companies
Sounds like a great Idea, I am about to Purchase my first Duplex, But having a time finding funds for a down payment. .Any Ideas?
Great information!!
I am in the beginning sponge stage, learning as much as I can. My target is going to be triplex or fourplex's only in SoCal, Washington, or florida within a hour of my duty station. Im active duty overseas for the next 3-5 years so I appreciate all the information from the OP and inputs. Good luck to all
I'm looking to buy a triplex in the Union City, New Jersey area (four-plexes are rare in this area). This part of the country is insanely expensive, though.
So to sum it up, an FHA loan is a way for me to put ONLY 3.5% down?
But what about mortgage insurance? (Is this referred to as PMI?) Isn't that going to eat a huge chunk of your cash flow?
Whereas if you put 20% down, then you do not need to pay mortgage insurance. I've been told to always put 20% down or else you are "throwing money away" because of the mortgage insurance.
So if I'm understanding this correctly, FHA loan is a way of putting down only 3.5%, getting the loan, and getting the property. I will have to pay mortgage insurance, but it all boils down to the MATH: if the numbers work out, then this can be a way to get in the game with little down.
That sound about right?
@Alex W. a friend once told me to just consider the PMI in your analysis. If it works with the market rents that you've established, your tenants will be paying for it. Therefore, you can get the property for a very little out of pocket. Once you reach the 20% threshold, refi and enjoy the remaining cash flow with out ever having spent your own money on the PMI portion.
Albert Bui thanks for your info! I've never thought about that! How can I not get tagged for creating securities and not talk to a SEC lawyer? How can I better prepare against these kind of things which would otherwise hinge my LLC acquisitions
You talk to someone as smart as @Amy Wan about how not to create a security =), but generally as long as you dont trigger the definition of a security you should be fine.
Its something to the effect of having investors who are solely relying on you to provide a return with out any involvement in your project and you're the KP key principal / GP general partner.
Im sure Amy could help elaborate a bit further on the fine line between active participation and passive participation or creating a security.
So to sum it up, an FHA loan is a way for me to put ONLY 3.5% down?
But what about mortgage insurance? (Is this referred to as PMI?) Isn't that going to eat a huge chunk of your cash flow?
Whereas if you put 20% down, then you do not need to pay mortgage insurance. I've been told to always put 20% down or else you are "throwing money away" because of the mortgage insurance.
So if I'm understanding this correctly, FHA loan is a way of putting down only 3.5%, getting the loan, and getting the property. I will have to pay mortgage insurance, but it all boils down to the MATH: if the numbers work out, then this can be a way to get in the game with little down.
That sound about right?
HI Alex,
No conventional financing has a product from freddie mac called "home possible," that will allow 95% LTV or 5% down payment on a fourplex.
The pro's of the HP product is it allows for PMI or private mortgage insurance instead of mandatory FHA MI which is 1.75% points up front and .80-.85% annually that never drops off (unless if you put down 10% it could drop off as in as little as 11 years + but no one puts down 10% on FHA almost ever...).
HP Freddie Mac (home possible) is great because you can chose to absorb all your monthly MI in your rate (no monthly MI, but higher rate), you could pay your MI monthly, or you could even in do split MI which is a chunk upfront and a lower monthly MI (kind of like a hybrid of the first two). Does not require landlord experience to use rental income to qualify.
VA Financing - Also if you're a veteran in active service or have served actively in the branches in the past or have served in the reserves or coast guard for 6+ years you could be eligible for VA financing for a fourplex which allows for as little as 0% down payment and no monthly MI (huge upfront though 2.15% on first use of VA). Requires landlord experience to use rental income to qualify.
FHA financing - pros are 3.5% down payment but cons are pricey ever lasting MI as mentioned above and SS - self sufficiency rule you need to abide by and 3 months payment reserves to qualify
203K financing for a fourplex - advantage over regular FHA is that you can use ARV (after repair value) rents as opposed to using the "lower of," current market rents as determined by appraiser or current leases in place. This disintinction makes 203k FHA better from a qualification perspective because the self sufficiency rule above is easier to meet especially when future market rents or ARV rents are much higher.
Regarding your comment about "throwing money away," about paying mortgage insurance, you're not throwing money away its because the MI is needed for you to qualify with no money down. Consider it a risk premium to lend to someone with so little money down. Often times unless revoked by the IRS, you could write off MI up to 110k AGI income per year. You may want to check with your accountant to make sure MI write off is still available or is applicable to your situation.
Hope that helps recap on some fourplex primary residence strategies for house hacking.
@Albert Bui @Carlos Gonzalez Hi there, it depends on what exactly you're doing, but generally, if you and a business partner are actively contributing cash and significant, unique skills to a real estate project, it shouldnt be considered a security. But when you take on passive investors, it may or may not be a security, depending on several details.
@Ryan Hurd Congrats on the multi!
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).
Any other posters on here familiar with that? @Albert Bui @Denny Robert @Paul Cleveland
Josh,
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.
There are the home possible and home ready loans that are conventional but they have income restrictions.