FHA + 50% Rule = No Cash Flow?

9 Replies

I am having an extremely hard time finding a single deal that will work with the 50% rule using an FHA loan. In almost every case the cash flow is negative with a few around break even. This is using list price and existing rents being paid by tenants.

Even with assumptions (not a fan) of buying at a lower price and raising rents by $100 or $150 to market, the 50% rule still yields break even or very minimal cash flow. Basically the extra $200 or so per month that you pay with FHA over conventional is eating the cash flow. At 42% expenses which may be more accurate for a duplex, some deals start to make sense but are still short of the desired $100 per door. Overall, I feel like I am fudging numbers at that point to make it work. I would have no problem achieving this on many deals I have looked at with conventional.

Is this just the price you pay when using an FHA? Tips or Advice? It's obviously possible but it looks like it would have to be a screaming off market deal.

I have $15K and saving $1,500 a month. I can get a 15% conventional on a duplex. Should I just wait and go that route?

The "50% rule" includes the cost of property management. If you're willing to contribute your own labor to do the property management you can earn the PM's cut of that 50%. I assume, since you're considering FHA, that you're looking at buying a duplex, living in one side, and renting the other. So, dealing with the tenant is reasonable.

Many properties don't make sense as rentals.  I'd go so far as to say "most".  When you're buying a residence, you often have requirements (location, type of property, amenities) that make it less profitable as a rental.  So, while "house hacking" may make sense to get started, it doesn't make for the most profitable rentals.

One thing you could do is search around for a bank that will do a portfolio loan with 10% down that will ALSO let you not pay PMI/MIP. I did everything I could not to go FHA just to avpid PMI. Also the higher your down payment the lower your monthly mortgage will be. You could wait and do 15% down or look for portfolio lender that'll do 10% with no PMI.
Something to note with this is that if you do go portfolio and get an ARM you should factor in the cost to refinance in a couple years IF you want to lock in a rate at some point with a conventional loan. Compare increase in cash flow due to lower monthly payment vs refi in X months and you can say: If I refi in 18 months I will break even on cash flow savings, but then make more long term since after that I'll make more due to no PMI. (PMI is paid for the life of the loan)

A couple of clarifications:
FHA is for Owner Occupied only, not straight rental properties.
Not only are you paying MIP, you are Paying MIP because you put less than 20-25% down. It’ll be hard to find any property that cash flows when you’re borrowing 96-99%.

@Jon Holdman I will be self managing the first couple deals but I 100% intend to turn everything over to property management in the future. Yes, I will cash flow now but if I don't factor that 10% in at purchase cash flow will be erased instead of just reduced. Also, I am not specific to Duplex with FHA. With 3.5% down this gives over $300K buying power which I will not likely have again for a long time. This makes me inclined to buy a quad while I can afford it but the numbers seem to get worse as the price goes up. Thanks for the reply.

@Joe Arida Good tip! If I increased my down payment to 10% from 3.5% I'm sure alot more of these deals would make sense. I am kind of in a weird spot at %15K. Just shy of conventional requirements but couldn't cover closing anyway. FHA will do that plus leave me with reserves. Thanks for the advice.

Wow, I got on BP to ask almost this exact question and found your post within 30 seconds. And you are in my area. Crazy. I'm curious, if you don't mind me asking, where did you find the 15% down conventional loan? I'm seeing the same issue with FHA where PMI is just choking the cash flow. Guess you can't have your cake and eat it, too! I plan on calling around and seeing if I can find a 10% down lender in the area. Seems to be worth it to wait a little longer to put down a higher percentage and avoid PMI.

While there are ways to get into properties with little down, this is ultimately a cash-on-cash return game, like most investments.  If you manage 10% cash on cash, you're doing pretty dang good.  If you want to create a large portfolio of properties with very little cash invested, you're going to have to invest a lot of time in finding those properties.  E.G., tired landlords who'll sell with owner carried and minimal down payment.  Or take on a lot of risk like buying a bunch of rentals subject to.

@Jonathan Vandal Welcome to BP! That is crazy and at least I'm not alone. I am a first time home buyer and they were offering me 3 and 5 percent conventionals on single family. When I mentioned that it was 2 units it jumped to 15% which I still don't understand because these produce income while you live in them and SFRs do not. Anyway, I am not sure if that is specific to first time buyers. Check your inbox!

@Jon Holdman I agree. Really my main goal with the FHA and the first property is to live for free. In doing that I like to think I am cash flowing the $700 in rent that I am paying now. I have been analyzing as if I'm renting both units (after I move out) trying to cash flow 100 per door. Not happening. I guess if the FHA breaks even I should cash flow after refi to conventional later on.

Too much/expensive debt 

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