Househacking / FHA / Multifamily

19 Replies

Hi,

I'm a newbie to the industry, hoping to buy my first rental property this year. I'm considering using money from my 401k as a downpayment on an FHA loan. I want to househack a multi-family and live in it for a year or two, then move on to other properties.

Does anyone have any advice/experience with FHA loans, or other lenders in the Wisconsin area?

Has anyone ever used money from their 401k to jumpstart their real estate investment company, I'm a little nervous about using retirement money?

Any advice you provide is greatly appreciated?

Best Regards,

Heather

@Heather M Long , I would advise not using your 401k as a downpayment since you'll be incurring different penalties for early withdrawals and such.  You also don't want to disrupt the compounding interest that the 401k is producing.

With respect to FHA, I purchased a duplex using an FHA loan as owner occupant in Virginia and the process was seamless. I would advise talking to different realtors and asking which brokers they are used to working with. I recommend talking to local smaller banks as well. That is how I found my broker and quite frankly, I now have been using him for any financial questions I have regarding real estate investing.

Hope this helps and good luck!

i would speak to your CPA about the 401K money, it most likely be a taxable event, so interest and penalty will probably apply, FHA has a 3% down product, so if you need 3% from your 401K you probably are not ready to buy, just my opinion. to clarify when you say multi family how many units are you talking about? 1-4 is considered residential and normal owner occupant loans work, 5+ you are in the Commercial world.

FHA is an option if you dont have much money saved up, but the loan itself is not great, its fine for some buyers, but as a broker i will say they are a pain to get closed usually.

Penn Tran and Scott Schultz,

  Thank you. 

I really don't feel comfortable with using my 401k but was advised that it was an option. 

I wanted to get opinions from fellow BP members and I'm happy I did. I will do more research on the FHA loan, its good to know they have a down payment option as low as 3%. I have decent credit & I'm paid very well through my job, so I believe I willbe able to make more than a 3% downpayment for a 1-4 unit multi-family.

I'm excited to buy my first property but I want to be sure its done properly,  so I'll leave my 401k funds & the wonderful compounding interest alone to continue to grow. 

Thanks again guys,  I really appreciate your feedback! 

Best Regards, 

Heather

@Heather M Long You can get a conventional loan at 5% down. FHA loans can just be difficult to close and best to avoid if you can. I also agree @Scott Schultz , that you should have some cash saved up and not dependent on 401k money to do a deal. 401k money is definitely an option, but you'll also want to have some cash reserves. Also, are you talking about a loan from the 401k? That makes a difference.

@Heather M Long . There are ways to borrow money from your 401k and reimburse it by paying principal and interests to yourself. Maybe that is what was meant, when you were advised to do it. In one of my previous investments, I was short on funds, so I borrow money from my 401k, then set up a payment plan (3 years). I repaid myself within 2 years with interests. Not all 401k plans allow it and there is a cap on how much you can borrow. In my case, the cap was 50k and the interest rate was 8% to be paid to myself. This also doesn't go on your credit record to blur your borrowing power. The catch is, if you switch jobs, you will be require to pay the loan in full by the end of the calendar year.

Heather, Welcome!

Yes, you should only need 3-3.5% down and if you buy a property with renters, close on the 3rd (or shortly after) and at closing you get credit that month's rent, their security deposit, and another month's rent before your 1st mortgage payment is due :)

@Henri Meli has a good point, borrowing your own money from your 401K is a great option, the cap is $50K (IRS limit) the interest if any is paid back to you into your 401K there may be fees involved, and if you quit or are let go from your job you need to pay the full amount back, not sure how fast, not i think its withing 30-60 days or the withdrawal becomes a taxable event. if you have a ROTH IRA also, you can pull out the principal that you put in interest and penalty free you just cant touch the earnings you put into the account. also if you are a first time buyer look at a WHEDA Loan, if a Veteran the VA still has a zero down program, and if you plan to buy in a Rural area USDA also has zero down. FNMA has some very low down programs as well. seek all your options, you are getting into bed with your loan for 15-30 years, make the most educated decision possible.

Have you determined what price you will pay for the rental and what area you want to buy in? When you say multi-family, do you mean duplex or higher? The reason I am asking is you may be thinking you need a huge amount as a down payment. We just got a conventional on an SFR at $46k from Equitable, 4.1% fixed, 30-yr and only had to bring $1778 to closing. You can still get decent duplexes at $55k-75k in some decent areas. Last year Educator's had a program where you could buy a property and use the equity as a downpayment so if you found a property with the right numbers, you literally could've closed with $1k closing costs.

My favorite lenders right now in Milwaukee are Equitable Bank-Jeff Justin/Carol Ford and Waukesha State Bank/Joel Benz-Joel Potter-Kevin O'Connor.  What I like about these two banks is they have much more flexibility and they are doing great things with investors. 

I would say don't use your 401k unless you really have to. Network some more or go to some Meetups to gather more ideas and thoughts on this subject. There may be many alternatives depending on your personal circumstances vs taking out money from your 401k.  It always blows my mind away hearing stories about the strategies the local market is doing with their self-directed IRAs/Roths/SoloK's/Coverdell ESA but that's a whole other topic. 

@Heather M Long I have experience with this situation, the things to consider with the FHA loan is equity and PMI. PMI will hurt your cashflow so you may need to refi out of an FHA loan before renting the property, the lack of equity caused by the small downpayment in the FHA loan can also make the deal tough to make profitable. Give some thought to staying in the property a bit longer, or saving up a lump sum to pay down the principal when you refi so that the property will cashflow nicely.

Hope this helps

@Heather M Long talk to your retirement company about the terms of using the monies to purchase your primary residence they can put your mind at ease and inform you about the terms and conditions for pulling money out of the account

I bought my duplex with an FHA and it was a tremendous deal. Even borrowed from my retirement account to do it. On a 200K purchase, my downpayment was 7K. Yes, the PMI stinks but it's a small price to pay to buy into an income-producing property (that's assuming it is producing positive cash flow).

I would recommend borrowing from your 401k if possible, but if you go FHA, you won't necessarily need a lot down so it might not be a bad idea just to save for the down payment.

Thanks everyone, for all the great advice.

 After reading some of your responses, I believe it's best to leave the 401k money alone and just save more money towards my downpayment.

  As stated previously, I'm a newbie and I got a little excited when advised that I could use 401k money to get me into my first home purchase sooner.  However, I want it to be done correctly in order to have positive cashflow, so I'll slow down a bit, take my time, and learn a lot more about lending options and how to evaluate the properties properly.

@Doug Prahst , thanks for the closing tip, I learn something new everyday I'm on BP.

@Rebecca Holmes , I mean up to a 4-unit family building; I figure I can stay in one unit and rent out the others.  

I plan to attend some of the meetups to network and learn more from the pros....thanks for the list of lenders!

@Vaughn Smith , I agree, I'm now thinking of staying in the property longer. 

@Cosmo Iannopollo and @Vaughn Smith, I've heard a little about the dreaded PMI, is there anyway to avoid PMI?

Best Regards,

Heather

@Heather M Long the only way to avoid PMI is to put down 20% or more or you can wait until you've built 20% equity in the property and refi out of it that's tough though as the first 5 years of a 30 yr amortized loan is typically spent paying back interest

@Heather M Long - I used an FHA loan for my house. In my experience having used one myself and talking to my two best friends who have also house hacked - FHA loans aren't that difficult.

Don't let the PMI scare you away!! Run the numbers and include the cost of PMI. Only make a purchase where the numbers work. The numbers work on my duplex having factored PMI. Once I move out and rent the unit I'm living in my cashflow will be $500 per month on the building.

I'd say save tapping your 401(K) for when you graduate to a 5+ unit building! :)

The nice thing about FHA loans is that they allow you to buy into a 2-4 unit building for only 3.5% down. You can also roll in the closing costs and finance them into your loan....You can ALSO use an FHA 203k loan to get up to $30k in rehab money to fix up a building. This option is great because that $30k can potentially increase your value by $50k+, allowing you to use the BRRR strategy and buy another building in a years time.

Good luck!

@Heather M Long As @Tim Puffer said, don't let PMI scare you. Consider that if PMI is the difference between positive and negative cashflow, it's a bad deal.

I also wouldn't consider it dreaded. It's the cost of buying into a property-producing income at an absurdly low price. If the property is a good buy after running the numbers, your tenant(s) will more than absorb this cost for you. And then when you get 20% into the home (which also could be aided by appreciation, mind you), you refinance into a conventional loan, wipe out the PMI and have instantly increased your cash flow.

Now, when you consider that you'll be making money during this time versus saving up for years just to put 20% down to avoid PMI, PMI doesn't sound so dreaded, does it?

@Doug Prahst why would the seller give you the rent for that month if they paid on the first? Close on the 27th of the month before and the 3 day right of refusal becomes nullified. The third day is either the 30th or 31st leaving you with the first or second day as the 1st, making the rent yours. Cheers

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