As a newbie, I was wondering if seeking a conventional loan for my first rental property will affect my eligibility in the future to get a FHA loan to purchase my first primary SFR?
I have never owned a home and my newlywed wife owns a condo, which we plan to sell in the future to buy a home.
As a bonus question, she own the condo outright for $270k and is cash flowing $850/month. Would it be advantageous for us to try to get a HELOC on this property to purchase our new SFR rather than selling the condo?
Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
7y
@Adam L. you should definitely use your conventional loan before you use an FHA. It will not mess up your ability to use FHA financing in the future for your "forever" home. In fact, I normally recommend my buyers in the Chicago burbs use the conventional loan for their first house hack. They can then transition to FHA later on for their second house hack or for their primary home.
You may find, though, that FHA financing is not the best option once you look to acquire your home. Most buyers with strong credit end up with better loan terms through the conventional program.
As of your last question, I think whether you sell the condo or not is really a matter of personal preference/investing philosophy. If you are really cash flowing $850 per month (including maintenance and CapEx) then you are making a 3.7% return on equity annually. You should have no trouble deploying that equity to get a stronger return in other ways.
Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
7y
@Adam L. you should definitely use your conventional loan before you use an FHA. It will not mess up your ability to use FHA financing in the future for your "forever" home. In fact, I normally recommend my buyers in the Chicago burbs use the conventional loan for their first house hack. They can then transition to FHA later on for their second house hack or for their primary home.
You may find, though, that FHA financing is not the best option once you look to acquire your home. Most buyers with strong credit end up with better loan terms through the conventional program.
As of your last question, I think whether you sell the condo or not is really a matter of personal preference/investing philosophy. If you are really cash flowing $850 per month (including maintenance and CapEx) then you are making a 3.7% return on equity annually. You should have no trouble deploying that equity to get a stronger return in other ways.
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
7y
@Adam L., so I understand, you are currently renting out your wife's condo?
I would double check your numbers. $850/month is ALOT, but might just be a result of having no debt. I would leverage a HELOC for an investment property, use the BRRRR method so you can pay off the HELOC, then rince and repeat.
You should qualify for a FHA loan since you'll be using it for your primary residence.
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
7y
@Adam L., don't get too caught up on the 10 loans thing. This is only an issue if you work with larger banks and they sell off the debt to Fannie / Freddie. If you work with a local/regional bank/credit union, and they don't sell off their mortgages, then it won't be a problem. Be upfront with the bank and tell them what you're trying to achieve. If you being successful as an investor, it's in their interest to work with you.
I would also recommend selling that condo and putting your money to work better. As @John Warren, said you're getting a pretty terrible ROE. You could afford a multi-family property in the $1MM dollar range. I bet you could double or triple your cashflow (assuming an 8 Cap) and your appreciation, depreciation, and mortgage payoff will also be much, much higher.
Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
7y
@Adam L. if it were me I would sell it and redeploy the capital. It all goes back to your personal goals though. You can definitely get a better return on that capital, and some would say you could do better simply by putting the money in an index fund. It would certainly more passive! I am not a stocks guy, but I always like to consider how passive an investment is, etc.
If you were to purchase a much larger building, you could almost certainly increase your return on equity. As @Jaysen Medhurst said, if you get into a larger deal you will get a lot more debt pay down over the course of the hold, and you should be able to double your cash flow without too much trouble.
Lender · Chicago, IL · Member since 2017 · 438 posts · 193 votes
7y
Agree with the above. Adam, use a conventional loan for this non-owner occupied investment. Then you can consider FHA (or conventional for that matter) on the primary residence down the road. As to whether you'd want to go FHA on the primary, I'd probably only consider that if the new primary will be a 2-4unit. Otherwise, conventional will likely be the choice there too.
I wouldn't be worried about the 10-financed property limit. That's well down the road, and there are options for unlimited financed REO. PM me anytime, happy to help dive deeper.