Using 50% Rule with an FHA Loan Question

14 Replies

So the 50% rule is taking 50% of the rents and saying that will put towards operating expenses. So what is left is used to pay for the mortgage. So when dealing with an FHA loan and having extra payments like MIP. Would what is left after taking the 50% be the principal, interest, and MIP? Maybe it is just my market, but from the properties I have inspected that would be a very hard to have 50% of your rent cover those three payments monthly.

Thanks in advance for the help. 

@Riley A Holzmeyer , you're correct. In many markets you won't be able to cover all of the debt service for 2 reasons:

  1. You've leveraged at 96.5% LTV.
  2. You're "losing" rent from the unit you live in.

With FHA the aim is to dramatically lower your living expenses (helping you save for another property). After living in the property for 1+ year, you can move out. At which point the additional rent should allow for some cash flow.

This is why it's important to run your analysis two ways, with you living there and when you move out.

@Riley A Holzmeyer

This is how I calculate potential rentals:

Loan( principle + interest + pmi + taxes + property insurance)

Then add your expenses:

Vacancy rate 5% of the rent

Maintenance

Capital expenditures

Repairs

Property management( add this even if you plan on self managing)

Add all that up and subtract it from the rent and you will have your cash flow.

Bigger pockets has calculators on here and they also have a video on YouTube to break down what I did above. Hope this helps!

@Riley A Holzmeyer , generally speaking it's a good idea to refi out of a FHA loan, since you pay PMI for the life of the loan with FHA. Probably worth waiting until you hit 80% LTV, to avoid further PMI. You really need to run the numbers to determine pay-back period of the additional closing costs, etc. There are a few variables here.

Share your analysis here. The community will take a look.

@Drew Heiss

That’s a great question. I’ve thought about it a few times but discovered the answer is pretty simple.

If you take $50k out on a HELOC to help purchase your next deal. Call it down payment and repairs. Just add it to the purchase price. Say the loan is another $50k. You will be all in for $100k. From there factor taxes, insurance and use the formula I used above.

@Jaysen Medhurst so even before 80% LTV would you think the PMI payments would be higher than the MIP payments? Also so from what you're saying you would just look at your annual cash on cash return to see if that time before 80% and 100% would be worth a refinance?

Thanks for all the help Jaysen

@Riley A Holzmeyer you are definitely on the right track when it comes to thinking about different ways to analyze a deal, even as a house hack. I admire you starting at such a young age too. I started when I was 22 and I thought I was young lol.  I am currently house-hacking a duplex in Oakland City (about 30 minutes north of Evansville). If you want to connect sometime I would love to give some input on my experience. We will have been here for two years in November.

I agree with everything everyone has said. My advice that hasn't explicitly been said would be to make sure you refinance into a conventional loan while you still live there. That way you got the lower rates of an owner occupant AND you can get another FHA loan to do your next house hack.

I recommend doing as Scott Trench has been and doing multiple house hacks, especially before you have a wife and kids. My wife (then-girlfriend) was on board to move into our duplex, but now we're married with a baby on the way. She wants more than anything to move out and get "our own house". 

Good luck man and happy investing.

@Dalton Dellinger Thanks for the input. I'm happy knowing I'm at least on the right track with house hacking. I just view it as the best method for getting into real estate investing. I'm not looking into actually owning until I have graduate so since last August I have been developing an excel spreadsheet that has grown slowly during that time. I think at this point the most crucial thing for me is to make sure that my analyzation is spot on so immediately after graduation I can house hack in whatever market I move to. In that case I would love to connect and hear your experience with the field considering your experience seems to be my future plans. So meeting in person would be fantastic so I can fully explain my plans and my spreadsheet. Just let me know what you would like to do!

Thanks