Multi Family Purchase FHA Loan - good deal?

Question

Hi,

These are my numbers, I'm new so I want to get opinions from others who are more experienced:

Duplex / FHA 3.5% down (12,775)
Purchase Price: $365,000 
Gross monthly rent: $2700
Total Monthly Payment: $2400
50% rule: -$240

I have also heard that starting in June FHA is going to start requiring PMI for the full life of the loan.  Any input on this subject?

Thank you!

Cory Rogers · Answer

Damn iPhone really messes up my writing.

Cory Rogers · Answer

Oh, one last thing that I really wish I considered before I got my tri-plex. THE YEAR. Try not to buy too old. Maintaining it can be more expensive. Make sure it has a new roof. Just some thoughts.

Cory Rogers · Answer

Sean,
What is the 50% rule? 
I have a tri-plex in upland and I'll tell you that if I wasn't living in one I would be short about $200 a month. Water, trash, sewer can be expensive. Don't forget your landscaping cost every week, regardless whether you do it or not I.e. gas, weed eater wire etc.... Find out what the vacancy rate is for Lakewood. I would imagine 15% - just throwing a number out there. It might seem great, but when it's vacant- it really hurts. Don't assume because you say beautified it when it became vacant that someone would want it right away- just saying (I did that). I bought might a little tight, but the way I saw it 1) I didn't want analysis paralysis. 2) there is more to make in property than just appreciation. I'm sure you know this- but depreciation, annual loss, adding value, most of all someone else paying it for you. California is a tough market to find great cash flow properties unless you have both ( I'm assuming) resources - network and cash. It's. how i got started. Good luck.

Brian Morgan · Answer

HI Sean,

I think there may be a few other expenses you want to consider. Is this town water/sewer? Will you be paying for any other utilities? 
Most investors I know budget 10% of the net operating income for yearly maintenance of the property. Depending on the age and condition of the property this may be overkill or not enough.

Finally, how about vacancy? How will you be impacted if one unit is vacant for 30 days. How about 60 days? What if both units go down?

To me, the numbers look a little too thin for it to be profitable. Can it be the right fit for you.... possibly, but Proceed with caution.

Tim G. · Answer

One thing I think is universally missed here.

Someone basing a purchase from what the numbers would be in another side of the country.

While it can be done, it would say right now it is almost impossible to find something that follows the 50% rule here. The 70% rule doesn't work here either. Simply put, someone else will buy it at a higher price.

So you have the choice, go invest in Ohio or Florida and get those numbers or face up to the fact business is done differently in this market and accept those numbers.

I'm not telling you to, but you will have to determine if that fits your investment criteria or not.

Wayne Brooks · Answer

Sorry, I wasn't thinking. The T and I would be in your 50% rule.

Sean Lynch · Answer

Is there something I'm missing? I understand that with the FHA loan, I have to live in one of the units for 1 year. After that:

Lender says my Total Mortage Payment: $2400 (includes taxes, hazard insurance and PMI)

Gross Total Rent (on the two units): $2700

I will be doing my own property managing. Doesn't this leave me $300/month to put into an account for repairs?

Shea Stringert · Answer

Hey Sean, I'm in the middle of hunting for and buying a duplex or triplex utilizing an FHA loan myself.  Whether you use the 50% rule or actual expenses make sure you are meeting your guidelines for investing.  For me that requires a certain amount of cash flow after all expenses are paid plus putting a reserve away for unforeseen expenses and eventually major repairs.

That said, yes FHA loans now require PMI for the entire length of the loan.  However, after a year or so, you can re-fi to hopefully get a better APR, but even if it is a little more you can still get a conventional loan that does not require PMI and thus saves you a few hundred a month.

Best of luck!  I'd suggest reading the countless threads on here about analyzing deals, it's what helped me create a solid investment strategy.

Kelly N. · Answer

Looks like a no go to me- however, if you consider that you will be living there cheap ($1050/month) instead of paying $2700/ month.

If it were me, given the new PMI rules for FHA loans, I'd try to come up with a large enough DP (20-25%) to avoid that and just go conventional.  That will also lower your payments.

Say your interest rate is 3.75%, your payment (without PMI, sorry I don't know how to calculate that since I haven't been looking for this type of financing) on the FHA deal would be about $1630.  If you can swing a $75,000 DP instead of $12K, you are looking at $1390 a month with no PMI.  That doesn't put money in your pocket every month on this deal, but less money is going out so you are living there cheaper.

Wayne Brooks · Answer

Well, using the 50% rule you're negative $1,050/mo.  Yep on the MIP,  life of the loan.  Don't forget about approx 5% in closing costs and prepaids for tax and insurance.