Realtor · Crystal River · Member since 2021 · 33 posts · 13 votes
Hey guys!
Next year, I intend to purchase a home for the first time. I want to aim for an FHA loan with 3.5% down. I want to buy at least a triplex (preferably a fourplex), live in one unit for a year to satisfy the FHA requirements, and use the other three units as short-term rentals. What do you think? Is this legal?
@Caitlynd Fawn Born-Dohm easier said then done. You're correct, this is legal and the method is talked about constantly when referring to house hacking. I would start networking with real estate agents in your area that have or are currently house hacking. I would also be open towards renting the units long term depending on your market and what makes the most sense analytically. Hope this helps!
@Michael Dumler Definitely easier said than done! I have been trying to find private funding for about a week now, to no avail, but I know it takes time. We have a lot of waterfront properties where I live and I am hoping I can snag something nearby the water to make it more desirable for STR's and LTR's alike. I just joined a neighboring county's REI zoom group and attended a meeting this morning. I am so excited to begin investing! I wish it could come sooner than later.
@Caitlynd Fawn Born-Dohm private lending is going to be hard to come by if you have no prior investments or real estate investment experience. Are you currently pre-approved with a lender? If not, an additional step you can take is to start networking with different lenders and see which vendor is the best fit for you and the investment. Awesome to hear that you have found a REI group near you, definitely take advantage and try to soak up as much knowledge as you can from those who have grown a real estate portfolio. Best of luck!
@Michael Dumler So far, the only thing I found available is hard money, which I do not feel ready to risk, at least not until I have some more experience and understanding when it comes to refinancing under my belt. I am not currently pre-approved with a lender, but I tried about six months ago, and my main issue was not being able to provide two commission-only tax returns. Do you know of any lenders that are beginner-investor friendly?
@Caitlynd Fawn Born-Dohm unfortunately you're in a tight situation. Yes, I don't recommend going down the hard money route unless you have a partner that is well versed to help you. Do you potentially have someone that could be a cosigner for a loan? The lender will account for their credit and income as well, therefore, granting pre-approval. If you bring a good deal to the table, you can structure a partnership so that your cosigner has equity in the deal and receives monthly cash flow. Win-win situation if an opportunity comes about.
Perfectly legal. But I wouldn't look at hard money for an owner-occupied investment because you're going to get much better terms from a traditional bank. P/HML's don't do FHA loans.
@Michael Dumler That is currently the route I will try to take. I opened up to my mother about the wonders of real estate investing, and she is now open to the possibility of cosigning on a house for us. If we cannot qualify for something together, do you think I would have any luck looking for a partner here on BP, or should I try to find someone I can meet up with locally for my first deal?
@Nicole Heasley Beitenman I'm glad to hear that is perfectly legal! I know P/HML don't do FHA loans, but how hard is it to refinance into an FHA or conventional loan after using hard money to initially purchase the home?
Could you possibility put in the dirty work (cold calling, texting, emailing etc.) to find a deal, then underwrite it and bring to an investor? This way you can be an equity partner and bring experience to the table when you go for your first deal. Private money is always there to take advantage of and this would be a great start!
What do you mean by underwriting a deal? I have experience cold calling and prospecting from when I used to be in automotive sales, but I am not sure how to underwrite a deal!
This is definitely legal. I did the same thing about 6 months ago - purchased a triplex with an FHA loan with 3.5% down, and I live in one unit while using the other two as short-term rentals. The two major roadblocks I'd think about (which it sounds like you already are) are 1) financing and 2) validating short-term and long-term rates for the area.
1) Financing - FHA loans on multi-family properties can sometimes cause some headaches that you need to be aware of. For example, FHA requires that each of the units must have separate electric meters. Additionally, although you don't technically need separate water meters, the water lines must at minimum have separate shut-offs for each unit (i.e. it cannot be one water line with only one shut-off). These are two specific issues that I ran into, but generally speaking, FHA loans are maybe a bit more strict/nuanced than some other loan products, so you'll want to do your homework on the property ahead of time to ensure it will meet FHA requirements - or at least have the ability to be remedied to meet the FHA's requirements prior to closing.
2) STR vs. LTR Rates - as mentioned above, as part of evaluating the validity of an investment like this, you'll want to "underwrite" the deal. This includes mapping out everything from income, expenses, vacancies, etc. to understand every single dollar that "comes in" and "goes out" of the investment. Keep in mind the additional costs typically associated with short-term rentals - cleaning fees, supplies, furnishings, utilities, any short-term license fees in your local market, etc. You want to do this to ensure that the time and money investments of operating a short-term rental outweigh that of a long-term rental. If you figure out through your underwriting that operating an STR only nets you $100 more per month compared to an LTR, but you're spending 20 extra hours a month to do so, does it make more sense to simply do an LTR? Make sure the juice is worth the squeeze...
Another factor to consider when weighing LTR vs. STR: most lenders will not qualify STR income until you have two years of tax returns showing that STR income, whereas an LTR can qualify either 1) rent in place if occupied or 2) the market rent. So if you're trying to scale your investment portfolio rapidly within the next two years, do not plan on being able to use your STR income to do so for your debt-to-income qualification purposes.
@Joshua Janus I see. I would really like to get into wholesaling, which of course requires cash buyers. Perhaps I could form a good relationship with one of them, and perhaps present my deal to them? I don't see why not, but it does sound like it would require an enormous amount of networking for an indefinite amount of time.
@Brenden M. Wow! That is all really good information to know. Who knew that an FHA loan cared about an eletric meter! I have been reading many of BP's published books, and learning how to analyze a deal, so I am getting more familiar with that. As with anything, I suppose it will just take time to get comfortable!
I am surprised you can't use your STR income right away! That does present a major roadblock. Do you think if I put the home purchase under an LLC, it may help? Because my debt-to-income ratio won't be affected, just my business? I do want to rapidly scale my investment portfolio within the next two years.
I figured some cities might put a regulation on that. Especially if an FHA loan is involved.
Thank you for the encouragement! It is easy to get bogged down with investing, especially if you can't figure out how to solve one major hurdle! However, the difficulty and creativity that comes with real estate investing might be what makes it so addicting.
Yeah being creative works out, I get around the rules by buying properties where I can easily change the permitted use of the property or make the property commercial.
@Nicole Heasley Beitenman I'm glad to hear that is perfectly legal! I know P/HML don't do FHA loans, but how hard is it to refinance into an FHA or conventional loan after using hard money to initially purchase the home?
My understanding is that it's no harder than if you bought the house with cash. The bank doesn't care how you acquired the house. They care about it's value and your qualifications for repaying a loan.
Wow! I didn't realize it was that easy to refinance once you had acquired the house for the right amount. I wasn't sure if I would basically have to qualify for a refinance in the same way I would have to qualify for a conventional or FHA loan.
Wow! I didn't realize it was that easy to refinance once you had acquired the house for the right amount. I wasn't sure if I would basically have to qualify for a refinance in the same way I would have to qualify for a conventional or FHA loan.
You do. A lender wants to know your income and credit score. They want to know you can repay the loan, and they want to know the property's value is greater than the loan. That applies whether you bought the property in cash or if you acquired it through a mortgage.