Purchasing multiple rental properties using FHA

10 Replies

Hey BP family, as I stated in my goals, im trying to figure out how to build a large portfolio of rentals (for rental income of 5k+ monthly)in the NJ/NY area.

My situation; I've been making 40k a year for the past 3 years (steady job)

-this coming July I will hit 2 years since bankruptcy (so I should be fine in that aspect)

- I have about 15-20k liquid cash

-credit is slowly getting better at 620 now

So this summer I'll officially be looking to purchase multi-family home in NJ area, I picked NJ cause a lot of REO dupelx/triplex are going for under 150k. I guess the reason is the area is not so great BUT there are some beginning signs of gentrification. my questions;

-How can set my self up to for purchase additional property after my first purchase?

-how many times can use a FHA loan (I plan to live one of my units)

-Should I ask FHA for additional funds on top on the mortgage to cover unexpected cost?

-can own all the proprieties my self or do I have to partners with other investors ?

-should I use Section 8 tenants since it give more of a guaranteed cash flow

-should I try and do two closings at the same time ?

Any insight, opinions, links, suggestions are all welcomed, thanks everyone !

@Donald Placide

I will try to answer some of your questions: 

You can purchase I believe up t a 4 unit under FHA financing. You then have to live in the unit for I believe 1 year. You should then be able to buy again with FHA bt will then have to move into the new place. I dont think you can ask FHA to get some extra funds. Any property you purchase has to be in livable move in condition and pass inspection otherwise you wont get a loan on the home. You can own them all yourself assuming you can get approved for the loan. You cant do 2 FHA closings at the same time.

Good luck

You can only have one FHA loan at the time, unless you can show you had to move for work, etc., since you are supposed to be living in it. Can't borrow for "operating/unexpected costs". FHA is for owner occupants only, so no investor partners. 40k a year income will qualify you for about $1800/mo. of payments...PITI, MIP, and other personal monthly debt payments.

1. You have to wait two years to use your rental income to qualify for loan. You can buy more if you qualify with your regular job income.
2. You can ask bank for more money using FHA 203k rehab loan
3. You can't use FHA on second loan unless it been 3 years
4. Do not try to do two closing at same time if you want to grow your real estate investment.

Good luck.

Hey @Donald Placide you are way ahead of yourself. Others have given you solid info on FHA, limits, ect and the best bet is to get it from the horses mouth and call a banker

Focus on navigating the first deal successfully and build from there. You do not need to know what your going to be doing for your 5th or 6th deal when you have not closed one yet. 

FHA is for owner occupants only, you must live in the property for at least 1 year. The areas with live-able triplexs selling for under $150k in north jersey are ROUGH.

After you have navigated your first deal you can reevaluate your goals with all the new knowledge you have acquired from doing one transaction. It is important to set a destination or goal, but also do not get to bogged down with details that are irrelevant to you at this stage of the game. 

Here are some action steps to take:

1. Talk to a few mortgage brokers and bankers and see what you personally could qualify for. Keep in mind any traditional purchase of investment property will require 20-30% down in the current market, but an owner occupant can purchase with FHA loan for 3.5% down. Consider living in the property, based on your cash it may be your only option.

2. Go out and look at some of the areas you are planning to invest in, take a few hours and drive around the area, do some online research about the area, and if you like it start making offers. 

I invest in Newark, NJ and am knowledgeable on that city as are others on the forum who can chime in to specific questions. 

Wow thanks for all the insight guys. @Steve Wilcox I am planning to invest in the Newark areas or bergon county. I will sit down and digest all this info ......

@Steve Wilcox, I am a total newbie and I have narrowed my first investment to multifamily homes.  I am meeting with some mortgage brokers and I am considering several areas to start looking.  I had considered Newark but am not sure because of some of the areas of Newark.  Can you suggest particular areas of Newark that I should look?  I am from the Parsippany area and am also considering Boonton and Morristown.  Any suggestions?

There's some solid answers in this chain. Don't try to think too far in advance - planning is good, but do so in terms of goal setting, education, and networking for now. Get this first deal and then think about the financing for the next.

I'd suggest looking into fha 203k. Finance for improvements is included. If you buy right and improve right, the added equity could be stripped at a later date to find future purchases.

Hi @Rita Droz  , I would say that Newark is a unique challenge, and not for the faint of heart. Affordable housing in low income areas is a very management intensive process, and you need to have the right management team in place. Be prepared to deal with lots of repairs, lots of BS phone calls, people trying to duck paying their rent, ect. I have enough properties and a great team in place of managers, handyman, and own a general construction company so dealing with those issues is easier for me than for many others. I also am a full time investor who is committed to dealing with these challenging issues and delivering a good product to very under-served market. However working in this area is defiantly more work and more challenging then other areas. 

If you want to work in that area I would suggest you partner with a more experienced developer, and/or interview lots of managers to find the right fit. This area is not for beginners, but there is alot of money to be made.

If you are just looking for one or two passive properties that you can self manage I would steer you towards an area more like morris plains or boontown. I tries looking out there but have never found anything with strong enough returns excite me or my investors, but you will have a much easier tenants. 

@Steve Wilcox, Thank you for the advice Steve, I will definitely use it to decide on the area I will hone in on.  I will start looking in the Morris Plains and Boonton area and leave Newark to the advanced investors.  What do you consider a minimal return in order to purchase a property?

I would not deploy capital at anything less then 8% annual cash on cash returns. 

I find it difficult to find a property that is actual cash flow positive in any of those type of areas. I know morris county has very low taxs (for NJ), but if you do a rough estimate using the 50% rule which means that in the long term expenses will be about 50% of gross income from a property, then you subtract your debt service from that you need to be making about $200 per unit to make it worth the hassle of ownership.

You can also look into putting some money into a bigger deal or Syndication on a larger commercial space which you might find some better metrics then residential properties in blue ribbon school districts in North Jersey. We work on some mixed use, and light industrial properties where investors get a perfected return for putting money up and a piece of any upside for strong performance or profit from sale, but our investors are limited partners looking for truly passive investments in real estate. 

You need to determine your level of investment (both capital, credit, and time), and that will help you determine what options you actually have in front of you. Understand how much cash you have on hand, how much time you can put into a deal, and what if any debt you may qualify for to leverage the cash you have. 

P.S. I do not want to dissuade you from Newark, or any other newbies, but people do need to understand that while the numbers may pencil out, it takes a lot of work and support to hit those levels of returns. For the person from a high end area you may not be prepared for what you have to do to be successful in the affordable housing market. 

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