Starting a Real Estate Portfolio

4 Replies

First I'm very thankful for any helpful advice. 

Location: Omaha, NE

My wife of 5 years and I have 3 young children and have lived in our mortgaged home for 4 years. We have a FHA loan and put down 3.5%. We purchased our home for 140,000. My wife runs a daycare out of our 3 bed room 2.5 bath all brick ranch that backs up to a golf course. I work out of the home and we make good income but with other expenses our debt to income ratio is at the top of the lending line for banks.

We have 15k for a new home. 22,000 in a 401k account and we're looking to upgrade to a 4 bdrm home sooner than later. I'm interested in keeping our home because its a rare home in a good neighborhood with little outside maintenance. To get the space we need I'm looking at getting a FHA 203KS loan so we can get the space we need and make nonstructural upgrades to our next home. We can qualify for the loan if we rent our home for 1400 a month (RE agent told me thats what we could get) and the bank will use 75% of monthly rent as income.

I'd like to put the minimum down with the FHA 203(K)s loan so in 2-3 years we can move again with the possibility of refinancing both homes and getting another. I'm at a crossroads on what to do next because of a few question marks. Do I go for another 203k loan where I can make up to $35k of updates and try to sell in two years and hopefully my updates will give me more value when I sell to make a profit? I essentially want to make enough money where I can purchase property with cash, but I feel it will be a while to get the cash flow from current properties. Should I look at multi family units or single family units with a cement foundation?

In 5-6 years I'd like to be settled down into a home that my kids can graduate high school in, so what should I be learning about in the meantime?

Thanks all in advance!

They frown on having 2 FHA loans at the same time. However they do make exceptions:

To prevent circumvention of the restrictions on FHA insured mortgages to investors, FHA generally will not insure more than one mortgage for any borrower (transactions in which an existing FHA mortgage is paid off and another FHA mortgage is acquired are acceptable). Any person individually or jointly owning a home covered by a mortgage insured by FHA in which ownership is maintained may not purchase another principal residence with FHA mortgage insurance except under the situations described below. Properties previously acquired as investment properties are not subject to these restrictions.

FHA will not insure a mortgage if FHA concludes that the transaction was designed to use FHA mortgage insurance as a vehicle for obtaining investment properties, even if the property to be encumbered will be the only one owned using FHA mortgage insurance.

We do not object to homebuyers using FHA mortgage insurance more than once if compatible with the homebuyer's needs and resources as follows:

A. Relocations. If the borrower is relocating and re-establishing residency in another area not within reasonable commuting distance from the current principal residence, the borrower may obtain another mortgage using FHA insured financing and is not required to sell the existing property covered by an FHA insured mortgage. The relocation need not be employer mandated to qualify for this exception. Further, if the borrower returns to an area where he or she owns a property with an FHA insured mortgage, it is not required that the borrower re-establish primary residency in that property in order to be eligible for another FHA insured mortgage.

B. Increase in Family Size. The borrower may be permitted to obtain another home with an FHA insured mortgage if the number of legal dependents increases to the point that the present house no longer meets the family's needs. The borrower must provide satisfactory evidence of the increase in dependents and the property's failure to meet the family's needs. The borrower also must pay down the outstanding FHA mortgage (secondary liens do not need to be paid off or paid down) on the present property to a 75 percent or lower loan to value (LTV) ratio. A current residential appraisal must be used to determine LTV compliance. Tax assessments, market analyses by real estate brokers, etc., are not acceptable as proof of LTV compliance.

C. Vacating a Jointly Owned Property. If the borrower is vacating a residence that will remain occupied by a co-borrower, the borrower is permitted to obtain another FHA insured mortgage. Acceptable situations include instances of divorce, after which the vacating ex-spouse will purchase a new home, or one of the co-borrowers will vacate the existing property.

D. Non-Occupying Co-Borrower. A non-occupying co-borrower on property being purchased with an FHA insured mortgage as a principal residence by other family members may have a joint interest in that property as well as in a principal residence of their own with an FHA insured mortgage. (See HUD Handbook 4155.1 for additional information). Under no circumstances may investors use the exceptions described above to circumvent FHA's ban on loans to private investors and acquire rental properties through purportedly purchasing "principal residences".

Considerations in determining the eligibility of a borrower for one of these exceptions are the length of time the previous property was owned by the borrower and the circumstances that compel the borrower to purchase another residence with an FHA insured mortgage. In all other cases, the purchasing borrower either must pay off the FHA insured mortgage on the previous residence or terminate ownership of that property before acquiring another FHA insured mortgage

Considerations

The FHA puts several restrictions on obtaining a second FHA mortgage. For the borrower who wants to use the option to upgrade to a larger home, the first home must have a loan-to-value of 75 percent or less. The borrower will need to obtain an appraisal and pay the mortgage down to meet the 75 percent limit if the loan to value is higher. To qualify for the second FHA loan, the borrower may have to have a signed rental agreement on the first home and show cash reserves to pay the payment for 6 to 12 months on the first mortgage if he loses the renter.

I'm on a mobile so excuse grammatical errors. 

Thank you for the info. Our family is expanding so under the exception we would be able to qualify for another FHA and in a short time refinance my first home out of a FHA we should be compliant.

Any thoughts on increasing our portfolio going forward with not a lot of liquid cash?

@Chase Metzger

BP is a treasure chest full of resources. You will find resources here from blogs to pod casts and forums. You can also send messages to members which is my favorite part of the website.

Do you have any equity in the house?  If so you could go after a home equity line of credit and us that towards a downpayment on another house.

Or you could see if the seller will do owner financing of some sort.  Not all sellers will do that but it never hurts to ask.

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