FHA Loans better than Conventional Loans for rentals?

2 Replies

Let's say for instance, I'm looking to buy a duplex that is $200k, I can either use a FHA loan 3.5% down or use a conventional loan with 20% down. Wouldn't a FHA loan over the course of 1 year save me more money? In this scenario, the duplex would be used as a rental - live in one side and rent the other.

Here's why I think the FHA loan would be better:

FHA Down Payment = $7,000 (.035 * 7,000)

Conventional Down Payment = $40,000 (.2 * 200,000)

PMI on the FHA would be around $150 a month, but we'll make it $300 to be extra safe here. (The amount for mortgage every month doesn't really since someone else would be paying the mortgage)

$300 * 12 = $3,600 PMI a year.

After one year in FHA you would refinance the house - by not having enough equity in the house yet, you would still pay for PMI but it drops off after 78% by refinancing it into a conventional loan. Let's say closing costs are $8,000 for the refinance - being extra safe here.

Assuming I've got a decent deal on a house, I'd have to help pay $300 to cover mortgage on the house. Adding the PMI above which is $300 a month, makes it $600 a month I'd have to help pay for. ($600/month is cheaper than most apartments/houses around here, so I'd still be saving money overall compared to renting out another place to live in)

Over the course of the year and the refinancing closing costs I would’ve paid:

$7,000 Down Payment

$3,600 PMI over one year

$8,000 Refinance closing cost

Total of: $18,600 over the one year

$40,000 - $18,600 = $21,400

I would’ve saved $21,400 in this one year time frame.

After the one year and the refinance has gone though, I would move out and rent out the other side. This would then cover everything and give some profit. I know the PMI would kill the profits on the duplex for the time being, but after the loan reaches 78% LTV the PMI drops off and then the profits would be higher.

There is more paperwork this way, and much more of a hassle, but considering you save $21,400 the extra time spent on filling out paperwork, going to the banks, etc is well worth it.

Most people recommend buying rental properties with a conventional loan, but how I'm thinking about it, it seems like a conventional loan is just a waste of money. Why save $40,000 to down payment a rental when it would only cost $18,600 to FHA then refinance the loan?

If the way I'm thinking makes sense, then wouldn't repeatedly taking out FHA loans year after year to get 2,3,4 plexes super cheap a great idea? (I would have to move every year to live in the new place, but that doesn't really matter to me)

Overall, It would take less money to get into the market, and the rental income covers everything for me. 

Am I missing something here that a FHA requires that would make this not a smart thing to do?

@Dow Yang , from what you're written, it sounds like you don't really need a FHA loan. So, why go through the cost and hassle of starting with that and then refing?

If you just put the full $18,600 as a down payment, you're at nearly 10%. There are plenty of lenders that will give you an owner-occupied mortgage with 10% down. The obvious advantage is that all of that money is going toward the DP as opposed to just $7k in your example.

I didn’t read your analysis because it doesn’t matter.....max ltv for a conventional refi for an owner occupied duplex is 75%......so you couldn’t refi into a conventional loan anyway, without paying up the difference in cash.