Using an FHA loan to buy a commercial duplex

Multi-Family and Apartment Investing
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Using an FHA loan to buy a commercial duplex

Joshua King
Member since 2020 · 17 posts · 2 votes

I put an offer on a duplex that I intend to house hack. The financing is FHA. The property is zoned as commercial and used for student housing. The counter offer came back in my price range. The question now is can a commercial property be owner occupied? And if so can it still be used as student housing? And last question. At least some of the students have renewed leases for next semester. Does FHA not let me buy or can leases be broken by a sale?

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Dave Jensen
Real Estate Broker · Spring, TX · Member since 2016 · 20 posts · 12 votes
4y

Hi. Great plan to house hack. FHA allows financing up to 4units so you're fine on a duplex. Calling it commercial - definitely ask your lender if they have an issue there. My lender says technically it's commercial since it's income producing. but he says his co views up to 4 units still as residential. FHA requires owner occupancy for the first year. Terminating leases...not sure why you would do that. If they're paying and are not wrecking the place, keep em and bump the rent to market level as soon as you can. The cool part of house hacking a duplex (or any rental) is you get to use a portion of the lease income as qualifying income to help you meet loan guidelines...helps your dti. FHA loan limits for low cost areas for a duplex is $456,275. The concern remains with an fha loan is that the place needs to appraise high enough. If it cash flows, a good appraiser will use all 3 methods to appraise (replacement, income, comp) so they should "get it" and agree it appraises. Breaking leases. That is generally subject to the terms of the lease that's in place. read the leases carefully on how a lease can be terminated. That'll give you your answer in that specific case. In all cases, negotiation solves problems. Hope this helps.

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  • Dave Jensen
    Real Estate Broker · Spring, TX · Member since 2016 · 20 posts · 12 votes
    4y

    Hi. Great plan to house hack. FHA allows financing up to 4units so you're fine on a duplex. Calling it commercial - definitely ask your lender if they have an issue there. My lender says technically it's commercial since it's income producing. but he says his co views up to 4 units still as residential. FHA requires owner occupancy for the first year. Terminating leases...not sure why you would do that. If they're paying and are not wrecking the place, keep em and bump the rent to market level as soon as you can. The cool part of house hacking a duplex (or any rental) is you get to use a portion of the lease income as qualifying income to help you meet loan guidelines...helps your dti. FHA loan limits for low cost areas for a duplex is $456,275. The concern remains with an fha loan is that the place needs to appraise high enough. If it cash flows, a good appraiser will use all 3 methods to appraise (replacement, income, comp) so they should "get it" and agree it appraises. Breaking leases. That is generally subject to the terms of the lease that's in place. read the leases carefully on how a lease can be terminated. That'll give you your answer in that specific case. In all cases, negotiation solves problems. Hope this helps.

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  • Joshua King
    OP
    Member since 2020 · 17 posts · 2 votes
    4y

    @Dave Jensen thanks for all that that's a big help! Let me explain a little more about why I said breaking leases. I know FHA requires me to live in the property for 1 year. That being said if the duplex is fully rented I wouldn't be able to live in 1 side. I'd absolutely like to avoid terminating leases if I can. So there in lies my question. The seller says both sides are fully rented however the disclosure says there are 4 occupants. If I can move all students/ tenants to one side and live in the other perfect. But can I?

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  • Kim Meredith HamptonBusiness Member
    Real Estate Broker · St Petersburg · Member since 2014 · 2k+ posts · 2k+ votes
    4y

    @Joshua King You can’t just do that, but what you can do as a part of your negotiations, is ask the seller to have one side vacant upon closing. I just think that this will be a problem, as you can’t just terminate a valid active lease. You never know, maybe someone wants to leave?? 

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  • Joshua JanusBusiness Member
    Realtor · Cleveland, OH · Member since 2021 · 1k+ posts · 1k+ votes
    4y

    @Joshua King You can either ask the seller prior to purchase to use the cash for keys approach as a way to terminate the active lease. I would also really think about if this specific property is worth all of the hassle that you are going through just to get it. If you can get a similar return somewhere else that doesn't require so much juggling, I would try that route. 

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  • Dave Jensen
    Real Estate Broker · Spring, TX · Member since 2016 · 20 posts · 12 votes
    4y

    @Joshua King - That depends in the leases and if the occupants of the 2 duplexes want to live together in 1 side. From my experience, none of my tenants would ever agree to that because 1-one side of the duplex is too small for everyone to live in, and 2-They don't know each other. Sounds like this is a deal that ALMOST fits your criteria. A lease is a legal contract. You can only change it if all parties agree or if 1 party is in breach allowing a change.

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  • Joshua King
    OP
    Member since 2020 · 17 posts · 2 votes
    4y

    @Kim Meredith Hampton right! Just to be clear I don’t “want” to terminate leases or kick anybody out. I’m just trying to make the deal work and learn what my options are.

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  • Joshua King
    OP
    Member since 2020 · 17 posts · 2 votes
    4y

    @Joshua Janus I thought about trying the cash for keys approach as and option. Just still learning about the developing situation. Also it is a little bit of a struggle but this property produces twice the income of a normal duplex in my area. Hopefully the risk is worth the reward.

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  • Joshua King
    OP
    Member since 2020 · 17 posts · 2 votes
    4y

    @Dave Jensenright I definitely feel like your tenants. I wouldn’t want that. However that’s how the tenants in this property are already living. The duplex is huge, over 3000 sq ft, 4 bedrooms on either side. And the tenants are college students. This is a regular living situation for them.

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  • Chris Pasternak
    Real Estate Broker · Pueblo, CO · Member since 2013 · 367 posts · 303 votes
    4y

    Y'all are way ahead of yourselves.  

    First, confirm the zoning you think it is with zoning department.  Ask them the history on the zoning as well.  I ran into a case where the property was last used as commercial but historically it had been used as a residence before zoning existed, therefore they allowed it to be a residence again.

    Next, ask your lender if you can use FHA on this type of commercial zoning.

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  • Dave Jensen
    Real Estate Broker · Spring, TX · Member since 2016 · 20 posts · 12 votes
    4y

    @Joshua King 

    cool. it may then work.  and agreed. check with your lender to ensure this property is going to qualify for fha financing. i assumed this had been done since you're so far into the process. keep chasing those doors.  the more the merrier, right?



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  • Joshua King
    OP
    Member since 2020 · 17 posts · 2 votes
    4y

    @Chris Pasternak thanks that’s kinda the spot I’m in. I called town zoning and was told to call back Monday, but basically what you just said about going from commercial to residential is the info I got. So I came to bigger pockets to pick y’all’s brains.

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  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    4y

    I think folks are making this too confusing. You cant end a lease until it expires, except usually if the owner wants to move in. So seller can not break the lease but new owner may be able to.  I would just clarify your locales laws (look up landlord/tenant law in your state)

    As a seller I would never ask a tenant to leave as a condition to close...  what if buyer walks/ then what?

    also, you cant just ask one home to move in with another. that is creative but not doable. 

    So step 1 - find out what your local laws are for lease breaks when the owner wants to move in then go from there. 

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