Using an FHA loan to buy a multi-family property in CT

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Hi, My name is Daniel, I am very eager to learn about my options when it comes to buying a multi-family rental property with an FHA backed loan. I pretty much get the gist of it but I would liken to know more specifically how and what is involved. I am in Manchester, CT, so if you have experience with this process or are familiar with my area then please let me know.I have the intention of living on the property at first and having the tenant pay the mortgage but would like to eventually leave and rent my unit out to generate some positive cash flow. I would like to learn as much as possible about the pro's and con's as well as my best options. Thank you for reading.

@daniel 

@Daniel North II undefined is you only option FHA? There are low money down owner occupied conventional mortgages that may work in you favor. With FHA you may have PMI that will not go away unless you refi it out once you generated enough equity in property. FHA is what works best for you it comes down to the numbers, you can make it work even with the PMI.

Pros: low money down, low entry barrier, you can find tremendous deals. 

Con: you gotta live in it. Depending on where the property is, you may or may not want that. 

Since you're going to live in the property, and it sounds like you're considering a duplex (tenant, not tenants), the main issues would be to be sure you can financially withstand the vacancy and you're comfortable managing the property and tenants. Also, if you get a 3 or 4-family property, a single vacancy is less of an issue financially. 

fha defines multifamily as 5 or more units. Program is great with high ltv, low fixed rate, assumable, easy to qualify. Contact me and I can give you all the insight on the pros and cons. I am a MAP underwriter for fha loans.

Thank you all for the fast responses and useful information . I am asking about the FHA because i don't have the required down payment for a conventional loan and i would like to start the process sooner than later. I want to explore the possibility of a two family or even a three family. I was really wondering if there is a specified time frame i have to live on the property before i can move out and rent all the units. I definitely like the idea of a HELOC and reinvesting towards another property and so on. Compounding cash flow is nothing new but it is for me.

FHA has a non-owner occupied product for larger complex's (minimum loan amount $1M)

We are in an FHA loan on a 31 unit in Arizona.

It is 80%LTV.

35 year fixed rate (at 3.5% + PMI)

35 year term.

... I know.  Incredible. 

Downside:  

  • 9 year pre-payment penalty but is assumable.
  • Takes about 5 months to close so it's best used for refinancing.
  • Only allows distributions to the partners twice annually.

This debt instrument has actually changed our multifamily strategy.

We are tying up deals 'subject to' with a 20% down payment and then refinancing the project with the FHA product and in some cases actually pulling cash out.

My theory is that I want to borrow millions and millions of dollars at 3.5% (as long as it debt services + cash flow) and be sitting in a nice position 10 years from now.

Having long term low interest debt in ten years from now will make you look like a genius. 

Not sure when the PMI burns off

Lender will want to see a stable asset, 1.2 DCR, - credit score is probably a minor component,

Broker charges 1 pt and the 3rd party reports range from $5 to $15k depending on the size of asset.

Happy to give my lenders info - just don't bother him if your a tire-kicker.

Originally posted by @Danny N. :

@Matt Skinner Is the PMI for the life of the loan or till a certain equity threshold is reached ?

Usually when the Loan amount reaches 70% LTV. Sometimes, this can lead to a debate about 70% LTV or original purchase price or current appraised value.

If the value increased dramatically or even decent, the option is to refinance to get rid of PMI.

Originally posted by @Mohit Madaan :
Originally posted by @Danny N.:

@Matt Skinner Is the PMI for the life of the loan or till a certain equity threshold is reached ?

Usually when the Loan amount reaches 70% LTV. Sometimes, this can lead to a debate about 70% LTV or original purchase price or current appraised value.

If the value increased dramatically or even decent, the option is to refinance to get rid of PMI.

So with the commercial fha loan the PMI does fall off? Because it does not, ever, with the residential fha loan. Correct?

with a 3.5% long term fixed rate on several million dollars, quibbling over a few basis points of cost for PMI seems petty. I don't really care if I pay PMI until the loan is due - in 35 years - when I'm 78 years old.

If someone offers you free money don't negotiate with them on who's going to pay for gas for you to pick it up. 

Originally posted by @Matt Skinner :

with a 3.5% long term fixed rate on several million dollars, quibbling over a few basis points of cost for PMI seems petty. I don't really care if I pay PMI until the loan is due - in 35 years - when I'm 78 years old.

If someone offers you free money don't negotiate with them on who's going to pay for gas for you to pick it up. 

Meh, on a million+ dollar loan, PMI over the entire life of the loan is going to be hundreds of thousands of dollars, right? It would be interesting to look at the actual numbers. Obviously you are borrowing money for cheap, but in the long run how much more money are you saying goodbye to with the PMI and paying interest for that long of a term? Not saying its not a good idea, just curious.

Two basis points per million is $2,000. PMI takes your rate from 3.5 to approximately 3.7 (effective rate).

x35 years = $70,000/million

And yes it would be best to get the PMI removed at some point but should probably weigh very little in deciding to take this loan. For one, there are no other 35 year commercial loans so the cost of refinancing would be more than the cost of PMI. Not to mention the value to your buyer being able to assume this debt is priceless.

Matt's a little bashful on this RE stuff sometimes:) However, he really knows this REI stuff! Check him out at the latest Harvard Mindset of Success presentation.

@Daniel North II ,

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Raymond

I emailed my broker.  This is his response:

The mortgage insurance stays on the loan for the duration. It is recalculated after each payment so it's shrinking, but never leaves.

On Jun 11, 2015 6:19 PM, "Matt Skinner" <[email protected]> wrote:

With the FHA loan does the PMI burn off?

If so, when?

___ 

Sometimes it's not necessary to know all the answers if you know the right people to ask.  = )

@Danny N.

@Steven S.