Multi-Family Refinancing/Strategy Question

Multi-Family and Apartment Investing
9yFollow

Multi-Family Refinancing/Strategy Question

Nick Vought
Rental Property Investor · Salt Lake City, UT · Member since 2016 · 22 posts · 7 votes

Hey everyone,

I bought my first property a four-plex in March, and I am trying to figure out the best strategy for my next step and how to get ready for it when that oppurtunity comes. I got an FHA loan for the property which was 450k and put down 3.5% on it. It is in good condition but needs some cosmetic work. I am currently getting 875 per unit, all 2 bedroom 1 bath. I have updated the unit I am living in and believe I can get between 1000-1100 in rent for it, going off of similar 2 bed 1 bath units in the area. I would like to use the BRRRR strategy and use the refinance money to purchase my next property after I have lived there for a year. After I have lived at the property for a year, I plan on just moving to an apartment and not doing another FHA loan for at least the near future.

So my questions are:

1. Do I have to convert my FHA loan to a conventional loan in order to use the refinance money on my current property to purchase my second?

2. Does the refinance go off of just the appraisal value of the four-plex or does it also go off of the amount I am getting in rent?

3. With the rehab just being cosmetic like I said, how much should the min/max I should spend updating units? FYI I spent about 6k updating the unit I am in, but basically did everything myself. New floors, molding, LED recessed lighting throughout house, new paint, new kitchen countertops/sink, bathroom/laundry room floor tiled, shower wall tile, new vanity, new doors. 

4. Last question, would it be a better strategy to convert my FHA to a conventional loan instead of using the refi money on a second property. I crunched the numbers and I believe my mortgage payment would go down about give or take 1k a month.

Any information would be greatly appreciated, thank you!

2Reply
88 views

Most Popular Reply

Jacob Murphy
Contractor · Cincinnati, OH · Member since 2015 · 92 posts · 75 votes
9y

@Nick Vought I think this is a great question. You may be able to prove me wrong but this is my 2 cents.

1. Do I have to convert my FHA loan to a conventional loan in order to use the refinance money on my current property to purchase my second? - Yes, you will need a investment property loan since you will no longer be owner occupying the property. Typically, lenders are looking to refinance at a max LTV of 75%. Meaning you will need to increase the value of your property from 450K to at least 562.5K to break even on the refinance. This will be tough to do unless you can really increase rents, then convince the bank to go off of income rather than comparable properties sold.

2. Does the refinance go off of just the appraisal value of the four-plex or does it also go off of the amount I am getting in rent? - Depends on the bank. I'd suggest using a small local bank's commercial lending department because they will have more flexibility in making this work for you circumstance.

3. With the rehab just being cosmetic like I said, how much should the min/max I should spend updating units? FYI I spent about 6k updating the unit I am in, but basically did everything myself. New floors, molding, LED recessed lighting throughout house, new paint, new kitchen countertops/sink, bathroom/laundry room floor tiled, shower wall tile, new vanity, new doors. - I say calculate how much you think your time is worth in the calculation. Then look at your rate of return for your time value + the material costs vs annual increase in rent. If I can get a 10% return or more then I am all in.

4. Last question, would it be a better strategy to convert my FHA to a conventional loan instead of using the refi money on a second property. I crunched the numbers and I believe my mortgage payment would go down about give or take 1k a month. - If I were in your shoes, I would refinance into an investment property loan at 75% LTV after fulfilling your 1 year requirment of living at the property. Then get another FHA loan for a triplex at 3.5% down and live there for a year. Next, either move to your dream house and fill your coffers from your passive income, or keep it going and buy another investment property with conventional financing (remember you are limited to 7 units using the FHA loan. That is why I suggested a triplex instead of a fourplex)

6Reply
See this reply in the discussion

27 Replies

Jump to latestLatest
  • Nick Vought
    OP
    Rental Property Investor · Salt Lake City, UT · Member since 2016 · 22 posts · 7 votes
    9y
    Originally posted by @Jeff Kehl:

    @Nick Vought let me suggest a different line of thinking. You just bought this property in March right? 3 months ago? Slow down a bit and focus on it before you move to the next step. Coming from me this is a bit ironic because I am always full-throttle 3-4 things going on at once but looking back I would have benefited by taking a chill-pill and focusing more. 

    Is everything good at the property? Are the other 3 tenants happy? You asked about criteria for whether to update the other units. Forget the 'force appreciation' thing for a minute. Have you done an evaluation of them? What kind of shape are they in? Hvac, floors, paint, counters, cabinets,etc? Do they need upgraded? How are your tenants feeling? Do you think they want to stay? What is your primary competition and what rents are they charging?

    Jeff this is probably just what I need to hear. I get caught up in creating this empire and I need to learn how to crawl before I can walk. 3 tenants love the apartment and its location. The other units are really in decent shape with a few minor things that need to be addressed. The units are a bit outdated and could definitely be updated. All the tenants want to stay. The average rent in the area is 950, there are a few multi family complexs that are asking for 875 but there location is not as good as mine and some of the larger apartments can go upwards of 1250 for the same unit sizes I have, 2 bed 1 bath around 950sqft. currently I am charging 875 a unit, but the unit I have renovated believe I can get 1100 or more for it. I just recently put an add for a roommate and had multiple people interested at 700 a month to rent out the room. 

     What value have you added?

    I am planning on renovating all units and doing some exterior work such as new paint color, fencing, and some small tree planting.

    I guess $112.5k rental units are a great deal in your area. But when you add $6k +labor to them are they worth much more? If I can bring the rents up from 875 to 1100/ 1125 and get $225/250 extra a month I will get that money invested back in about 2 years. That would also put me at the 1 percent rule, getting 4500 a month in rent on a 450000 purchased property.

    Am I saying you should not work on the duplex angle? No, I personally would partner with you on it and put up the $50k down-payment if it were a good deal on purchase OR IF THE VALUE COULD BE CREATED. But no thinking person (which excludes the government) is going to support you buying another retail priced property.

    I appreciate you post Jeff, and you're right. I will have to get creative on financing my next venture, but will try to set that aside and focus on this property till the right time comes. 

    0Reply
  • Sebby Gabre Madhin
    Investor · Mount Dora, FL · Member since 2015 · 92 posts · 44 votes
    9y

    my two cents.

    You really don't seem to have any equity in this house. You have a <$16000 down payment, and have owned the house for three months, so no chance of having any paydown of principal. Your only shot would be if the value appreciates significantly in the next 9 months until your are ready to refinance, but if you had a hard time getting it appraised for $450k in March, I wouldn't count too much at getting it up to $550k in a year. The BRRR strategy only works if you either pay cash OR have a significant rehab to truly force value. I don't see that from your description.

    Even if your were able to get it appraised at $550 k, at 85% LTV, that would give you $467 k , minus closing costs of several thousand? You would be lucky to clear $10K and would have a higher payment to boot, since your rate is not likely to go down and you would be financing a larger amount.

    If I were you I would focus the rest of this year on saving enough for another down payment through your income (take a side job, hustle your a## off!) and your rents, if you are lucky enough to have no major issues/expeditures to eat into your cash flow.

    If you find another multifamily cashflowing deal in a year, then can jump on that with another FHA loan with low down payment. Move into that unit and let your new tenant pay the $1000 for your current unit.

    Someone with more knowledge can feel free to correct me, but I do not think that you HAVE to refinance out of FHA when you move out in a year, just as long as you have been there long enough to show that your initial intent was to occupy the property. The only reason to refinance would be to get out of PMI, but, again, if you are trying to save cash to buy a second property, this may not be worth it to you.

    2Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free