Analyzying a multi family home with an FHA loan

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Hello, I am currently looking to purchase my first home. I want to take advantage of the FHA loan and house hack with a multi family home with my brother. We are both first time home buyers. We were thinking of looking into a fourplex in either Albuquerque or Rio Rancho, nm. We also only plan to live in one of the units for the 1 year required by fha. Our goal is to have a cash flowing property after we move out and at the least live rent-free for the year we live in one of the units.

What would be some good things to take into consideration when analyzing the property?

What would be some things to factor in when analyzing a property due to using an fha loan.

What other strategies would be suggested for my brother and I looking to start out with multi family homes? Would it be recommended we each use the fha loan for a duplex or triplex each? Or would it be best for both of us to go in together on a fourplex? 

if we both decided to use the fha benefit together on a fourplex, would that mean that we are both now unable to use the FHA loan benefits or would we be able to use it on two projects since it is two of us.

My brother and I are partnering up in Real estate and are going all in.

You will have to pay mortgage insurance on the FHA loan as well as your monthly payment so be sure to factor that into your expenses.

Also, FHA appraisals are a bit different than conventional mortgage appraisals. The appraiser is required to do a more detailed inspection to ensure that the property is safe, sanitary, and habitable. They will look at the roof, the foundation, etc. With conventional banks their goal is to close the deal and sell the loan ASAP. With FHA their concern is that the person they lend to is living in a safe environment. See the difference? If there are multiple offers on the table you might miss out because it might take longer for the loan to go through.

I'm not sure how to answer the last parts of your question about the fourplex so I'll leave that to someone more experienced. I would think having two cashflowing 2-4 family properties between the two of you would be better than one fourplex, but I don't know enough about your market to really say. It also depends on your budget for the down payment and what you can currently afford. 

Good luck to you both! :)

@Sergio Castillo I tried to do FHA for my 1st MFI and it ended up financing the conventional given the loan insurance. FHA is a great way to finance your property if you think that you will not be able to come up with money in a short time or thinking of refinancing within a year or two.

I did not do it just because of all the insurance expenses taking from my NOI.

Depends on how serious you are. If it’s a long term career path then I would try for FHA under one person’s name and then down the line do another multi as a FHA under the other persons name. The nature of the fha loan might have more fee’s built into the loan as it is federally insured but the advantage is obviously only requiring a small down payment. I would be cautious that you’re getting a good deal as with so little equity I. The deal even if the property falls by 5% value you’d be slightly ‘underwater’ on the loan - again, not a huge deal if you’re playing the long game. Also, as a property manager living next to your tenants I would refrain from telling them you actually OWN the property, you can say you are the property manager that represents the owner in their absence or something, this way if they ask you to upgrade the landscaping or put in new appliances or give them a break on late rent etc. They don’t know it’s your decision and it’s easier to say you will check with the owner for approval and this way you’re not ‘the bad guy’.

Due to the fact that I am in this for the long term and have big goals in real estate investing, I am thinking that using the FHA under my name first then have the second one under my brother/partner's name would be the best option so far. What hesitations does anyone have with this process?

I would think the advantage of using the FHA loan would benefit me more for the long term investing due to the fact that there is less down payment required and the money that was left over could fund another deal for it's 20% down with a conventional loan.

I was thinking about the possibilities of refinancing each of our FHA mortgages after the year of completing the required term of living in one of the units. That way I could exempt myself out of the additional fees and insurance for having it under an ha loan. What are your thoughts on this?

The reason I am leaning toward this is because I would like to have much more rental investments and I am in in for the long run. Pay less down on the first two and be ready for the next investments. I am completely open minded to listen to doubts, hesitations, ideas, or other methods. @Mark Hughes Account Closedundefined

Yes that’s a possibility. With mortgage rates likely increasing 2-3 times in the next year it might be worth it to just keep the fha. Personally I did a FHA loan on my first home (townhouse in Denver) and I just did my best to pay it off quickly so that it was paid free and clear and then I did another loan for a new primary residence for myself and kept the townhouse as a rental unit and still have that property today. So for me, it took 3-4 years to pay it off but then it was almost 3 times as profitable as before and is my best cash flowing property in my whole portfolio. I have 10 other rental units all in abq now and am actually considering refinancing that original townhouse in co to be able to purchase another multi family property here. So there are tons of strategies and the good thing is if you buy for the right price that will have good cash flow you have options to tweak your strategy along the way to cater to your changing goals!! One thing I try to do is look back on values from past peak (ie from 2007) even in Zillow or something just to get a ballpark to see if you can see what the property or similar properties were selling for in peak versus now. For example a fourplex I purchased near central and Wyoming was listed at $160k but needed some work. I was able to find out the owners purchased it for around $195k in 2006-7 so I felt good about buying at this time and was able to negotiate down to 153k and renting each unit for about 515/mo. So it’s 1.3% on the 2% rule and also has some potential upside if I can continue to invest in the cap ex over the next few years to hopefully bring the value back up closer to $200.