FHA financing on owner-occupied fourplex (second investment)

Multi-Family and Apartment Investing
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FHA financing on owner-occupied fourplex (second investment)

Corbin Jones
Rental Property Investor · Joplin, MO · Member since 2017 · 65 posts · 9 votes

Hello,

I have a few questions regarding using an FHA loan to finance on a fourplex. I've read plenty of blogs about the benefits of FHA & conventional financing to house-hack and owner-occupy properties. I currently have a single-family unit in Milwaukee, but I would like to house-hack a fourplex soon through an FHA loan. I have a W2 job that supplies me with $65K per year, and my current rental unit supplies me with $9K in gross rent per year. I have zero consumer debt and no car payments, as I have a company vehicle.

1. When applying for FHA financing on a fourplex (or duplex/triplex), how can I utilize the gross rent in the actual qualification? What if the fourplex is currently vacant? If there are tenants, can I use those rents as qualifying income toward my qualification? How does this part of qualifying work?

2. How can I figure out how much I'll be able to qualify for? I would like to get a rough idea before I go and take a hard hit on my credit from a bank.

3. Where is the best place to locate multifamily units? I love Trulia and Zillow, but it seems difficult to find good units on that site. I have checked out Loopnet a little bit.

4. What is a solid cap rate for fourplex investments? 7% - 9%?

I look forward to your feedback, and let me know if there is anything else that I may have not asked about!

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Daniel GonzalezPro Member
Real Estate Investor · Maplewood, NJ · Member since 2017 · 127 posts · 47 votes
7y

@Corbin Jones

1. When I was searching for a property to househack, I looked at 2-4 unit properties. The lender will do a self-sustainability test to see if the rents from the other units would cover the note. Keep in mind this only applies to triplexes and fourplexes. The appraiser they send to do this test, in my experience, had no local knowledge and just looked at the first comps they found. They don't take into account any reno you might do. If the property is occupied they use the current rents. 

2. As others have mentioned speak to a lender. They can get some financial info from you and give you a general idea without having to run your credit. 

3. Use BP to find a realtor you want to work with, the realtor I used to close on my property is great and I highly recommend him. @Vaughn Smith If you're serious about finding an investment property he is awesome. 

4. Use BP, go to REI meetings, or ask a realtor. Even though jersey isn't the biggest it does vary in different parts of the state. Of course, that's my experience when I was analyzing properties. Cap rates can be everywhere. I focused more on cash flow and ROI as my main metrics.

Good luck 

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  • Seth Williams
    Real Estate Broker · Winthrop, MA · Member since 2014 · 260 posts · 199 votes
    7y

    1) you will be able to use 75 percent of rent for three units, and underwriting will assume you live in the best / most expensive unit usually. You’ll have to provide leases or use market rent if vacant. This is what a few lenders have told me in underwriting in the past.

    2) before you go crazy finding properties - ps just get an agent ! Probably on here for the area you are looking - get pre approved or talk to a lender, they could answer all these questions and let you know more accurately.

    3) see 2

    4) cap rate, which I also use as one indicator even on small residential - is subjective to the buyer, and the p&l provided, which is usually bull, and won’t be as accurate with you occupying a unit. Personally, everyone wants a different style cap rate or return , you have to Set your own criteria. You can look up local cap rates online, I believe irr.org or something, and you can get area cap rates based on LARGE commercial multi family apartments. 

    Best of luck! 

    1Reply
  • Marcus Auerbach
    Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
    7y

    @Corbin Jones I see that you work in NJ, so keep in mind that if you want to house hack you actually have to live in the property to qualify for an owner-occupied loan. I assume you are moving back to Milwaukee?

    It is not the easiest to buy a property with an FHA product in a very competitive market. Often times you end up buying a mediocre deal, because the best deals get bought up by cash buyers. However, there are conventional products, that allow you to avaoid FHA (and the FHA inspection) with 5% down.

    A lot of the 4 family inventory we have is low in come by design. You have to see if that feels right for you. If you prefer better neighborhoods, you should consider 2 or 3 families (a duplex with a 3rd attic unit).

    1Reply
  • Corbin Jones
    OP
    Rental Property Investor · Joplin, MO · Member since 2017 · 65 posts · 9 votes
    7y

    Thank you, @Seth Williams!!

    0Reply
  • Corbin Jones
    OP
    Rental Property Investor · Joplin, MO · Member since 2017 · 65 posts · 9 votes
    7y

    @Marcus Auerbach I am not relocating to Milwaukee. I wish I were, but I’m just waiting for my employer to relocate me to a less expensive area than New Jersey so that I can finally owner-occupy a home instead of renting. Hopefully that will be in the Midwest. I’m just preparing ahead of time. Thanks for the tips. Are there any legalities, rules, or procedures for renting out unofficial units, such as an attic unit?

    0Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    7y
    Originally posted by @Corbin Jones:

    Hello,

    I have a few questions regarding using an FHA loan to finance on a fourplex. I've read plenty of blogs about the benefits of FHA & conventional financing to house-hack and owner-occupy properties. I currently have a single-family unit in Milwaukee, but I would like to house-hack a fourplex soon through an FHA loan. I have a W2 job that supplies me with $65K per year, and my current rental unit supplies me with $9K in gross rent per year. I have zero consumer debt and no car payments, as I have a company vehicle.

    1. When applying for FHA financing on a fourplex (or duplex/triplex), how can I utilize the gross rent in the actual qualification? What if the fourplex is currently vacant? If there are tenants, can I use those rents as qualifying income toward my qualification? How does this part of qualifying work?

    2. How can I figure out how much I'll be able to qualify for? I would like to get a rough idea before I go and take a hard hit on my credit from a bank.

    3. Where is the best place to locate multifamily units? I love Trulia and Zillow, but it seems difficult to find good units on that site. I have checked out Loopnet a little bit.

    4. What is a solid cap rate for fourplex investments? 7% - 9%?

    I look forward to your feedback, and let me know if there is anything else that I may have not asked about!

    1. Work with a REI-friendly local lender. That's the long and short of getting that rental income to "count." NONE of our pre-licensing education, continuing education, or testing, covers rental income matters. It's niche knowledge the individual loan originator gets on the job. You can be a doctor with a successful 30 year career without being an expert in lung cancer, right? Same thing here. Or you can be a legit MD and licensed neurosurgeon without being any good at surgery, looking at you IRL Doctor Death.

    2. Ballpark each $1500/mo chunk of rental income will add $75k in purchasing power, for owner occupied low down payment 2-4 unit home purchases (if any of that changes, the math goes out the window).

    3. Local REI friendly Realtor.

    4. What people at your local REIA say.

    In case you didn't read between the lines, go to your local REIA meetup and drink some beers and talk to people. :)

    1Reply
  • Eric Carr
    Real Estate Broker · Los Angeles, CA · Member since 2017 · 655 posts · 293 votes
    7y

    Great work so far

    1. 75% of rents or market rents

    2. Don't worry about the hit, they aren't that bad and it's not going to weigh heavily since it is a mortgage preapproval not a shiny new credit card. Settle on an area, factor the average rents, pick a potential property to offer on and get preapproved for it. Even if you don't offer or its not available long, you'll need the approval for any property. And now you'll have it with average rents factored into the income

    3. Meet brokers or agents that are experienced with investors and investing. Off market, new to the market, these are ways to go

    4. Look at other factors like total ROI on a given property. If you are investing in an area, there's your cap rate - but beware, people get caught up in cap rate and don't consider a given rates implications

    Also factor your strategy, A, B, C, D class? Blue collar? White collar? Stable and steady? Emerging markets? each of these will take a different approach and has different risks and rewards 

    1Reply
  • Marcus Auerbach
    Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
    7y
    Originally posted by @Corbin Jones:

    @Marcus Auerbach I am not relocating to Milwaukee. I wish I were, but I’m just waiting for my employer to relocate me to a less expensive area than New Jersey so that I can finally owner-occupy a home instead of renting. Hopefully that will be in the Midwest. I’m just preparing ahead of time. Thanks for the tips. Are there any legalities, rules, or procedures for renting out unofficial units, such as an attic unit?

    I would say make sure it's official! Often times they are permitted and pass fire code, meaning they have 2 ways of egress. For me the risk of renting an unpermitted unit would be too great, not so much because of the permits, but because of my personal liability if an accident were to happen.

    1Reply
  • Daniel GonzalezPro Member
    Real Estate Investor · Maplewood, NJ · Member since 2017 · 127 posts · 47 votes
    7y

    @Corbin Jones

    1. When I was searching for a property to househack, I looked at 2-4 unit properties. The lender will do a self-sustainability test to see if the rents from the other units would cover the note. Keep in mind this only applies to triplexes and fourplexes. The appraiser they send to do this test, in my experience, had no local knowledge and just looked at the first comps they found. They don't take into account any reno you might do. If the property is occupied they use the current rents. 

    2. As others have mentioned speak to a lender. They can get some financial info from you and give you a general idea without having to run your credit. 

    3. Use BP to find a realtor you want to work with, the realtor I used to close on my property is great and I highly recommend him. @Vaughn Smith If you're serious about finding an investment property he is awesome. 

    4. Use BP, go to REI meetings, or ask a realtor. Even though jersey isn't the biggest it does vary in different parts of the state. Of course, that's my experience when I was analyzing properties. Cap rates can be everywhere. I focused more on cash flow and ROI as my main metrics.

    Good luck 

    2Reply
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