FHA restriction a blessing or curse?

Question

Amateur investor here. First post. I own four townhomes in a 44-unit townhome complex. Am considering purchasing another soon. I am aware of FHA issue when 10% or more of units are owned by the same entity, an LLC in this case. Is this a positive or negative for me as an investor? I can take title in personal name, if necessary. Can this 'leverage' be advantageous, and how?

Dennis Simonson · Answer

WOW! Great responses.  I'm impressed with the quick and thoughtful replies.  Have decided to limit to 4 units,  HOA is amiable and residents are a close knit 'community' and amiable.  I am past HOA pres. Lived there for 7 yrs.  Will look for neighboring community for new investment.  Thanks again to all. Terrific site.  Have already recommended.

Bill Gulley · Answer

Are most buyers in the complex in N. Logan FHA borrowers?

1st, I wouldn't have the first unit, but whatever, yes you can kill the complex if your market relies on such financing, banks will look at that as well for conventional loans too. You make it harder for others to sell you could drive prices down. Is that the plan, to buy them all?

Own it all or don't own any is my thinking. Having a concentration of units in one complex that I don't have total control of just doesn't make a sound business plan IMO. It's not just disaters from mother nature but also from others in the complex, external factors, marketing, financing, maintenance and the image of the complex over the years.

Your only salvation might be owning a particular phase of the project that might be peeled away by lenders, but don't bet on it as the problems arise through the HOA of the PUD, if it is a PUD.

As to slick thinking circumventing lending regulations....with multiple entities....bad idea. How are you going to be represented in the HOA, have someone else show up acting like the representative of the owner? I'd think that if you attempt to deceive lenders concerning your ownership of units in the complex you'll be hearing about it.

Eric M. · Answer

There was a recent thread where people were discussing the risk natural disaster risk involved in having all your properties in one city or regional area.  I think that is too much worry, but all in one complex is really lacking diversification in every sense of the word.  I wouldn't do it.

Every risk there is, your setup just magnifies it for you.  You are at risk of special assessment.  One issue discovered that leads to a special effects your entire portfolio.  You do have more opportunity to vote your shares.  I hope you are heavily involved in the association to have some "control".  Condo boards are notorious for in fighting, and self-dealing and overall ineptness.  A bad board can really drag a complex down.  You are at real risk of that.

Dennis Simonson · Answer

A good thought.  I have no problem buying it in my name and later placing it into the LLC.  This however, would create difficulties for anyone else trying to obtain subsequent FHA financing as FHA forbids loans if a single entity has 10+% ownership in HOA complexes.  I am particularly seeking advice on advantages or negative consequences if I 10+ this complex.

Jim S · Answer

Why not create a 2nd LLC? I doubt they would check on who owns them.