First property on FHA loan, how to purchase second property

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First property on FHA loan, how to purchase second property

Carlos Rodrigues
Investor · Kearny, NJ · Member since 2016 · 214 posts · 29 votes
Good afternoon BP users! Let me indeed ice myself once again. I'm new to BP and the real estate business, and I'm currently sitting at a Barnes and Noble reading and learning the business to better myself. I'm also taking my 75 hours to get my real estate license. I joined BP because I'm planning to invest in real estate. I currently work in a corporate company as a electrician in the solar industry and I'm seeking future financial freedom. My plan is to purchase a multi family property and rent it out. I was trying to put as little money down as possible the 3.5% but I didn't want to commitment of keeping the property as my primary residence. My plan would be to live in the basement for about a year and rent out the other two floors, garages and rent parking spaces in the backyard. After about a year I'd like to move out and purchase a second property, again another multi family property. Now could I do this? How would I be able to do this legally? I would like to purchase the second property again with little money down with the 3.5% down payment. Could I have two FHA loans? Is there any different loan programs that could help me in such situation? What should I do? Thank you in advance, sorry this is all new to me. I'm reading real estate books and listening to BP podcasts. You can also guide me to a podcast and or other threads. Thank you once again!!
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  • Josh Mitchell
    Real Estate Agent · Naperville, IL · Member since 2013 · 402 posts · 177 votes
    10y

    @Carlos Rodrigues you are only allowed one FHA loan at a time. If you purchase the first home, you could refinance it out to the secondary market with a conventional loan, freeing up your FHA loan for the new purchase. However, if you go to refinance the first property, the rate will not be as favorable since it is looked at as an investment property.

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  • Carlos Rodrigues
    OP
    Investor · Kearny, NJ · Member since 2016 · 214 posts · 29 votes
    10y
    Josh Mitchell okay so only on FHA loan at a time which makes sense. So if I got this correct the only way I could purchase a second home is either with 20% down to use a conventional loan or pay the remainder of the 20% of the first property and then refinance with a conventional? Is there any other loan program that would help me purchase a second property without putting 20% down for either property? Or is my only option is to gain more funds to continue to grow without using 1031? I'm sorry if I seem confused or lost, honestly it's because I am. I wish to continue to grow once I purchase my first property after about a year or two but I don't have a clear image on what I should do once I get there. Thanks again everyone and Josh!
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  • Josh Mitchell
    Real Estate Agent · Naperville, IL · Member since 2013 · 402 posts · 177 votes
    10y

    @Carlos Rodrigues Ok so if you buy the first property with a 3.5% FHA loan. You must live in that house for a year as your primary residence. After that year you could essentially refinance it into a conventional mortgage. Again, this will come with a higher rate associated with the loan, because it will be looked at as an investment property. Refinancing out of the FHA loan will then allow you to obtain another FHA loan on a primary residence (seeing that you meet all requirement). You do not have to have 20% equity into a property to refinance it, if that is what you are asking.

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  • Carlos Rodrigues
    OP
    Investor · Kearny, NJ · Member since 2016 · 214 posts · 29 votes
    10y
    Okay Josh Mitchell I think I'm understanding now, I don't have to have the 20% of the purchase price paid by that one year. I just need to live at the property for at least a year and then refinance the loan with conventional. And now would there be a limit of FHA loans I could do? What I mean by that is if I keep refinancing to conventional and getting I new FHA loan, it seems like I would be able to do this every year. So would there a limit? Thank you!
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  • Joshua Lyon
    Investor / Sales Associate / Airline Pilot · Oviedo, FL · Member since 2016 · 105 posts · 31 votes
    10y

    Once you hit 4 properties it gets harder to finance more without paying off one or more of your mortgages. The federally backed loans weren't designed to make investors rich, but rather allow people to get into homes themselves. Therefore the requirements to qualify for mortgages gets a lot tighter. It's possible but requires higher down payments or higher interest rates. 

    Also, this is something I figured out recently and could be where your getting the 25-30% equity requirement. https://www.biggerpockets.com/renewsblog/2015/03/04/how-to-use-future-rental-income-to-qualify-for-duplex-loan/

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  • Carlos Rodrigues
    OP
    Investor · Kearny, NJ · Member since 2016 · 214 posts · 29 votes
    10y
    Joshua Lyon good point, they're not trying to make me rich with FHA loans. And it's good to know that about after 4 loans it will get harder. And I'm sure when I'm at that point I have figured something out and have a better and clearer understanding. But this leads me with a few more questions.. My plan is to purchase a duplex in New Jersey. I'm trying to put between 3.5%-10% down with FHA loan. I'm not sure yet on if I should put a little and save a lot or put a lot and have almost nothing saved. I mean if have PMI either way. I was wondering if I could rent both floors and have myself live in the basement. Also if there is separate attic access I would like to rent that out too. Any advice on living in the basement? Risk vs reward? 
Is this legal? Thank you in advance for your help!
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  • Joshua Lyon
    Investor / Sales Associate / Airline Pilot · Oviedo, FL · Member since 2016 · 105 posts · 31 votes
    10y
    Carlos Rodrigues Where in NJ are you looking at buying? As far as the banks are concerned, you just have to live there. You can rent parts of it out if you can find the renters. I know friends that rent each room out in their house. Another idea is turning a couple rooms into pilot/flight attendant crash pads if your close to an airport. Check out crashpad411.com for examples. There's a big demand for crash pads in NY/NJ. You charge a lower rate since they only need a place to "crash" for a few days a month but you can have say 10-15 tenants. Look at Airbnb as well. As far as the legalities of living in the basement, as long as it's up to code and it's your primary residence I don't think you'd have any problem. Somebody correct me if I'm wrong.
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  • Carlos Rodrigues
    OP
    Investor · Kearny, NJ · Member since 2016 · 214 posts · 29 votes
    10y
    Joshua Lyon wow that's great information!! It's funny because I'm actually looking to purchase a property in Elizabeth NJ right by the Kean University. I feel like it's a great location. It's near major highways, great shopping centers, Kean University, County Colleges, great schools, it's a growing community and it's right near EWR airport. One of the biggest airports, and I will definitely take a look at this!! Thank you so much!!! If anyone wishes to add on this please feel free. GREAT ADVICE HERE!!
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  • Mike Wood
    Developer · New Orleans, LA · Member since 2015 · 1k+ posts · 898 votes
    10y

    @Carlos Rodrigues What others has said is correct on the loans.  I would caution you on assuming you can turn a duplex into a fourplex (basement, unit 1, unit 2, attic), as the local zoning will dictate what you can do with the property.  Also, if you convert it illegally, it will be difficult to sell (zoning) and if you get caught, you could be in for some hefty fines.

    One last thing I will add is that units near universities will have higher turnover, and longer vacancy, especially in the summer months.  This can cost you significant lost rent if your only market is the school.

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  • Carlos Rodrigues
    OP
    Investor · Kearny, NJ · Member since 2016 · 214 posts · 29 votes
    10y
    Mike Wood thank you for your response. I'm glad your brought the school thing up because a its good to keep in mind who I'm renting to. I don't want to have any units vacant in the summer. Also I agree and understand that it might not be legal. I'm just unsure on how I could figure out if I could do live in the basement. And I also wish I knew how could I make it legal. But I would like to know before purchasing the duplex. Thank you again Mike and BP users for your advice. Please add on to this thread for any additional advice, suggestions or experiences you might have!!
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  • Angel M.
    Elizabeth, NJ · Member since 2016 · 27 posts · 12 votes
    10y

    @Carlos Rodrigues Hi, I'm new to the site as well and this is my first post. I'm also following a similar house-hacking strategy in Elizabeth, NJ. In 2009 I picked up a duplex as a short sale in Midtown (near St Mary's / EHS area) using FHA 3.5% down. I lived there for a few years & refi'd into a conventional. I then bought a 2nd duplex in North Elizabeth in need of major reno using FHA 203k with 3.5% down. I've been here now for 3 years and just refi'd into a conventional last month, in preparation for the next FHA loan. Both of my refi's required 20% equity, and even though the conventional rates are higher than the fha rates the monthly payment actually decreased since the mortgage insurance is eliminated.

    Hope that helps. Good luck!

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  • Joseph ScoreseBusiness Member
    Banker · Philadelphia · Member since 2009 · 2k+ posts · 631 votes
    10y

    Hi @,

    Welcome to BP..

    Every scenario is different with credit, DTI, Equity & etc.

    Let me know if I can assist. You can PM to discuss further.

    Regards,

    Joe Scorese

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  • Jodie LaPrell
    Real Estate Agent · West Virginia, USA · Member since 2016 · 1 post · 0 votes
    10y

    I'm brand new here with almost zero knowledge (do keep that in mind) but sometimes you can have more than one FHA loan. There are exceptions to the "rule", for instance, if your family size increased or you outgrew your current house in another way. I currently have two FHA loans due to a business we started that was too much for our previous house, we needed more land and space (we are renting the other house out - accidental landlords which is how I ended up on BP) Good luck.

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  • Carlos Rodrigues
    OP
    Investor · Kearny, NJ · Member since 2016 · 214 posts · 29 votes
    10y
    Thanks Angel M. It's great that you're in the area I'm in! Also that's true and something I didn't realize till now. Although the interest is higher the PMI gets removed balancing itself sort of. Also one quick question, how do I inquire 20% equity? Let's use an example of $300k purchase price and I put 3.5% down.. Leaving me with 21.5% to pay off to get the PMI removed right? But if I gain equity how would that apply? Thank you and sorry for any silly questions that I may have asked, this is a new field for me. Thank you again for working with me and helping out!!
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  • Angel M.
    Elizabeth, NJ · Member since 2016 · 27 posts · 12 votes
    10y
    Originally posted by @Carlos Rodrigues:

    one quick question, how do I inquire 20% equity?

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  • Ian Reeves
    Rental Property Investor · Shawnee Mission, KS · Member since 2016 · 58 posts · 52 votes
    10y

    Carlos, I just went through this exact situation myself. I had quite a bit of money in my 401K so my original plan was to use a 401K loan and put 10% down on my first duplex, then use an FHA loan the second time around. I made it through most of the loan process and my loan officer called me at the last minute to tell me I would either have to put down 20% or switch to an FHA. I ended up switching to an FHA loan and just putting 5% down. What I didn't realize (and my loan officer didn't either) was that using a conventional loan on a duplex is considered two residences (10% on each side = 20% of the total price). I even had the property switched to one tax id and they still wanted 20%. I really wanted to stick to duplexes because they tend to cash flow better, so I was struggling to figure out how to stick to my original plan of purchasing one property per year. I was not going to be able to save enough to put 20% down on a 250K duplex in a year. Long story short I got smarter and started looking into creative financing and ended up buying a second property just a month later using subject-to financing. And I am now working on a commercial deal with a partner and only bringing a little bit of money to the table. So it is possible, just requires some creativity and persistence to push through when you find obstacles. Wish you the best of luck! -Ian

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  • Angel M.
    Elizabeth, NJ · Member since 2016 · 27 posts · 12 votes
    10y

    Sorry for previous post, still getting used to doing this from my phone. The best ways I know to quickly gain enough equity to refi is by buying below market and/or improving the property. 

    My first duplex sold at the height of the market in 2005 for 385k. It was listed as a short sale for a while with foreclosure looming. Was listed at something like 300k, then 250k, then 199k, then 149k. I offered 110k, and bank came back few weeks later with 113k. Then over the next 3 years I renovated both units & increased the rents (from 800 & 850 to 1k & 1200). I refi'd in 2012 & then opened a HELOC a few months ago for 65k. Haven't tapped it yet, just positioning myself to be ready when the next deal comes up.

    2nd house was vacant for a few years and needed major rehab. Purchased for 130k, and put another 120kish into it. It appraised recently for 310k when refi'd.

    One mistake I made was not refi'ing the first one well before I bought the 2nd. When the 2nd deal came up I was in a rush to jump on it, but I still had my FHA loan on my 1st. So I actually applied for the 203k for 2nd and refi'd on 1st at the same time with the same lender. Had a double closing same day, 1 for purchase and 1 for refi. The drawback was I got a higher rate on the refi b/c it was considered investment property instead of primary residence. I learned my lesson and didn't make the same mistake the 2nd time around!

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  • Carlos Rodrigues
    OP
    Investor · Kearny, NJ · Member since 2016 · 214 posts · 29 votes
    10y
    Thank you Ian Reeves for your response! In the future of my second purchase on a $250k- $300k duplex I just might not have 20% either. And that is why I would like to know what I can do. I feel like I got the impression as you mentioned to get creative. It seems like I can get another FHA loan just like Angel M. did. Also you Ian Reeves mention that I could subject to finance, which I'm not to familiar with but I'll research and study on that a bit more. Also it seems like to gain equity on a property and then use that equity to purchase another property I have to make the property gain value?... Again thank you everyone for helping me out, looks like there definitely is a way to get a second duplex after my first duplex looks like I just need to explore more what's out there. If anyone has any past experiences on what they did that worked please if you're able to share that with me. Thank you all BP users!!
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  • Ian Reeves
    Rental Property Investor · Shawnee Mission, KS · Member since 2016 · 58 posts · 52 votes
    10y

    @Carlos Rodrigues - Another potential option is to use owner financing.  If you read @Brandon Turner book on investing with low and no money down, that would be a great start to get a broad understanding of your options.  I would do some research and see if you have any local real estate clubs or landlording meetups.  As a younger guy myself, I have found that most of the landlords in my area are older and are very willing to help out a younger guy just getting started.  If you start networking and talking with people you just might find a deal falling in your lap.  There are lots of landlords who are looking to retire and don't want to deal with managing tenants, often owner finance can be win-win.  They get the benefit of continued monthly income (better tax situation for them) and you get your first property without the restrictions of bank loan terms. Good luck!

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  • Carlos Rodrigues
    OP
    Investor · Kearny, NJ · Member since 2016 · 214 posts · 29 votes
    10y
    Thank you Ian Reeves I will definitely check out his book. I've been listening to his pod casts and I'm on podcast 23 in 6 days. I've gained tons of knowledge just on there alone! I love that option as well on owners financing. Many great ideas is what I conclude here. I just need to keep gaining knowledge and I'll find answers on the way. Also it seems like networking is a huge deal in real estate, I'll definitely be working on that. Again thank you Ian and everyone who's helped me out on this thread!!! Again anyone with additional information please feel free to share it!!
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  • Michelle Melchione
    Pueblo, CO · Member since 2016 · 42 posts · 7 votes
    10y

    On the PMI thing, I had read something about LPMI. Which is where a lender will pay it upfront so you dont pay it monthly. Instead you take a slightly higher interest rate, which in theory would provide a bit more cash flow and a bit more interest to deduct. I could be wrong, and I'm no expert, so we might need that verified.

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  • Tim G.
    Rental Property Investor · San Diego, CA · Member since 2011 · 1k+ posts · 1k+ votes
    10y

    I bought my first two places within three months. 

    1st, a fourplex with an FHA203K renovation loan. 3.5% down

    2nd, SFR in area I wanted to live in. Used conventional renovation loan with 20% down and borrowed my Dad's credit as a co-signor. He wouldn't commit a cent to the deal but this helped get Debt to income in a range to allow it.

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  • Carlos Rodrigues
    OP
    Investor · Kearny, NJ · Member since 2016 · 214 posts · 29 votes
    10y
    Thank you Tim G. and that's great having someone help you out! And I've heard of 203k loan and I know that it's a loan to help you renovate/ fix the property. Do you or anyone on these forms know the guidelines on 203k loans? I mean I'll do my homework on it in the near future but hearing from you experienced BP users would be best! Thanks everyone in advance!!
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  • Tim G.
    Rental Property Investor · San Diego, CA · Member since 2011 · 1k+ posts · 1k+ votes
    10y

    @Carlos Rodrigues lookup my blog on here I wrote about it. I can't post links as its against the rules unless you pay for PRO. 

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