I am a first time home-buyer and I'm looking to purchase a Multifamily home/Duplex, live in one and rent out the other one to begin my rental real estate empire. I was wondering if anyone has went this route and took advantage of this loan. I would like to know the highs and lows of this loan and personal experience with it.
Ive done some research, and some say that this type of loan requires you to already have a renter in place and a lease signed? Is this true?
Rental Property Investor · Saint Charles, IL · Member since 2014 · 304 posts · 222 votes
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If you are a newbie looking to build your real estate empire then buying a multi unit with an FHA loan is a best way to start/ house hack. The loan only requires 3.5% down and if you can qualify for loan based on your dti's ( debt to income ) ratio then there is no need to have renters in place. Live in unit for two years and then buy another multi unit and owner occupy the new property, rent out your old unit, which ideally gives you positive cash flow each month. You can then hold first multi unit for 3 more years and sell it for no capital gain up to 250k for single, or 500k if married. If you decide to keep first unit longer then when you goto sell you could do a 1031 exchange to defer taxes. This is a great way to start. Use BP calculator to make sure multi unit cash flows when you move out. Good luck!
Rental Property Investor · Saint Charles, IL · Member since 2014 · 304 posts · 222 votes
11y
If you are a newbie looking to build your real estate empire then buying a multi unit with an FHA loan is a best way to start/ house hack. The loan only requires 3.5% down and if you can qualify for loan based on your dti's ( debt to income ) ratio then there is no need to have renters in place. Live in unit for two years and then buy another multi unit and owner occupy the new property, rent out your old unit, which ideally gives you positive cash flow each month. You can then hold first multi unit for 3 more years and sell it for no capital gain up to 250k for single, or 500k if married. If you decide to keep first unit longer then when you goto sell you could do a 1031 exchange to defer taxes. This is a great way to start. Use BP calculator to make sure multi unit cash flows when you move out. Good luck!
Investor · Baltimore, MD · Member since 2013 · 15 posts · 0 votes
11y
Are you saying that After two years I can get another Multi-Unit FHA Loan and owner occupy another investment property? I currently own/live in a three unit in Baltimore that I purchased with an FHA back in 2012.
If you are a newbie looking to build your real estate empire then buying a multi unit with an FHA loan is a best way to start/ house hack. The loan only requires 3.5% down and if you can qualify for loan based on your dti's ( debt to income ) ratio then there is no need to have renters in place. Live in unit for two years and then buy another multi unit and owner occupy the new property, rent out your old unit, which ideally gives you positive cash flow each month. You can then hold first multi unit for 3 more years and sell it for no capital gain up to 250k for single, or 500k if married. If you decide to keep first unit longer then when you goto sell you could do a 1031 exchange to defer taxes. This is a great way to start. Use BP calculator to make sure multi unit cash flows when you move out. Good luck!
See what I don't understand is, how can they want a renter in place if you don't own the house yet therefore you can show a potential tenant the house? Very weird
Investor · Chesapeake, VA · Member since 2014 · 18 posts · 3 votes
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This is how I purchased my first invetment property. It was a four plex and I had one unit and rent the other three out. As Ashley stated above the only requirement was 3.5% down and proper DTI ratio. I was not required to have a renter in place and maybe this was becasue of my DTI, but that never came up doing the loan process at all. I don't know of any reason other than DTI ratio that a renter in place would be required but I could be wrong about that.
I advise all of my clients to purchase a rental propety this way if they are in a position to do so, as it is very effective way to start out with much less capital than the traditional method.
Excellent. I hardy have any debt and my bills monthly are under $500.00 a month so hopefully I should follow suite. Thank you so much for the info Kev!
Kevin, was the FHA Loan just a normal loan or was it called something else. Just asking because from what I read on an FHA Duplex/MultiUnit loan stated they would give you more of a loan due to the reasoning you will have more income because of the other unit to rent. Just wanted to know if there actually are two different types of FHA loans for multi families.
Investor · Chesapeake, VA · Member since 2014 · 18 posts · 3 votes
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Mine was just a standard FHA loan and has far as I know there are not different names for properties between 1-4 units. The underwriting process my change slightly with the consideration of the extra rental income, so that my help with the amount of loan you are able to get. But as far as the type of loan it really is just a standard FHA loan that you are looking for.
Baltimore, MD · Member since 2014 · 88 posts · 8 votes
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Can someone clarify this for me please? Is it an FHA requirement that if you purchase a home with a loan from them, you have to live in the home 2 years or is it just that you can't get another FHA loan from them for 2 years? I think if you get a loan thru Fannie Mae as an owner occupant they require you to live in the home 1 year.
Investor · Portland, OR · Member since 2013 · 143 posts · 105 votes
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FHA is a decent program if the numbers work but don't there are a few things to be aware of. 3.5%-5% down gets you a market rate mortgage but you have mortgage insurance, which is now for the life of the loan. The good news is that they just reduced premium amounts, its now .0085 of the loan amount as the yearly premium. Just make sure that its added in when you run the numbers. They will also take somewhat longer to close, cost marginally more in closing costs, and the property has to meet HUD requirements.
Duplexes are just like SFH except that you can claim the other side as income, with 15%-25% (I can't recall which) removed as a vacancy rate. You don't have to use the income if your personal finances are in order but you can if you are trying to purchase a property that you wouldn't otherwise be able to afford. Triplexes and 4-Plexes are the same except for one weird rule; 85% of current rents (all of the units) have to be able to cover the monthly PITI payment. Its not really a rule that will matter in many purchases but I did have one where the rents were so far under market that it would have ended up requiring a 15% down payment since the total loan amount was restricted by that rule.
Also, you can only have one FHA mortgage at a time, there are some instances where you can get another but they don't apply to most people. Good luck!
FHA is a decent program if the numbers work but don't there are a few things to be aware of. 3.5%-5% down gets you a market rate mortgage but you have mortgage insurance, which is now for the life of the loan. The good news is that they just reduced premium amounts, its now .0085 of the loan amount as the yearly premium. Just make sure that its added in when you run the numbers. They will also take somewhat longer to close, cost marginally more in closing costs, and the property has to meet HUD requirements.
Duplexes are just like SFH except that you can claim the other side as income, with 15%-25% (I can't recall which) removed as a vacancy rate. You don't have to use the income if your personal finances are in order but you can if you are trying to purchase a property that you wouldn't otherwise be able to afford. Triplexes and 4-Plexes are the same except for one weird rule; 85% of current rents (all of the units) have to be able to cover the monthly PITI payment. Its not really a rule that will matter in many purchases but I did have one where the rents were so far under market that it would have ended up requiring a 15% down payment since the total loan amount was restricted by that rule.
Also, you can only have one FHA mortgage at a time, there are some instances where you can get another but they don't apply to most people. Good luck!
Two questions?
1. How do you tag someone in the post? :)
2. Zach, do you think a FHA Loan is good for a first time homebuyer/future investor?
Investor · Portland, OR · Member since 2013 · 143 posts · 105 votes
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House hacking is a great way to get started and the FHA is a good way to do it if the numbers work. I can't say whether its good or bad in your situation, the numbers for the individual properties are all that matters. I run the numbers as though I am buying a rental property. If income from all the units minus mortgage, insurance, taxes, vacancy, cap ex, maintenance, utilities, etc. equals the right amount of money in my pocket then its a good deal and I'll take whatever reduced living expenses I'd get while there. If it wont cash flow when I move out and use it strictly as an investment property then I want nothing to do with it, regardless of what it may save me while I'm there. The only difference an FHA makes to me is adding the mortgage insurance to the list of expenses when I tally everything up on my spreadsheet. If it still cash-flows well with the added expense of the mortgage insurance then I'll still buy it, if not then I'd pass.
You can mention someone by typing the @ symbol and then starting to type in the name of the person you are trying to mention. The person or a list of people should pop up on the bottom of the reply box and you can click the right one. @James Post for example. Good luck!
@Zach Davis nailed it! The PMI is true, I look at it as when I'm ready to buy my second property and move out of this one hopefully I can refinance and remove or lower the insurance. That's if my market value increases of course. That's the plan so far, but still exercising other people's strategies like yours so I appreciate the info. Thank you so much!!
Real Estate Investor · Auburn, WA · Member since 2015 · 2 posts · 0 votes
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I just purchased a duplex with a VA loan and will occupy one unit. I have also used FHA in the past. One thing to be aware of: lender required reserves. You cannot obtain a loan to satisfy this- it must be savings or a gift from a family member. For a duplex, both FHA & VA require a reserve of 3x mortgage payment (PITI) to be in your bank account. For a four-plex, its is 6 x mortgage payment. This is something that was not stated upfront on my first FHA purchase and almost killed the deal.
75% of the rents from the non-occupied units can be accredited to your income for qualification. However, FHA/VA tend to side with the appraiser on market rents- make sure your rents are not above market.
Investor · Baltimore, MD · Member since 2013 · 15 posts · 0 votes
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I do know that your spouse can acquire another FHA loan if you have one already. I'm not sure if they changed any rules around that, but definitely check. This way you can have two FHA backed properties with little capital upfront.