Quadplex DSCR FHA Conventional

[Max Emery]

What is up BP?!

Scenario here to get some input on:

I plan to purchase a quadplex(a tri might be okay) in 2023. I moved in June and a few lenders have told me to hold off when I asked about loan options because one of the considerations is FHA. DSCR has also been discussed. 5% down for owner occupied multi as well. My plan would be to sell my primary(cash poor but own 3 properties) when it is ready to go and use that equity for downpayment on a multi. My goal is to use the equity in this house to scale up as much as possible. What sounds like the best course of action to make this happen? I'm interested in any advice that you guys have!

-Max

[Katherine Blazer]

@Max Emery I am not exactly sure what your question is. But yes, you can use a 3.5% down FHA loan to purchase a 4-unit property you plan to live in. If you plan to live in it and can qualify for an FHA or conventional, those are normally your best options.

[Max Emery]

@Katherine Blazer Thanks for your response! My question is what would a seasoned investor do in this situation to maximize growth? Househack w FHA/conventional vs DSCR vs options I don't even know about? My longer term goals is to build equity in a quad and convert to something bigger like a 8-16 unit complex.

[Nathan K.]

Great work on the 3 you do have, Max! A seasoned investor would maximize their returns for the least amount of their own money into the deal. The best loans for rate and down payment options are almost always for primary homes. DSCR is pushing 8-9% rates right now because they're considered risky (I've been working with the One Brokerage trying to get more details on them). So between FHA/DSCR, there's really no competition. If you can buy a 3-4 plex as residential while renting out the other units, you'd be hard pressed to fail.

Other food for thought:

1) How much equity do you have in the 3 properties you do have? Consider cross-collateralizing those 3 with a small local bank and taking out a HELOC to take down more properties.

2) Seller financing, loan-assumption, and wrap-around mortgages are also potential creative options.

[Max Emery]

@Nathan K.Thank you for that perspective, makes a lot of sense. I talked to a lender about cross collateralization and we calculated equity in each property, LTV was roughly 75-80%. He said I don't have enough equity just yet for that to be possible. Maybe that is a consideration for the future(Although I'm looking to make moves in 2023).

I was able to purchase property 2 and 3 with HELOC funds from 1. So, I am stretched and perhaps should just be patient. Not my strong suit.

Is there a typical % that folks usually shoot for with seller financing or is it completely what the two parties agree on?? Loan assumption is similar to subject to? I'll read more on that. Wrap-around is also something I'm not familiar with but will be. 

Thank you guys so much for helping me think through the next move!!

[Erik Estrada]

Quote from @Max Emery:

What is up BP?!

Scenario here to get some input on:

I plan to purchase a quadplex(a tri might be okay) in 2023. I moved in June and a few lenders have told me to hold off when I asked about loan options because one of the considerations is FHA. DSCR has also been discussed. 5% down for owner occupied multi as well. My plan would be to sell my primary(cash poor but own 3 properties) when it is ready to go and use that equity for downpayment on a multi. My goal is to use the equity in this house to scale up as much as possible. What sounds like the best course of action to make this happen? I'm interested in any advice that you guys have!

-Max

You can use an FHA loan to house hack a 4-plex, but be aware of the self-sufficiency test. 75% of the rents from all units must be able to exceed the mortgage payment.

DSCR could work, but you would need to put at least 20% down.

[Jack Mawer]

Is the ultimate goal to save on a down payment and put as little money as possible into the property?

[Max Emery]

@Erik Estrada Thank you sir!

@Jack Mawer I would say so. But, I am trying to make the decision whether to maintain my current property and turn it in to a rental(and then go FHA into a quadplex), or to sell my primary in order to make a downpayment on a nicer/more valuable quad or tri. Reason to let my primary go is flood insurance - way more per month than I expected it to be. Apparently with flood mapping changes in 2021, prices went up as well. The expectation was $35-50/mo but its more like $200 - cashflow killer if it is a rental. On the flipside, how much $$ do I pay in fees to sell a property. Thanks to everyone for their input here!!

[Matthew Wolk]

In order to go DSCR you have to own a primary. So if you sell your primary and then rent, that could be an issue. You MIGHT be able to get an exception at some lender but with no primary, you couldn't go DSCR most likely. You might have issues with conventional depending on if your income can support all the mortgages you currently have (I am not sure how much your mortgages or rents are on the other properties). You most likely will then have to go 25% down on the multi if you DSCR it. If you can go FHA into a quad and your income supports it, that would be best bet.

[Jacob Gomes]

There are a ton of investors who are looking for quadplexes in Nashville, unfortunately quads tend to be rarer than in a lot of other cities. I'd take your funds, find a partner on these forums, and go into an investment together. You can structure the deal based on who's doing most of the work/who's putting up more capital. 

Once you figure that out, MOVE QUICKLY! Competitive properties still sell fast. 

[Max Emery]

Thanks to everyone for your insights!

[Zach Edelman]

If you're planning on living in the property, a DSCR loan will not work as they are exclusively for investment properties. If you acquire the property with a DSCR loan, and live in it, you'll likely be violating the covenants of your loan docs.