FHA, MULTI-UNIT PROPERTY, AND A LOW CREDIT SCORE walk into a bar

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FHA, MULTI-UNIT PROPERTY, AND A LOW CREDIT SCORE walk into a bar

Shaneice J.
Newark , NJ · Member since 2016 · 8 posts · 5 votes

Hello BP community, 

I am a long time "lurker" on this site so please allow me to introduce myself! My name is Asia and I'm interested in house hacking/cash flow through an FHA approved multi family property. I have put together a plan and would like the communities feedback/ tips/ suggestions on if there's any holes in it.

About me: I'm 23 and moved to Chicago a few years ago to attend university. I became interested in real estate when I realized how difficult it is to start your own business. Especially with no time (because you're always working) and no money (because it all goes to bills, groceries, and parking tickets). 

Goal: To obtain a 4 unit property with an FHA loan. I would reside in one unit and rent out the other three units. I want to be able to house hack the property (live virtually rent free, while tenants pay mortgage and other non repair related expenses) as well as create sizable cash flow (minimum 1k per month) which would be reinvested into buying more real estate. My ultimate goal is to buy enough property within the next 3-5 years so I'm able to quit my full time job and live comfortably off the cash flow (while also reinvesting it back into real estate). Thus allowing me to focus more of my time and energy into investing in my brand/ building my own businesses.

Obstacle: Currently I am on the hunt for an experienced FHA lender who accepts credit scores between 600-620 (due to having less than 2 years of established credit history and 2 accounts in collections, one is completely paid off but remains on report, the other is from school and is only $991) To build my credit I have 2 credit cards, I only utilize 10% monthly and pay in full & on time. Currently I only have a couple thousand saved, but I have drastically reduced my living expenses by moving in with relatives so I am no longer paying rent (which was 1k) I also anticipate a higher than average tax return this year which I'll also save. So as of right now my biggest issue is finding an established FHA lender who understands how the loan works and is effective in securing them.

Plan: When you have a credit score under 680 most lenders require at least 3 months of PITI (principle/interest/taxes/insurance) in reserve. By the end of March I anticipate my savings to reach 7k (a conservative estimate). In Illinois IDHA offers two assistance programs for first time buyers in the amounts of 5,000 and 7,500. The rules for each varies but in any case you can use the money for closing cost or the down payment (however you must contribute $1,000 or 1 percent of the purchase price, whichever is greater).

Steps to ownership:

  • Find lender, get approved for a loan of 150k or less
  • Find Agent who specializes or is familiar w/ FHA loans
  • Purchase a foreclosed, tax lien, HUD owned, or short sell multi family property
  1. *this option is the most cost effective, but also the most difficult because of FHA guidelines which is why I need an awesome real estate agent!
  • Verify that property passes the Self Sufficiency test 
  1. *this is a rule for multi family properties purchased using FHA. "The self sufficiency test states that the maximum mortgage is limited so that the ratio of the monthly mortgage payment, divided by the monthly net rental income, does not exceed 100 percent". (Thank you Mark Hafeli @ chicago reinvestment I learned this from your site/BP! I copied the definition as to avoid confusion..hope you don't mind)
  • Utilize IDHA assistance program to put down 1% of purchase price
  1. *by using this option it leaves all my remaining savings available for PITI reserve
  • Ask the Seller to cover the closing cost OR have the closing cost included in FHA loan
  • After closing on property get insurance (umbrella too!), take property out of my name place in LLC, open separate bank account for rent checks to be deposited (although, I may just have the rent checks go directly into my betterment account so they can earn more interest)

Of course after this step the process begins for renting the units (if they're already not leased ... a girl can hope right?) Then I'll slip on my property management hat (Still learning and assembling a plan for this role) But I really do look forward to it! I'll get to learn a lot and dare I say it sounds like it may actually be "fun"!

So BP community, with the details given am I missing something? Is minimum 1k cash flow per month too optimistic? Has anyone had success purchasing foreclosed, tax lien, short sale etc properties using FHA? If so, any advice? Has anyone used the Illinois first time home buyer assistance program? Also lawyers, any advice on those?

I would also like to add as a side note that I've done my due diligence in understanding several real estate investing rules/ definitions. For instance I know the 1% rule (although personally I want to adhere to 2-3%) The 50% rule, The 70% rule, what is Cap rate, what is NOI and ROI, what's cash flow & how it works etc. Some things I left out in fear of being too redundant or coming off as a "know it all" because I defiantly don't Lol! 

I didnt expect for it to be so much writing, but if you made it this far thanks for taking the time to read and hopefully offer insight. I look forward to everyone's responses and learning as much as I can in the process. 

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Crystal SmithPro Member
Moderator
Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
10y
  • Cash Reserves- The plan to have $7K set aside may not be enough. When it's time to start making offers on properties make sure you evaluate the potential short term CAPEX requirements, independent of the FHA requirements. Unless you purchase a property where 100% of all the mechanical systems or major elements like the roof are new, you may need reserves beyond the $7K required by FHA. Nothing worse than having a major mechanical go bad & not having the $ to fix it & you have tenants waiting for you to fix it.
  • $150K move in ready multifamily- I'd research where properties in this price point are located to ensure it's someplace you'd want to live.    
  • Taking your property out of your name & putting it in an LLC- Be careful about this. Some banks may consider this a breach of the loan terms. What's your objective of moving the property from your name to the LLC?
  • Purchase a foreclosed, tax lien, HUD owned, or short sell multi family property - We've had success w/ all of these & you have a good plan, but don't limit your search to these type of properties. Don't ignore move in ready, non-distressed properties. There are many that are FHA qualifiable. Many of the distressed properties won't qualify for an FHA loan.
  • Regarding the 1% 2%,  3% ...rule- It's great to understand these rules but you should eventually establish your own finance ROI benchmarks & hurdle rates.
312-681-7487
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  • Logan AllecBusiness Member
    Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
    10y

    @Shaneice J., you're definitely on the right track. If you're in your 20s and currently unattached to children, house hacking is a no-brainer. If you do nothing else in real estate, you will have succeeded by getting into an Chicago fourplex as a young woman with only 3.5% down. Assuming the rents cover your expenses, in 30 years when you're in your early 50s and the mortgage is paid off, and you've done the smart thing by raising the rents over the years (this is Chicago we're talking about, not Podunk, Iowa), you will be sitting on a multi-million-dollar asset that cash flows thousands of dollars per month at the cost of a measly $20k or so out-of-pocket when you were 23. I can't think of any better way for young people with limited resources to prepare for their future so early on in life with so little cash out-of-pocket. Run the numbers and see for yourself.

    Also, remember this: you're young. You're not a 40-something married mother of three looking ahead to her golden years. Your priority at this point in life should be setting yourself up to build your balance sheet over the next few decades, not necessarily your current profit and loss statement via passive cash flow. Remember this when the turnkey providers come after you.

    Also, I put together a spreadsheet to help potential house hackers quickly analyze whether or not a three- or four-unit property qualifies under the FHA self-sufficiency test, which you mentioned in your post. There are other FHA requirements, of course, concerning which you should contact your local lender, but determining whether or not a triplex or fourplex meets the self-sufficiency rule is a good place to start as this rule will immediately eliminate many properties from your search, especially in expensive markets like ours.

    In terms of your questions, I'd say $1k/month is a bit ambitious if you're living in one of the units. But then again I don't know the Chicago market. Also, foreclosed, short sale, etc., properties typically require a cash buyer, and FHA guidelines demand that the property be in a certain condition to be approved for the loan, and as you know oftentimes foreclosed property isn't in the best shape. But anything is possible. Just keep looking. It took me 9 months to finally find my 4-unit househack I bought in an equally (if not more so) expensive market, Los Angeles. You will learn a lot, and yes, it is FUN.  I can't speak to the Illinois assistance program as I have no background with it.  In terms of legal counsel, you probably don't need to get an attorney on retainer just yet.

    I wish you the best, Asia, and feel free to reach out to me with any questions!

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    2Reply
  • Alex Saleeby
    Rental Property Investor · Beaumont, TX · Member since 2015 · 161 posts · 77 votes
    10y

    Hello @Shaneice J.. First of all, I want to congratulate you on your well thought out plan. You are certainly on the right track. Very few 20-somethings have this much clarity and focus. Fantastic!

    I agree with Logan on the points he made. Working on improving your credit score is of course important. There are plenty of free of inexpensive resources out there to help guide you through the process. 

    While $1000 net from the first property might be quite a stretch, remember that you can buy additional 2-4 unit properties using FHA loans. If you are able to find and purchase one or two such properties within the next five years, you may very well reach or even surpass this target.

    Good luck 

    0Reply
  • Account Closed
    New to Real Estate · Charlotte, NC · Member since 2015 · 177 posts · 69 votes
    10y

    @Shaneice J. 

    Welcome to BiggerPockets! You have come to the right place for RE investing, lot's of great info and advice. Much success to you! 

    1Reply
  • John CasmonPro Member
    Cincinnati, OH · Member since 2013 · 1k+ posts · 1k+ votes
    10y

    @Shaneice J. First off congrats on making the commitment and being so detailed in your plan. What areas are you considering for the 4-plex? Depending on your location some of the rules won't apply. 

    Post and engage in the forums and get out to some of the meetups. I can share a few contacts who can help you as you start building your team. 

    0Reply
  • Shaneice J.
    OP
    Newark , NJ · Member since 2016 · 8 posts · 5 votes
    10y

    @Logan Allec

    Thank you so much for your feed back! I downloaded the FHA spreadsheet you have linked. I am going to practice using it now by crunching real numbers using four-plexes currently on the market. I do have one question, what did you mean by

    "Your priority at this point in life should be setting yourself up to build your balance sheet over the next few decades,not necessarily your current profit and loss statement via passive cash flow".

    Can you please elaborate?

    Thanks again!

    0Reply
  • Shaneice J.
    OP
    Newark , NJ · Member since 2016 · 8 posts · 5 votes
    10y

    @Alex Saleeby

    Hello, Alex 

    Thanks for your feedback! I have a few questions regarding your remark

    " remember that you can buy additional 2-4 unit properties using FHA loans"

    How long do you have to wait to purchase another property using FHA?

    Is there a legal limit to how many FHA loans you can have?

    Also, I checked out your profile and you seem to have 10+ years in various sections of real estate. What is your biggest tip for an investor looking to buy and hold?

    and this is a lil' off topic but how is the Austin market for single family & multi unit properties for an investor looking to buy & hold ... or maybe even house flip? 

    Thanks again, sending you well wishes from the Windy city!

    0Reply
  • Daniel Sprague
    Rental Property Investor · Mankato, MN · Member since 2015 · 47 posts · 13 votes
    10y
    I would make sure you are careful about not paying rent yourself right now. With a lower credit score your lender is going to want a rental history Most likely 12 months at a minimum of cancelled checks showing rent paid I wouldn't be surprised if your lender brings up payment shock (going from zero housing expense to a mortgage) when you go to apply
    0Reply
  • Shaneice J.
    OP
    Newark , NJ · Member since 2016 · 8 posts · 5 votes
    10y

    @John Casmon 

    Hey there! Thanks for taking the time to reply. I am looking in the Hyde Park, Oak lawn,(near Chi state), as well as the Pilsen neighborhood. However I'm not dead set on any particular area, im more interested in the best deal. Chicago only, not interested in the suburbs just yet! John, from your profile you seem to have much experience in the multi family/ buy and hold game. Hope you don't mind I'm going to send you an email to further discuss team building contacts you mentioned as well as local real estate investing.

    @Account Closed Thanks for the warm welcome!

    0Reply
  • Shaneice J.
    OP
    Newark , NJ · Member since 2016 · 8 posts · 5 votes
    10y

    @Daniel Sprague

    Great point! When I was renting I stayed in the same small apt complex for more than two years. Do you think that rental history would count? I just recently moved. Also the rent was paid in cash and I was only given paper receipts which I didn't retain (or will have to dig to find) 

    Do you think it will beneficial to work out a system with relatives where I pay a portion of the rent and they keep it documented?

    0Reply
  • Alex Saleeby
    Rental Property Investor · Beaumont, TX · Member since 2015 · 161 posts · 77 votes
    10y
    Asia Whitlock before I answer your questions let me just say that I've never personally used an FHA Loan so I don't have first hand knowledge. From what I've read and heard from others, I believe that 12 months is the minimum time to live in a property before moving on to another. I found the HUD web site for you. I believe you'll find it helpful. Looks like they have links to lenders and down payment assistance. I live in SE TX quiet a ways from Austin. Lives in Austin about 20 years ago. Great place. Generally speaking, Austin is a hot market, competitive and rather expensive. Then again, Chicago is expensive as well. Other BP members more familiar with the Austin market are better qualified at answering specifics. As far as advice, do plan on building some reserves. You'll need to it once in a while. Don't stay too lean financially to avoid getting into trouble in case of vacancies, repairs, etc. Best wishes in your investing career. Keep us posted on your progress.
    0Reply
  • Mark Tapp
    Lender · San Antonio, TX · Member since 2016 · 22 posts · 10 votes
    10y

    Concerning your credit profile "obstacle", you might consider getting a secured (not prepaid) card from a national lender.  Put about $1,000 in the account and then use it like a debit card.  Be sure to pay it frequently (suggested bi-weekly).  Treat the card just like a debit card.  Over a short period of time, it will generally alert the lender of your good paying habits and you will be issued a small balance credit card.  Use these cards exactly the same way you would use the debit card and pay frequently.  Always maintain an utlilization of less than 30%.

    Credit scores are all calculated by algorithms.  You can affect your score positively by working in the parameters of the algorithms.  It would be a good idea to get the derogatory items removed from you profile.  Be cautious if you decide to use on-line credit repair companies.  Many credit repair agencies do not know how to help you build "business credit".  Be sure to maintain your current revolving credit lines and pay on time.

    In a few short months, you should see a rise in your scores.

    Hope this helps!

    2Reply
  • Account Closed
    Frederick, MD · Member since 2015 · 654 posts · 256 votes
    10y

    One. You can keep getting FHA loans, but can only have one at at time, so you'd have to refinance (or otherwise get out of it) before getting another.

    1Reply
  • John CasmonPro Member
    Cincinnati, OH · Member since 2013 · 1k+ posts · 1k+ votes
    10y

    @Shaneice J. Would be happy to help. I purchased my first duplex using FHA financing and I recommend the strategy to many new investors.

    You can only have one FHA loan out at a time so if you wanted to purchase another property using FHA financing you'd have to refi out of that original loan first. To do this, you need to have enough equity to qualify for a more traditional loan and there may be new loan origination costs and other factors to consider. 

    With that said, start saving, improve your credit, learn as much as you can and focus on getting that first property.  

    2Reply
  • Account Closed
    Frederick, MD · Member since 2015 · 654 posts · 256 votes
    10y

    @Shaneice J. - regarding the "higher than average tax return this year" - I suggest you modify your W4... no sense in loaning Uncle Sam money interest free.  If you aren't sure you can be disciplined enough to move the increase net you'll receive in doing so, into your savings account, then arrange for it as a direct deposit (from your employer) or automatic transfer (with your bank).

    On another note, you're subject line was too enticing to resist, so...

    FHA, MULTI-UNIT PROPERTY, AND A LOW CREDIT SCORE walk into a bar… LCS is head over heels with MUP, so when MUP nods toward the bar, and asks LCS, what she's drinking, LCS is tickled pink and responds that she'll have a cup of humility and promptly consumes it. Affected by the drink, LCS gets the courage to introduce herself to the others in the bar, starts sharing some of herself, asking questions, and soliciting feedback; all the while flirting incessantly with MUP. Pretty soon, LCS and MUP are surrounded with lots of folks who are willing to share too!

    Eventually, seeing their connection, FHA approaches MUP and LCS and lets them know that by the power vested in him, he can join the two. And so it went.

    With a new forename (HCS), and the passing of time, their family of MUPs grew and grew, and lived happily ever after.

    Wishing you much success!

    2Reply
  • Joe Santiago
    Rental Property Investor · Addison, IL · Member since 2013 · 37 posts · 6 votes
    10y

    Love the goals and the planning. 

    I was in the same boat as you last year. I am 24 and I recently purchased my first investment property, 4 unit using a 203k loan in the burbs.

     I wouldn't count on receiving any grant money for being a first time home buyer with a multi family property. I asked a couple lenders if there were those types of programs and was told that none can be applied to a multi family building. 

    If I were you I would be calling lenders right now and get pre approved or see what you need to do inorder to be approved. Most likely they will want more in savings, but some lenders can get creative. 

    0Reply
  • Alex Saleeby
    Rental Property Investor · Beaumont, TX · Member since 2015 · 161 posts · 77 votes
    10y

    @Shaneice J. i just realized that i did not give you the web site in my last response. Here it is:

    http://portal.hud.gov/hudportal/HUD?src=/buying/lo.

    0Reply
  • Shaneice J.
    OP
    Newark , NJ · Member since 2016 · 8 posts · 5 votes
    10y

    @Account Closed I spoke with a lender yesterday and it turns out my situation isn't as bad as I initially thought. Upon purchasing free trials from the 3 credit bureaus website my credit is 50 points higher than what was being shown on creditkarma.com (I encourage everyone who uses that site to also get scores from the actual credit bureaus... You'll be surprised). Joe you should check out this website http://www.ihda.org/homeowner/gettingLoan.htm there you will find the first time home buyers assistance programs. They even offer a list of lenders that deal specifically with IDHA loans. Even though you've already purchased a property you may still be eligible to use the assistance for your next investment as long as its not inside the same county as your first property. Please feel free to send me an email if you have any additional questions. There's nothing like free money! (although w/ one of the options you have to pay the assistance back so 5k/30yr loan =$41/month) 

    Thanks guys!

    0Reply
  • Crystal SmithPro Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
    10y
    • Cash Reserves- The plan to have $7K set aside may not be enough. When it's time to start making offers on properties make sure you evaluate the potential short term CAPEX requirements, independent of the FHA requirements. Unless you purchase a property where 100% of all the mechanical systems or major elements like the roof are new, you may need reserves beyond the $7K required by FHA. Nothing worse than having a major mechanical go bad & not having the $ to fix it & you have tenants waiting for you to fix it.
    • $150K move in ready multifamily- I'd research where properties in this price point are located to ensure it's someplace you'd want to live.    
    • Taking your property out of your name & putting it in an LLC- Be careful about this. Some banks may consider this a breach of the loan terms. What's your objective of moving the property from your name to the LLC?
    • Purchase a foreclosed, tax lien, HUD owned, or short sell multi family property - We've had success w/ all of these & you have a good plan, but don't limit your search to these type of properties. Don't ignore move in ready, non-distressed properties. There are many that are FHA qualifiable. Many of the distressed properties won't qualify for an FHA loan.
    • Regarding the 1% 2%,  3% ...rule- It's great to understand these rules but you should eventually establish your own finance ROI benchmarks & hurdle rates.
    312-681-7487
    3Reply
  • Shaneice J.
    OP
    Newark , NJ · Member since 2016 · 8 posts · 5 votes
    10y

    @Crystal Smith You are awesome thanks for taking the time to reply.

    I understand completely what it is your saying and it's actually given me a different perspective. Thanks for pointing out the Capex. The saying "you make your money when you buy" is true for a reason. As far as putting the property in a LLC, I thought it would make sense to protect myself from as much liability as possible. I will research the banks policy regarding this before making that move. It's not something that has to be done immediately but I intend on owning several properties ... seems like it could get messy if they're all under my name and something unfortunate happens.

     That's exactly what I intend to do! However I am enjoying the process of learning right now from vets like you! Thanks again! Will keep you posted

    0Reply
  • Melissa Gittens
    Real Estate Broker · Windsor, CT · Member since 2015 · 1k+ posts · 268 votes
    10y

    Thanks Logan I am definitely going to check out the spreadsheet 

    0Reply
  • Brandon Gentile
    Real Estate Agent/Investor · Clarkston, MI · Member since 2013 · 156 posts · 34 votes
    10y

    Awesome post @Crystal Smith! A lot of great nuggets there!

    0Reply
  • Jimmy Watson
    Investor · San Diego, CA · Member since 2014 · 65 posts · 39 votes
    10y
    Wow, I learned a ton from your post- thank you so much for sharing exactly what your plan is. I'm in a very similar boat... 24 years old, looking for a multi family, and investing in the Midwest (Grand Rapids, MI). Keep us posted on your progress and good luck with your search!
    0Reply
  • Crystal SmithPro Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
    10y
    Originally posted by @Shaneice J.:

    @Crystal Smith You are awesome thanks for taking the time to reply.

    As far as putting the property in a LLC, I thought it would make sense to protect myself from as much liability as possible......but I intend on owning several properties ... seems like it could get messy if they're all under my name and something unfortunate happens.

    312-681-7487
    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    @Shaneice J., from my reading, it looks that you will only be lent a maximum amount that results in your mortgage being just 75% of what your rent expectations will be (not 100%). For example, a four-plex that rents each unit for $500/m = $1500 (none for your one), of which 75% = $1125 maximum monthly mortgage; WILL allow a purchase price circa $150k, but would leave little in reserve for other expenses, of which there will be plenty along the way, as you have already been reminded about. The remaining 25% of "hoped-for" rent MAY alleviate some of those expenses, but should not be counted on. I agree with others who have written that $1000/m surplus is likely too ambitious. more likely, NONE of your own living expenses (other than free rent) will be covered unless 1: you have bought in a seedy area, OR, you get VERY lucky with buying a super bargain.

    Of course, I could be wrong. Your plan does have great bones. All the best...

    0Reply
  • Shaneice J.
    OP
    Newark , NJ · Member since 2016 · 8 posts · 5 votes
    10y

    @Brent Coombs

    Hello! and thanks for the feedback! To clarify:

    I can get a higher loan amount, I just dont want to. The reason being is that this is my first property and I am anticipating surprise expenses. A lesser loan amount allows me to keep the mortgage within my budget. I will still have income coming in from my FT job therefore if I have a higher vacancy rate or any unexpected repairs etc I will still be able to pay the mortgage. To sum it up I am only biting off what I can chew! 

    Although I am keeping my eyes open for any great deals within my 100k-150k range I am primarily focused on finding as you put it a "super bargain". Which is why Im looking first at HUD, foreclosed, tax lien properties etc. Yes, it may be harder to navigate with the FHA loan however I do think it's possible to find a property in that situation that's in good condition and does not need many repairs.

    I really appreciate you taking the time to respond and thanks again for the well wishes! I will keep you updated. 

    1Reply
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