When to make my first small multifamily deal

Question

Hey everyone my name is Marcus, I am a recent college graduate and I am looking to start investing in small multifamily housing units in Omaha, NE. I am currently trying to decide if I should try to pay off my student loan first before making my first deal or if I should start here in the near future? Any ideas or suggestions is greatly appreciated. Thank you

Stephanie P. · Answer

If you can use single premium finance PMI, it's cheaper than monthly.  You will have PMI on any loan to value above 80%.  PMI automatically falls off at 78%.  You can petition to have it taken off at 80%.  Big difference.

You're right; If you refinance the FHA loan into a conventional, as long as the loan to value is below 80%, there will be no PMI required and if you don't the MI from the FHA loan (according to the most recent FHA changes) stays for the life of the loan.

Stephanie P. · Answer

If the loan officer knows what they're doing (meaning they collect the necessary documents and they do a complete application on the front end and there are no wild cards like the appraiser finds an underground storage tank or mold or any other crazy thing that can come up to bite you) FHA can close in 3 weeks.  Some places do it faster, but 3-4 weeks is fine for most transactions.  Taking forever for FHA appraisers really isn't much of an issue anymore that I've seen and there really aren't any special hoops.  VA,  yes, but FHA, not really.  Health and safety concerns are things that have to be addressed regardless of your financing method as they should be.  Falling gutters, roofs, missing railings, peeling paint and bars across doors that don't have steps or a deck are things I've seen in the past to be addressed by both FHA and conventional appraisers.

Sorry I was so cavalier with my terminology.

MI or MIP is the term used to describe the Mortgage Insurance Premium on FHA. There is an Upfront Mortgage Insurance Premium (1.25% financed) and a Monthly Mortgage Insurance Premium (.85%).

PMI is Private Mortgage Insurance which is the term used to describe the Private Mortgage Insurance premium associated with conventional and even jumbo mortgages.  Many factors come into the cost including debt ratio, loan to value, credit and credit score.

Hope that helps

Stephanie

Alina Trigub · Answer

@Marcus Ethen Your student loans will definitely make an impact on obtaining a new loan. However to confirm that the best would be to ask a banker directly.

@Upen Patel can you help answering Marcus' question about FHA financing?

Thanks!

Marcus Ethen · Answer

Thank you, and thanks for the advice.  That makes a lot of sense when it comes to the percentages and certainly makes my decision easier.  A follow up question I have is, will my student loans make it harder for me to obtain a FHA loan/financing? They are currently the only debt i have and have been paying well above the monthly minimum. Would banks take either of these into consideration?

Matt Morgan · Answer

Congrats @Marcus Ethen on graduating!  I personally would look to invest before paying off your student loans.  Think about it like this, if you make 15% return on you rental property and you’re paying 5% in your student loans, your gaining 10% of a return on your money by not paying off your loan and using that money to invest.  Also, if you can buy a home yourself, you can buy a 4plex with FHA financing terms.  That helps you have a leg up on the competition as you don’t need to put 20-25% down.  Good luck with whatever you decide.

Logan Fast · Answer

MI is mortage insurance, which I believe is typically referred to as PMI (private mortgage insurance). From what I was told, if you use the 5% down conventional loan then you will also have PMI, but it will automatically fall off once you have 20% equity in the property. You can just make the additional payments later if you wanted to get rid of that PMI. With an FHA you would have to refinance into a conventional loan at some point for the PMI to fall off.

Marcus Ethen · Answer

When you state MI is that referring to the monthly insurance? and if so wouldn't I be paying insurance on the property normally or is this an additional cost on top of what i would have to pay for?

Stephanie P. · Answer

The problem with FHA is the MI.  The upfront MI at 1.25% and the monthly that never goes away at .85% can be costly in comparison to having just a little more down.

Logan Fast · Answer

@Marcus Ethen I agree with @Matt Morgan about comparing the interest rates on your loans against your ROI from house hacking. Typically, getting into one of these places for 3.5% down FHA or 5% down conventional gives a much better return than paying off the loans. One thing I've noticed in the past year when searching for these types of properties is that nobody really likes to sell to someone using an FHA loan. It takes longer to process and there are hoops to jump through that involve the seller making repairs that they would rather not make.

Upen Patel · Answer

Hey! @Alina Trigub Thanks for the mention.

Hi! @Marcus Ethen This is a very personal question. Though with the rise in rates, I would recommend you buy an owner occupied multi-unit. You will get the benefit of an investment property and save on rent.

When to make my first small multifamily deal

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