First Duplex Purchase with only $3,000 out of Pocket!

First Duplex Purchase with only $3,000 out of Pocket!

Residential Real Estate Broker · Mount Vernon, WA · Member since 2015 · 28 posts · 47 votes

We just received loan approval on our first investment property! We still have to sign and record the transaction, but we should be closed by the middle of next week. It is a duplex that we will live in half and rent out the other half. We are using FHA financing at 3.65% interest (I don't think rates can get much better than that).

I am excited and very nervous at the same time. Something about your first property is nerve-wrecking! We will be inheriting the tenant next to us, but they are on a month-to-month agreement. They have been renting there for 3 years now, and it seems like they take good care of the unit when we did our inspection. They are using Section 8 so that'll be a learning experience right off the bat.

I was putting off buying a property for so long, because I didn't think we could afford it. As it turns out, it was a lot more doable than I realized. It helps that we were able to apply the rent from one side of the duplex toward our income to qualify. 

We are getting in to this property for about $3k out of pocket, which allows us to keep our reserves healthy for any unexpected expenses. Being a RE Broker representing myself in the transaction, it turns out I can use my commission as a "buyer credit", which is about $8k. The seller is contributing $2k toward our closing costs and the listing agent is contributing another $2.5k toward our closing costs. (Word of advice here: never ask an agent to contribute part of their commission toward your closing costs or you risk seriously damaging your relationship with them. In our case, it was a very tough negotiation with a stubborn seller, and the listing agent offered her contribution to bring the deal together. I've also built a great relationship with a majority of the local agents in my area, so that helps too). 

We haven't even moved in to this one yet, and I'm already looking at how we can get the next deal! 

Thank you, BP! 

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Financial services executive · Frederick, MD · Member since 2015 · 609 posts · 341 votes
10y

Congrats. You'll find Section 8 to be a breeze. You need to take your HUD1  to the Housing Authority so they can switch the direct deposit over to you. The good and bad thing is they'll likely be around all day. I like that at my remote rentals. I wouldn't care for it with them next door. I suggest you give them a plan of contact, hours method etc that takes place out and away from the home. Set clear boundaries that you don't want to receive reports about problems at your home. If they try stand firm cause nothing is worse than bitching tenants when you're trying to wind down. Finally, be nice but aloof. Don't make friends  brief and professional. If they lose their voucher you might have to put themy out one day.

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  • Residential Real Estate Broker · Mount Vernon, WA · Member since 2015 · 28 posts · 47 votes
    10y

    @Austin Youmans You absolutely can use your commission! The only thing that is a big no-no would be to give a referral fee to an unlicensed person. It's actually better to use it as a credit because you don't pay taxes on it that way. Use it to your advantage to negotiate a better sales price! If you have a lender you're working with for financing, make sure you talk to them about your intentions and they will help you figure out the best way to go about it. Also, make sure that you disclose in the Purchase and Sale Agreement that you are a licensed broker representing yourself. And then check with your managing broker about their requirements as well. Basically, when your brokerage creates their DA (Disbursement Authorization), in place of your name, have them write "credit to buyer." That instructs the closing agent to apply the authorized commission amount as a buyer credit, rather than cutting a check to you personally. Sounds confusing at first, but talk to the person at your brokerage that authorizes the DAs, they do this kind of thing all the time and will be able to help you.    

    @Matthew A. @Shanel Wiggins I do have to a split with my brokerage. All licensees in WA state are now "brokers" and you have to hang your license under a "designated broker." Technically, the BROKERAGE gets paid the commission, and then the brokerage authorizes disbursement to the broker. My company has a cap to the amount of commission you have to pay them in a year, and I have "capped" for the year. 

    @Account Closed jump in and start looking at your options.. it might be easier than you think. That was my experience, now I regret not jumping in sooner. 

  • Realtor · Sherman Oaks, CA · Member since 2015 · 64 posts · 22 votes
    10y

    @Jenna Estefan

    Can you disclose your mortgage broker and lender? Do you know if they lend in CA? I'm looking for references for myself. You can PM me as well.

    Thank you.

  • Residential Loan Officer · Murrieta, CA · Member since 2012 · 1 post · 0 votes
    10y

    I am curious how you got the loan approved, unless they changed some FHA rules or section 8 housing is different which very well may be the case. FHA typically requires proof of at least a 1 year lease, also most of the time you need some type of previous experience being a landlord. Again perhaps since this is section 8 the rules are different, i am just curious how you were able to make this work.

  • Kenneth HynesPro Member
    Rental Property Investor · Easton, PA · Member since 2013 · 359 posts · 92 votes
    10y

    @Jenna Estefan

    Congrats on your first building block :) that is alot to pay in PMI though. I would echo what @Rich O'Neill said about re-financing , because with a 3.5 FHA loan you will be paying that PMI the entire time of the loan , even after you cross the 20% thresh- hold

  • Rocky Hill, CT · Member since 2016 · 66 posts · 19 votes
    10y

    Thanks for the info @Jenna Estefan, I like the info that even though you aren't going to be positively cash flowing while your live there you did the numbers as if you weren't. Something that has been keeping me away from investing is that I'm assuming that I need to find a deal that has me cash flowing from day 1. Thanks for the insight. How did you find the property?

  • Greg JeanfreauPro Member
    Real Estate Agent · New Orleans, LA · Member since 2015 · 146 posts · 127 votes
    10y

    Congrats! @Jenna Estefan Sounds like a great start. I can't believe the listing agent performed a $2500 commisionectomy on herself. The seller must have been a real pain that she was looking to be done with. FHA loans are a fantastic way to start with very little out of pocket and even better for a double. I'll reiterate what @Rich O'Neill said. Put a reminder in to yourself for 2-5 years from now to check your equity/LTV if there is some appreciation. It may not make financial sense at that time if the interest rate is higher, but who knows. The rate hike talk has been going on for many years now...

  • Contractor · Chadds Ford, PA · Member since 2015 · 567 posts · 460 votes
    10y

    @Greg Jeanfreau The rate hike may never come! (wishful thinking)

  • Residential Real Estate Broker · Mount Vernon, WA · Member since 2015 · 28 posts · 47 votes
    10y

    @Account Closed I agree, PMI is super expensive! I'll be looking to refinance as soon as we hit that 20% mark. It could make a big difference in our numbers.

  • Real Estate Broker · Tacoma, WA · Member since 2016 · 34 posts · 14 votes
    10y

    Jenna that is SO cool! I am super excited for you as I can relate to the excitement of being new and closing your own first deal. Did you buy in Burlington?

  • Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    10y
    Originally posted by @Jenna Estefan:

    @Austin Youmans You absolutely can use your commission! The only thing that is a big no-no would be to give a referral fee to an unlicensed person. It's actually better to use it as a credit because you don't pay taxes on it that way. Use it to your advantage to negotiate a better sales price! If you have a lender you're working with for financing, make sure you talk to them about your intentions and they will help you figure out the best way to go about it. Also, make sure that you disclose in the Purchase and Sale Agreement that you are a licensed broker representing yourself. And then check with your managing broker about their requirements as well. Basically, when your brokerage creates their DA (Disbursement Authorization), in place of your name, have them write "credit to buyer." That instructs the closing agent to apply the authorized commission amount as a buyer credit, rather than cutting a check to you personally. Sounds confusing at first, but talk to the person at your brokerage that authorizes the DAs, they do this kind of thing all the time and will be able to help you.    

    @Matthew A. @Shanel Wiggins I do have to a split with my brokerage. All licensees in WA state are now "brokers" and you have to hang your license under a "designated broker." Technically, the BROKERAGE gets paid the commission, and then the brokerage authorizes disbursement to the broker. My company has a cap to the amount of commission you have to pay them in a year, and I have "capped" for the year. 

    @Account Closed jump in and start looking at your options.. it might be easier than you think. That was my experience, now I regret not jumping in sooner. 

    Congrats Jenna on the purchase, the first one is always the best one  in terms of starting the investing path.

    Some comments I would have from a lending point/as a lender:

    - yes you can use your commission towards your down payment when you're acting as the principal buyer in the deal. This is seen as no problem with underwriters in my experience.

    - in this case this was a duplex purchase with FHA so you didnt have to meet the self sufficiency rule FHA imposes on 3-4 unit properties which states that 75% of the monthly gross rents of all units (even the one you live in) must be equal or greater than the monthly PITI of the property (principal/interest/insurance/taxes). Its something to consider if you plan to ever purchase a 3-4 unit and house hack with FHA again.

    - with a duplex you can refinance once your equity goes from 3.5% (today at closing since you put down 3.5%) up to 15% equity since thats the min equity fannie requires on a conventional loan. Now if you purchased under market value you may be eligible for a conventional refinance relatively soon. A quick way to avoid MI would be to structure the loan as 80/5/15 with 80% being the first loan, 5% being the second loan, and 15% being your equity.

    - 3.625% rate is decent, but you should probably have gotten a pretty large lender credit back towards your other costs in this lending environment so hopefully there was lender credit as well. I normally structure the rate a bit higher to absorb that 1.75% (points) UFMIP (upfront Mortgage insurance premium) which is not to be confused with the monthly FHA MI of .80-.85% since this cost or points is financed into your loan making it harder for you to ever refi out of FHA post closing along with other financial benefits.

    Hope that helps.

  • Real Estate Broker · Tacoma, WA · Member since 2016 · 34 posts · 14 votes
    10y

    @Shanel Wiggins@Matthew A. Broker=Agent. Her managing broker may have let her keep 100% commission since she is buying her first home as Coldwell Banker Bain let me do. And even if she still had to pay a split, you can still apply your remaining commission towards the sale. 

  • Residential Real Estate Broker · Mount Vernon, WA · Member since 2015 · 28 posts · 47 votes
    10y

    @Aaron Rich I believe it's lender specific, not FHA specific. The lease I had that was submitted to underwriting was signed in May this year. I know someone else that did the same thing as me, but through a different lender, and he wasn't required to have experience as a landlord or proof of a 1 year lease either.

    @Greg Jeanfreau commissionectomy made me laugh. I was hesitant to post that publicly, for fear of having thousands of furious agents breaking down my door hahaha. Very rare for an agent to do it, but I know I'll do it sometimes if it'll keep a deal together. 

  • Residential Real Estate Broker · Mount Vernon, WA · Member since 2015 · 28 posts · 47 votes
    10y

    @Eboni Allen Thanks! I'm buying in Mt Vernon. 

    @Albert Bui um, wow! You explained more to me in your post than my lender has through the entire transaction! I wish I talked to you before... just goes to show you the loan officer you work with is important!

  • Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    10y
    Originally posted by @Jenna Estefan:

    @Aaron Rich I believe it's lender specific, not FHA specific. The lease I had that was submitted to underwriting was signed in May this year. I know someone else that did the same thing as me, but through a different lender, and he wasn't required to have experience as a landlord or proof of a 1 year lease either.

    @Greg Jeanfreau commissionectomy made me laugh. I was hesitant to post that publicly, for fear of having thousands of furious agents breaking down my door hahaha. Very rare for an agent to do it, but I know I'll do it sometimes if it'll keep a deal together. 

    FHA does not require 2 year landlord experience to use rental income on the subject property being purchased or non subject properties (other rentals that are not the subject) , Fannie mae (conventional doesnt either), and freddie mac (conventional) did require this but later in 2015 they also removed this requirement, so pretty much all governmental agencies do not require the 2 year landlord requirement in most cases (some niche programs do) which was usually documented via tax returns (in some rare instances I've used CPA letters or third parties to document landlord experience when needed).

  • Investor · NJ · Member since 2015 · 182 posts · 38 votes
    10y

    @Jenna Estefan Good to know each state operates differently as far as licensure. In NYS, all licenses are not "brokers" for first time agents you will get a "Salesperson License", after 2 years of operating as a Salesperson you can apply to be a broker (I believe you need additional training and must take a state exam). So, the licensed salesperson must hang their license under a licensed broker. 

  • Rental Property Investor · Ithaca, NY · Member since 2015 · 1k+ posts · 1k+ votes
    10y

    This is very inspiring and educational. Congratulations on your duplex, I'm sure everything will workout for you and you will be able to make many more deals now! As an RE agent myself, it's nice to know I can use my commission as a buyer credit! Learn something new everyday. 

  • Sierra Vista AZ · Member since 2015 · 6 posts · 2 votes
    10y

    That is super-cool! That sounds like something we might want to do. We are military and move everywhere....plus our income isn't great right now. Inspiring!

    Odd question (I'm sorry if it's a stupid one).....how do you become a broker? It seems to me that if I want to start looking into my family moving into houses we purchase as investment rental real estate to rent out as soon as we move, I'll want to start thinking about these things.

  • Philadelphia, PA · Member since 2015 · 7 posts · 3 votes
    10y

    Congratulations!

  • Investor · Forest Hills, NY · Member since 2016 · 12 posts · 6 votes
    10y

    Congratulations! Thanks for the share!

  • Residential Real Estate Broker · Mount Vernon, WA · Member since 2015 · 28 posts · 47 votes
    10y

    @Shanel Wiggins it is interesting that each state is unique. WA changed to an all broker state, and now we have 3 levels of brokers, Broker, Managing Broker and Designated Broker. After 3 years you are eligible to take an exam to be a Managing Broker. A broker and managing broker must hang their license under a designated broker. Sounds like it pretty much works the same, just with different titles. PS that's funny you're in Mount Vernon, NY because the duplex we are buying is in Mount Vernon, WA. 

    @Amanda W. It's depends on which state you get licensed in. Each state has specific license requirements, and you have to be licensed in the state you plan to do business, so that might make it difficult if you're going to be moving from state to state frequently and doing deals in different states. Some people get licensed in multiple states, but I'm not sure how difficult that would be. In WA, to get your license, you have to do 90 hours of RE courses that are approved by the DOL and then you have to pass a State and National exam. Then you have to do continuing education. Just depends on your goals/needs if it's worth it to you. Hope that helps! 

    You should look into if you can get multiple VA/FHA loans. I believe you can get multiple FHA loans if you move away, so that could be a great way to acquire rentals as you move along, just be careful to not over-leverage yourself and that you have enough reserves to cover yourself if there is a disaster at one of your properties.

  • Investor · Boise, ID · Member since 2016 · 42 posts · 19 votes
    10y

    Great Job Jenna. A Venture Upwards!!

  • Investor · Philadelphia, PA · Member since 2016 · 32 posts · 4 votes
    10y

    that is great congratulations!!! What bank did you use that allowed you to use the rent as income before the purchase? I haven't had any luck finding one. Every bank so far has told me I  have to wait 2 years before I can count the rent as income.

  • Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    10y
    Originally posted by @Jenna Estefan:

    @Eboni Allen Thanks! I'm buying in Mt Vernon. 

    @Albert Bui um, wow! You explained more to me in your post than my lender has through the entire transaction! I wish I talked to you before... just goes to show you the loan officer you work with is important!

     Yeah it is really important I always stress that to borrowers to plan ahead but the reality is that most LO's meet borrowers and clients at the last minute when no planning can be done and we pretty much have to wing it the best we can with what the borrower is prepared to and able to show at that given moment.

    With 2-3 months or even 1 year advance planning the borrowing process can work like a well oiled machine. Additionally, the expectations can be set in advance so its a lot less stressful too especially for first timer's.

  • Real Estate Agent · Milwaukee County, WI · Member since 2009 · 3k+ posts · 525 votes
    10y

    congrats

  • Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    10y
    Originally posted by @Jenna Estefan:

    @Shanel Wiggins it is interesting that each state is unique. WA changed to an all broker state, and now we have 3 levels of brokers, Broker, Managing Broker and Designated Broker. After 3 years you are eligible to take an exam to be a Managing Broker. A broker and managing broker must hang their license under a designated broker. Sounds like it pretty much works the same, just with different titles. PS that's funny you're in Mount Vernon, NY because the duplex we are buying is in Mount Vernon, WA. 

    @Amanda W. It's depends on which state you get licensed in. Each state has specific license requirements, and you have to be licensed in the state you plan to do business, so that might make it difficult if you're going to be moving from state to state frequently and doing deals in different states. Some people get licensed in multiple states, but I'm not sure how difficult that would be. In WA, to get your license, you have to do 90 hours of RE courses that are approved by the DOL and then you have to pass a State and National exam. Then you have to do continuing education. Just depends on your goals/needs if it's worth it to you. Hope that helps! 

    You should look into if you can get multiple VA/FHA loans. I believe you can get multiple FHA loans if you move away, so that could be a great way to acquire rentals as you move along, just be careful to not over-leverage yourself and that you have enough reserves to cover yourself if there is a disaster at one of your properties.

    Thats a good point Jenna there are 4 exceptions and a borrower must meet one of them in order to get a 2nd FHA loan while having the first FHA loan in place with out having to refinance out of it and they are:

    -1) relocation to another area 50+ miles away for employment related purposes

    - 2) you were a cosignor on a FHA loan but were not the main occupant and now you want to use FHA for yourself

    - 3) you inherited a property or were legally awarded a property through court action

    - 4) you were recently separated/divorced and your exspouse holds a FHA loan with you on that loan but now you want to get your own FHA insured mortgage

    An important point to note is that if you're leaving the 1st FHA loan or property you may need 25% equity to use rental income to offset this mortgage so that you can qualify for your second home. The rule is to protect FHA in the event the borrower is getting over leveraged. However, a grey area is when the borrower has already vacated the 1st FHA property and now is in limbo either renting elsewhere or living with relatives. This grey area is because the borrower is now not considered "vacating a primary," any longer and can use rental income to offset the 1st FHA loan with out the requirement of 25% equity in the prior property. This is important for those are tight on income to qualify for that 2nd FHA loan.

    Obviously if the borrower makes a ton of income and can qualify for both FHA loans anyway then this loophole is not an issue.

    Most banks want you to atleast have moved away or have rented for atleast 6 months prior to starting that 2nd FHA loan. I think 4-6 months will be the grey area which an underwriter will make their own call and 6+ months is a highly likely call to make that decision.

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