Kodiak, AK · Member since 2016 · 13 posts · 2 votes
Hoping to get some insight on an opportunity I have. There's a fourplex I'm looking at, seller asking 550,000 that I can qualify for with an FHA, 3.5% down, using the rents from 3 of the 4 units. I love the idea of using the economy of scale, the great condition of the fourplex compared to most homes in our area, and the potential for much greater equity build-up from renters, than I'd normally be able to support with just a median income and not having 25% to put down. With mostly all new appliances, I'm guessing that cap ex and repairs should be relatively low. Gross rents once I'm out of the place should be around 5700, for the year I'm in will be about 4700. Monthly payments will be about 3600 (principle, interest, taxes and insurance, incl. PMI). Curious on the insight from others who have either used this approach, or who have sage council in this area. Our island in Alaska offers mostly pricey SFH ranging from 250-400k and I don't see many opportunities there. Thanks!
Hello. First off I would like to say that for FHA programs the correct term would be MIP which is mortgage insurance premiums. MIP and PMI are two different things as they are associated with their given loan program. A lot of people get this mixed up and end up not making correct choices.
You cannot cancel MIP on an FHA loan as that is only a thing for PMI on conventional loans. There, however, are certain minimum criteria to how long MIP can last and it's either 11 years OR the life of the loan. To get 11 years of MIP you would have to put down ATLEAST 10% for an LTV <90%.
Granted 11 years can still seem like forever, but the key difference is that MIP is based on LOAN amount and not equity. So your home could appreciate over the given years but it will not cancel out MIP even if you become under the 90% threshold.
Here is a link to the show you an example on how MIP is calculated for FHA loans:
Sounds like it could be a good deal. Remember to account for vacancy (if minimal use 5-7%) and monthly expenses (maintenance, utilities, reserves, etc.). Without knowing these costs, I would assume that the best you will be able to do is break even while living in one unit with no other vacancies. Which is not too bad as long as you save enough to have a couple months with one vacant unit.
You may also want to consider putting your "rent" into an account to save enough money to refinance with 20% down to eliminate PMI. Remember that FHA loans do not ever take away the PMI even if you get under 78% loan to value on that loan. If Kodiak is appreciating you may be able to use less out of pocket funds to reach an 80% LTV.
Tyson, thanks for the input! Where I've looked, it seems that you can get rid of the pmi once you hit 78% with the fha loan...do you know where I might find this out more definitively?
@Jennifer Newby, $137,500 per door looks "cheap", if each unit is about the same size as the lowest value SFR you can find that sold for $250,000. If you're already paying similar for rent, then swapping that out for a mortgage of $3,600/m AND an increased income of $4,700/m (less its expenses) looks like a plan. Why not keep staying there even after the year? You'll always have to live (ie. pay to) live SOMEWHERE.
I've read enough threads to believe @Tyson Cox is correct about the FHA Loans. ie. You'd have to refi OUT of it (once you have sufficient equity) so as to eliminate the PMI. [Anyone, is that wrong?]
Theoretically, shouldn't the 4-plex appraise at more than $550k now? ie. If you can get it for a BARGAIN price (maybe even less than $550k?), then you could have significantly MORE equity than just 3.5% - from day one (which should always be part of the goal)! All the best...
This should help regarding PMI questions. You can simply ask to have it removed once you meet the requirements. If you have appreciation in your favor, then it would make sense to refi so it's removed sooner. PMI is just throwing money away so the sooner you can get rid of it by whatever means the better.
Hello. First off I would like to say that for FHA programs the correct term would be MIP which is mortgage insurance premiums. MIP and PMI are two different things as they are associated with their given loan program. A lot of people get this mixed up and end up not making correct choices.
You cannot cancel MIP on an FHA loan as that is only a thing for PMI on conventional loans. There, however, are certain minimum criteria to how long MIP can last and it's either 11 years OR the life of the loan. To get 11 years of MIP you would have to put down ATLEAST 10% for an LTV <90%.
Granted 11 years can still seem like forever, but the key difference is that MIP is based on LOAN amount and not equity. So your home could appreciate over the given years but it will not cancel out MIP even if you become under the 90% threshold.
Here is a link to the show you an example on how MIP is calculated for FHA loans:
Hugely helpful comments- thank you guys! @Brent Coombs I wish I could get it for a bargain price, but I'm the only person getting to see it before the owner decides to list it. We are in a buyer heavy market here where there are often not many homes for sale and everything goes pretty fast if it's solid. This house has much more solid bones than any other I've looked at so far and with construction prices so high on an island in Alaska....I think it might be smart to pay more for something up front? That said, not sure how long it'd take to get to 20%, even making extra payments on principle in order to refi. @Nicholas Covington Really appreciate you taking the time to distinguish PMI and MIP for me. I had missed that and that's a big consideration. I hate the idea of throwing money away and yet, without taking the leap, I have no access to the rental income....
I did a quick calculation assuming 20% of rents for capex/repairs and 5% vacancy. You would have a positive cash flow of $675/month. (5700 rent-3600 mortgage-5700*.25 repairs/vacancy=675). That assumes tenants pay all utilities and that 20% of rent would cover repairs in Alaska. (I think so, but you mentioned construction costs are high and I could see weather causing more repairs.)
That would mean you'd be pulling in $8,100/year after having made only a $47,875 investment (3.5% down payment, 4.75% closing costs, and $2.5k in up front repairs). That's a cash on cash return of 16.9%.
In other words, I'd jump on that in a heartbeat.
I'm not sure if there are any lenders that will do 5% down on conventional loan for an OO four-plex, but if so it actually would be less up front than the FHA because you could avoid the up front MIP, which would drop your closing costs significantly. I know with 10% down you can do a conventional loan on a duplex, not sure about a four-plex, but again, if you can come up with that much, it would be worth exploring.
Hope it works out for you. Sounds like it could be a great deal!
Thanks for doing a quick analysis on that @Will Johnston. Being my first deal and a marine biologist who doesn't make much in the day job, I know I'm just trying to look at all angles so I don't get burned. I can't predict the future but I'm ready to have something tangible where I can put my money to work for me versus sitting in the savings account continuously.
Hey, Just caught this one a little late. I think you'll be somewhere above $3950 per month using FHA (4.5% interest). There's upfront PMI of 1.75% that most people choose to roll into the loan. So, @Will Johnston is assuming all utilities are separate. In Anchorage's market, all utilities are not separate or submetered. Electricity is always separate, and gas (if possible). I don't see too many others separating much else on multifamily. Gross numbers look good (assuming they are correct), but not something I'd want to bite into without knowing shared utility costs, maintenance, and condition of big ticket items.
Are you rolling the 1.75% into the mortgage in your estimate of the monthly payment? I included it in up-front closing costs, which would obviously make a difference in the monthly. I don't know anything about Alaska taxes/insurance or what rate Jennifer was looking at, so I didn't question her $3600/month number.
It's definitely worth taking a closer look at the numbers, but there's so little up-front investment on this, I'd probably do it even if cash-flow is break even. Then I'd work to pay down the principle until I had 20% equity and refi out of the mortgage insurance.
Thanks @Tyson Cox. I really liked the AHFC loan option for other homes I've looked at...but much less expensive homes, and not ones where projected income from 3 units is why I qualify for the loan in the first place.
@Will Johnston Yes, I rolled the upfront PMI into the loan to come up with that number. @Jennifer Newby you're on the right track with using FHA for 4-unit. I would also recommend thinking about your refinance strategy. You might look into doing a piggyback when you hit 90 or 85% LTV. The effective APR including all that PMI is 6.7% for FHA on anything over 80% with a 4.5% base interest rate. Pretty expensive and all that PMI is loaded towards the front of the loan.
@Jennifer Newby For FHA loans, the PMI doesn't drop off when you get to 80% LTV. The PMI is for the life of the loan. Depending on your income and income from the other units, if the DTI works then you can do a 5% down conventional loan. Then the PMI will drop when you get to 80%. You also want to look at the effective rate better the two options to figure out which one will be better in the long run.
@Upen Patel Do you know what the DTI conditions are for a 5% down conventional loan or who might offer this loan? I'm not sure I'd qualify but am interested in finding out should it lower the lifetime of the mortgage insurance.