Buying 4-unit Rental Property with 3.5% down

[Brendan Finney]

Hello, 

I am 23yrs old & currently saving money to purchase my first rental property using an FHA loan. I have a few years to go but I have been doing research for a few months now and want to be fully prepared before jumping in. I am wondering a few things below. Thank you!

- Where can I find an accurate mortgage calculator to find out my estimated monthly mortgage costs + insurance?

- What are the most important methods/metrics I should be focusing on to evaluate an investment with this amount of debt? (96.5% leverage) 

- is using an FHA loan a realistic option in such a competitive / expensive market such as Boston?

- How much of the purchase price do I really need to have saved up? i.e if the home is $1M I have to put down 35k plus costing costs, but how much should I really have saved?

- What is the minimum required annual income to qualify for this loan program? Again, say if I would like to purchase a million dollar home using the FHA program, what would my minimum annual income need to be?

I appreciate any help. 

Best,

Brendan

[Rigoverto Sanchez]

1. Use the banks to your advantage. 

2. Not sure on this, but I would say 75%.

3. FHA is decent option if you can afford the rates.

4. Depends on your loan, talk to the banks. 

5. Google FHA loans.

[Mekkel Blanchard]

Hi @Brendan Finney great that you are preparing and gaining knowledge as you save! I am also from Massachusetts on the south shore and have done some house hacking to pick up properties. I have used Redfin or Zillow to estimate monthly payments and they are normally close to actual numbers. I use rentometer to figure out what local rents are and view what rentals are going for on HotPads (app). Closing costs are roughly 2% of the purchase price but as you work your way up to $1M purchase price the 2% rule will be less. The best option is to connect with a local lender and attend local meet ups and ask more questions there. I’m a realtor in both MA and RI. Contact me if you need further help or questions!

-Happy 4th of July!

[Patrick Drury]

@Brendan Finney
-I use a mobile app on my phone called mortgage calculator plus. It's an orange app with a house and a plus sign. It's free in the app store. I have an iPhone not sure if you can get it on other phones.

- It really depends on what you are looking for. I know people that are ok with buying an owner-occupant duplex in a great location and the mortgage is less than it would have cost to live in the area, but they still have to pay a living expense, ie the mortgage each month. I know other people that want to live "rent-free". They are looking for so a duplex that with the rents of one side can cover the whole mortgage. 

[Dave Skow]

@Brendan Finney 1) most lenders will have amotizing calculators avaiable on line 2) most important things are can you qualify and also is the realistic monthly cash flow acceptable 3) FHA is your only option for that down payment amount and some sellers could shy away from the FHA loan ...this is likely quite as bad as it was 6-8 months ago 4) the amount of income will vary based on many different elements so I would advise beginning the free pre approval process to know for certain and to get the otherquestions answered - thanks again and good luck

[Andrew Valeri]

Hey @Brendan Finney,

Congrats on deciding to take the step into RE world. 

If you're good with numbers - just having MLS listings sent to you by an agent makes its easy to run the numbers.

1. The mortgage calculators on MLS pulls in the taxes for the property you are viewing. It calculates the mortgage with the different PMI/different rates/different % put as down payment so you can understand what range you would be looking at for monthly payments depending on what the circumstance is. It depends based on your specific market/factors (i.e you're in a flood zone, are pets allowed in building, what level of ins you want, etc.) to determine the cost of insurance. I found when I was first looking to buy - realtors would show me numbers of how much insurance cost and other misc cost would be and they were all significantly lower than the actual cost. Personally I like to forecast Expenses high and income conservatively.

I found playing with the numbers myself and understanding what ranges were possible made me much more confident come time to offer and move forward after having offers accepted.

2.  Realistically, your first step is to talk to multiple lenders - let them know you are a new investor. Ask what products they offer. If you don't hear what you are looking for don't be discouraged. Let them know what you are looking to do and ask "How can I make this happen?" If they say its not possible - It's not possible at their bank. Ask if they know of any other banks from their experience that lend on. I made a list of 10 banks/credit unions in my area when I was looking to buy (during Covid when many banks lowered rates and stopped doing creative financing solutions.) None of those banks did what I wanted but one bank suggested 2 different banks that could possibly help. One of those banks found a solution similar to what i was looking for.

Being highly leveraged you will likely want to have a high reserve balance in place. Be sure to include high CapX/reserve/maintenance cost in your calculations. 

3. That will have to be something you will have to find out from your conversations with lenders. Some sellers are not interest in FHA because its a longer closing process (usually) and they may not want to fix the small items that FHA loans will require to pass inspection.

You may find that your current plan is "not practical" and you need to shift your priorities to align with what is possible or more likely to get you to your true goal.

Is there a reason you have to be in Boston or a direct suburb of Boston? Could you push out a bit further from Boston to a price point that will allow you to be more competitive.

Determine the difference between a want vs a need. Sometime it is hard to evaluate on your own and this is where a mentor can help. It is a sliding scale - you have to sacrifice in the "would be nice categories" for what is needed. 

4. What repairs are needed? There are much more cost to owning out side of just the purchase price and monthly payments. There is no right or wrong answer here. You must understand your own tolerance for risk. If the goal for real estate ownership for you is to get financially free and live a life by design then being super stressed and scraping by - living in fear of the next repair that is needed and how to make mortgage payments isn't a solid plan. I bought in Attleboro, MA a Triplex for $485k and my closing cost was about $12k. I wanted to be able to have 18 months of PITI payments in the bank ~$40k after my down payment because that made me comfortable. I also knew there would be a light rehab needed once vacating one unit.

Feel free to message me bout any questions you have!

[Lorenzo Prieto]

Hello Brendan,

1. 1. Bigger pockets has a basic mortgage calculator that can be helpful. However, if you're wanting a bit more accuracy a lender is able to do a bit more research to find the taxes, and estimated closing costs. Insurance can be found on the MLS.
2. 2. I’d first start off by understanding what your goals are and make sure they are realistic in your current real estate market. Are you wanting to cash flow, lower house expenses, etc. Once you know your goal you can use the rental property calculator that BP has to evaluate any potential deals.
3. 3. Some sellers are reluctant to accept FHA financing because FHA loans can take longer due to the stricter guidelines. However, it can still be done! The increased rates are putting downward pressure on the market, so I believe sellers are becoming more open to other types of financing since homes are starting to see more days on market and sellers can become more "desperate" to sell.
4. 4. This largely would depend on the requirements of the lender. Some lenders may require X amount of mortgage monthly payments in reserves and others will not need any. Depends on your loan ratios, credit history, ect.

[Charles Renn]

Hey @Brendan Finney,

There is a lot of good insightful feedback here. I miss MA! (UMass Amherst grad). 

If I can add anything, it would be to ask your lender about any restrictions FHA loans might have for 3-4 units. I'm in escrow with a client here in CA for a duplex and the hurdles aren't too many. The appraiser called out some chipped paint and fixing the water heater straps. The regulations are likely different in MA, but here in CA 3-4 unit properties have an additional hurdle where the gross market rent must cover 100% of the mortgage. Again, ask your lender, but things like these can be additional headaches, at least here in CA where this hurdle in high demand markets could be too high to jump over.

One last thought is that often with 3.5% down, your mortgage payment (PITI) is going to be "high." Unless you're house hacking for a few years it could take some time for the numbers to make sense.

Hope this help!

[Zierry Eme Carl T. Tagbas]

Hello @Brendan Finney! Super excited for you that you are thinking about investing in real estate in such a young age!

To answer you questions:

1) I totally would take advantage the calculator that your lender have or http://tinyurl.com/3hm4emk8

2) When I purchased my multi family with FHA loan and doing house hacking, I was looking for "good" number (good is very subjective tho). I used the rental analysis that BP offers - I focused on CoC and CapRate.

3) I cant speak about Boston but here in Spokane, FHA is a realistic option for a first time homebuyer/investor.

4) Speaking of your up front cost, you will definitely need to have some cash for closing cost (2%-4% typically but contact an escrow company to make sure). You will also need some cash to pay for inspections.

5) Best to talk to a lender for that question.

Best of luck out there! Please feel free to connect with me if you have any questions!

[Kathleen McDowell]

Quote from @Brendan Finney:

Hello, 

I am 23yrs old & currently saving money to purchase my first rental property using an FHA loan. I have a few years to go but I have been doing research for a few months now and want to be fully prepared before jumping in. I am wondering a few things below. Thank you!

- Where can I find an accurate mortgage calculator to find out my estimated monthly mortgage costs + insurance?

- What are the most important methods/metrics I should be focusing on to evaluate an investment with this amount of debt? (96.5% leverage) 

- is using an FHA loan a realistic option in such a competitive / expensive market such as Boston?

- How much of the purchase price do I really need to have saved up? i.e if the home is $1M I have to put down 35k plus costing costs, but how much should I really have saved?

- What is the minimum required annual income to qualify for this loan program? Again, say if I would like to purchase a million dollar home using the FHA program, what would my minimum annual income need to be?

I appreciate any help. 

Best,

Brendan

Congrats on starting your RE journey so early!  Great questions. I recommend all my clients start by talking to a lender or mortgage broker. They will look at your specific situation and explain all of your options available. Some things that will determine the outcome is if you plan to buy a duplex and live in one of the units and rent out the others. This is a great way to build wealth early and should be considered  Once you have that step complete, find a realtor given that its your first investment. Good luck!

[Colleen F.]

@Brendan Finney   Being in MA you should look into one of the MA first time home buyer programs. Check here:
First Time Home Buyer (FTHB) | Mass.gov for info. A specific MA program might be a better option for you then FHA but there are classes you must take to participate. They cover alot of the questions you have asked but don't have the same outlook as this site. THe investor side you might getter a better perspective here.

[Brendan Finney]

[Tom Wagner]

Hi Brendan, some great questions in your post so I'll take them one by one:

1) For an accurate mortgage calculator I would agree with others who have said that you should work with a mortgage broker. You can estimate FHA MIP payments by taking your loan amount and multiplying it by 1.05%, then dividing by 12, but this number won't be exact. More info on this can be found in HUD 4000.1

2) Acknowledgement of the risk you are taking on with a 96.5% leverage loan is *really* important and not discussed enough on Bigger Pockets in my opinion. If you buy a $1mm 4-unit and the market drops 20%, you'll be "underwater" on your mortgage by over $100k. Related to this, I think one of the most important metrics is Debt Service Coverage Ratio, which compares a properties Net Operating Income (NOI) to your monthly payment. This metric can be used to stress test your property and make sure it will still cash flow if there is a 10% or 20% rent decline.

3) Yes using an FHA loan is an option in Boston. My colleague Andrew Freed shared the graphic below earlier this year toshow that buyers are in fact closing FHA loans in Massachusetts. Sure, it may be hard to compete against an all cash offer for the same amount, but people are still house hacking in Boston and the surrounding area using FHA loans.

4) I would recommend having about 5% saved for a 3.5% down payment, and slightly more if the property you are buying is <= $500k.

5) Your loan amount will depend on the rental income (or projected rental income) from the subject property and you can work with your lender to get pre-approvals written for specific properties. You will also need to pass the FHA self sufficiency test on 3- and 4-unit properties, which can be difficult in Boston. Feel free to DM me if you need a lender recommendation, or take a look at the FHA 203(k) endorsement report to see which lenders are doing substantial FHA volume.

Good luck and please keep us posted on the progress of your search!