Use FHA or conventional if you just started investment but you have enough downpaymen

[Jaekwan Lee]

Hi, I just start getting to know investment after reading a house hacking book and I really want to begin the journey of expanding rental real estate. I am married and my family size is three (me, my wife, and 3 yrs daughter). Since I need to think about sending my daughter school in a couple of years, I want to start with duplex. I have enough savings for down payment 20% but I also hear that you have one chance of using FHA loan. So here is my confusion. Is still better to get FHA loan with 3.5% when I have 20% down payment for the duplex? Since I feel I see two options I can think of.

- Buy duplex with FHA 3.5% and look for another property like fourplex

- Buy duplex with conventional loan 20% down and wait until gain another downpayment 

[Andrew Freed]

@Jaekwan Lee - You're asking the right questions. This decision alone can determine if you scale to 30 units in 3 years vs. 6 units in 3 years. The key to scaling a real estate portfolio is understanding how to utilize leverage to the best of your ability. For instance, the infamous househack. That is one of the best ways to utilize leverage. You can get into a 3-4 family properties (3 to 4 family is preferred since it is tough to find a duplex now that cash flows once you move onto your next househack) with as little as 3.5% down (FHA loan, you can only have one of these outstanding at any given time) vs. 5% conventional loan (you can have up to 10 of these on your credit report before you essentially run out of space) and create an investment property with little money out of your pocket.

I highly recommend that you utilize a low down payment loan (preferrably 5% down since it has less closing costs, you can get out of mortgage insurance once you hit 20%, and you save your FHA for another purchase) and move into a 3-4 unit property. The key is to ensure it will cash flow once you leave a year later with all the units rented. And continue to do this for 2-3 years with that original 20%. Combine this househacking with joint venturing on some commercial property around the same market (5-20 units) with a few other investors that compliment your skillset and viola, you will obtain 30-50 units in 3-5 years.

This is making some broad assumptions... you and your family keep your expenses as low as possible while saving and investing as much as possible. 

Additionally, you understand that anything you invest in with debt has to have a significantly higher return than the cost of that debt.

Lastly, you love the process. This is a grind for sure, but you will thank your future self 5 years down the road when you actually have control of your time (which essentially is the reason people seek financial independence). 

That is my soapbox for the day.... best of luck on your journey! 

[Jaekwan Lee]

Quote from @Andrew Freed:

@Jaekwan Lee - You're asking the right questions. This decision alone can determine if you scale to 30 units in 3 years vs. 6 units in 3 years. The key to scaling a real estate portfolio is understanding how to utilize leverage to the best of your ability. For instance, the infamous househack. That is one of the best ways to utilize leverage. You can get into a 3-4 family properties (3 to 4 family is preferred since it is tough to find a duplex now that cash flows once you move onto your next househack) with as little as 3.5% down (FHA loan, you can only have one of these outstanding at any given time) vs. 5% conventional loan (you can have up to 10 of these on your credit report before you essentially run out of space) and create an investment property with little money out of your pocket.

I highly recommend that you utilize a low down payment loan (preferrably 5% down since it has less closing costs, you can get out of mortgage insurance once you hit 20%, and you save your FHA for another purchase) and move into a 3-4 unit property. The key is to ensure it will cash flow once you leave a year later with all the units rented. And continue to do this for 2-3 years with that original 20%. Combine this househacking with joint venturing on some commercial property around the same market (5-20 units) with a few other investors that compliment your skillset and viola, you will obtain 30-50 units in 3-5 years.

This is making some broad assumptions... you and your family keep your expenses as low as possible while saving and investing as much as possible. 

Additionally, you understand that anything you invest in with debt has to have a significantly higher return than the cost of that debt.

Lastly, you love the process. This is a grind for sure, but you will thank your future self 5 years down the road when you actually have control of your time (which essentially is the reason people seek financial independence). 

That is my soapbox for the day.... best of luck on your journey! 

 @Andrew Thanks for replying. Your comment is really an eye-opening that how real estate strategy can be flexible. Just to review your suggestion, I understood as below.

 - Starts with 5% conventional loan for duplex
- Move over to 4 plex property with FHA loan
- lowering expenses while we are on the proess.

I guess the broad assumption for the duplex and the fourplex should be that both properties has to have positive cashflows. I am near Austin surburb area where duplex does not cashflow but we need to find a place to stay. Also, I can't find any four plex that makes sense. Is it still a good idea to go with 5% conventional loan?

[Andrew Freed]

@Jaekwan Lee - Happy to help. Not particularly. I was saying utilize a 5% down conventional first if possible and find a househack that is at least a 3 to 4 unit property since duplexes don't cash flow once you leave. If duplexes are your only option, I would recommend house hacking that and investing out of state to find more multifamily. Or you can invest in San Antonio and househack there. I know there are more multifamily in that market than Austin TX. 

[Ryan Kelly]

@Jaekwan Lee I wouldn't get too stuck on which loan product to use. With our higher interest rate environment, 3% or 5% down may not be enough to be cash flow neutral. I would focus on purchasing the best property in the best location you can for your budget so it's a good investment. As others have said, it may make more sense to use FHA on a quadplex as you have more units to try and generate income with. We have a lot of clients house hacking multifamily and happy to help run numbers for you.

[Crystal Smith]

Quote from @Jaekwan Lee:

Hi, I just start getting to know investment after reading a house hacking book and I really want to begin the journey of expanding rental real estate. I am married and my family size is three (me, my wife, and 3 yrs daughter). Since I need to think about sending my daughter school in a couple of years, I want to start with duplex. I have enough savings for down payment 20% but I also hear that you have one chance of using FHA loan. So here is my confusion. Is still better to get FHA loan with 3.5% when I have 20% down payment for the duplex? Since I feel I see two options I can think of.

- Buy duplex with FHA 3.5% and look for another property like fourplex

- Buy duplex with conventional loan 20% down and wait until gain another downpayment 

Because I don't know the price points in your market along with what you can get for rent it's impossible to answer the question about whether or not it makes sense to buy with 3.5% down or 20% down and still positively cash flow a duplex.   I recommend you do some market research on the price points to purchase and what you can get for rent to answer the question yourself.

Regarding a 3 to 4 unit, If you decide to use an FHA loan make sure you research the FHA self-sufficiency guidelines.

[Jaekwan Lee]

Quote from @Andrew Freed:

@Jaekwan Lee - Happy to help. Not particularly. I was saying utilize a 5% down conventional first if possible and find a househack that is at least a 3 to 4 unit property since duplexes don't cash flow once you leave. If duplexes are your only option, I would recommend house hacking that and investing out of state to find more multifamily. Or you can invest in San Antonio and househack there. I know there are more multifamily in that market than Austin TX. 

You are right. I see the number works better in San Antonio than Austin. It is kind of difficult to decide since I need to move with my spouse and 3 yrs old daughter.

[Jaekwan Lee]

Quote from @Crystal Smith:

Quote from @Jaekwan Lee:

Hi, I just start getting to know investment after reading a house hacking book and I really want to begin the journey of expanding rental real estate. I am married and my family size is three (me, my wife, and 3 yrs daughter). Since I need to think about sending my daughter school in a couple of years, I want to start with duplex. I have enough savings for down payment 20% but I also hear that you have one chance of using FHA loan. So here is my confusion. Is still better to get FHA loan with 3.5% when I have 20% down payment for the duplex? Since I feel I see two options I can think of.

- Buy duplex with FHA 3.5% and look for another property like fourplex

- Buy duplex with conventional loan 20% down and wait until gain another downpayment 

Because I don't know the price points in your market along with what you can get for rent it's impossible to answer the question about whether or not it makes sense to buy with 3.5% down or 20% down and still positively cash flow a duplex.   I recommend you do some market research on the price points to purchase and what you can get for rent to answer the question yourself.

Regarding a 3 to 4 unit, If you decide to use an FHA loan make sure you research the FHA self-sufficiency guidelines.

@Crystal Smith Thanks. It is good to know FHA self-sufficiency guidelines.

[Justin Brickman]

I would do FHA 3.5% and keep the rest in the bank.