All Forum Posts by: Erin A.

@Steve K. - thanks for adding to the discussion on the 75% rental income rule. Because my triplex was vacant when I bought it, I suppose I had to go with this rule because it didn't have the 2 years' worth of rental income. Do I understand your post correctly to mean that if someone buys an occupied multifamily via FHA they could count 100% of the rents as income if it had been consistently rented for at least the previous 2 years? In essence, my question is: is the 2 year requirement tied to the *property's* rental income or the *potential buyer's* rental income? Thanks for any clarification you can provide!

Wow, I've never heard of that 85% rule. Here's where I think the confusion may lie:

You are allowed to count 75% of the rents received from the non-owner-occupied units as your own income in order to qualify for a (higher) mortgage. Here's an example for a quad:

Unit 1: Yours

Unit 2: $650/mo

Unit 3: $650/mo

Unit 4: $500/mo

Total all non-owner-occupied units = $1,800

75% of that: $1,350 -- which you can use as additional monthly income to qualify for the mortgage.

Now, this was the case in December 2013 when I closed on my FHA mortgage for the triplex I own and still live in.

Have you called around to several other mortgage brokers? If this "85% rule" is indeed rubbish as the other respondents and I seem to think, you may want a different broker. ;-)

I had this same question when I was looking at multifamily properties and wanting to use FHA. I was told that the FHA won't make you kick anyone out or evict them just so you can satisfy the owner-occupancy requirement. You do have to move in at some point (or else you're committing mortgage fraud... yikes) but you don't have to break someone's lease to do it.

As @Rob L. noted, a lot of times the tenants are on month-to-month leases and at least one of the units can be delivered to you vacant. 

I ended up buying a fully vacant triplex so didn't have the good fortune of those prorated rents he speaks of, but if the closing is properly timed you could have some extra cash flow from the property the day it becomes yours. Pretty sweet.

Another thing I didn't know about at the time: You don't have to move into the largest unit. It can be any of the units. 

Good luck!

Erin

Like others who have posted before me, yes, I'd say the first step is to get in touch with some mortgage brokers to sort out what your options are. 

You'll also want to get pre-qualified / pre-approved for a loan so you know what your price range is going to be. This will prevent you from spending time research properties priced out of your range. Also, some agents may not want to show you properties unless you have the pre-approval letter. In their minds, without this letter, you could be wasting their time if you later don't qualify for financing and the deal falls through because of it. 

I went the FHA route for my first property, a triplex, and was also very concerned about out of pocket costs. There is the 3.5% down payment, of course. Typically, the home inspection, pest inspection, roof inspection, etc. are paid for out of pocket—but you might be able to negotiate to have the various providers paid through escrow (closing time). Prices for these reports vary. Here in California, I think I paid around $300 for the home inspection, around $200 for the pest inspection and around $100 for the roof inspection.

The appraisal process for FHA is a real bear. FHA appraisers are very concerned about (perceived) health and safety issues, and will "fail" a property if there are broken windows, mold, unsafe living conditions, etc. etc. Since you are wanting to do a 203k where these issues might exist, I'm not sure what the protocol is. (I didn't do a 203k.) But for straight FHA, if any of these issues are found, the seller has to fix them and then the appraiser comes back to the property—and you have to pay for the re-inspection! I was told initially that the appraisal would be $750. The appraiser ended up having to come back TWICE at a cost of $100 each additional time. So it cost me nearly $1,000. Argh. I was lucky enough to have this expense paid by the mortgage company, but I had to reimburse them at the close of escrow. In other cases, this could be an out-of-pocket expense, which is why I mention it here. Ask your lender who pays for the appraisal.

Lastly, for a 3- or 4-unit property purchased with FHA, you are required to have 3-4 months of reserve funds. This means that you take your monthly PITI payment (principal, interest, property taxes and insurance) and multiply it by 3 or 4, depending on what your lender requires. For example, my monthly PITI payment is $1,133, so I had to put up around $3,500 in reserves.

That's all I've got! If you have more questions or want to talk about FHA, please send me a message. Best of luck to you!

Erin

@Jerry Padilla, you're right, I think I got that mixed up. I think what we ended up doing was using the gift funds for the down payment and my 3.5% for reserves. Can't remember now... but glad it worked out!

Hey Kyle, as far as I know, there is no reserves requirement for a duplex!

I agree that the FHA program, which allows you to put 3.5% down on 2-4 unit properties, is a great way to start for some people. This is how I got started in real estate investment.

I can answer almost any other question about FHA except this one! I would call *several* lenders and ask around. Different lenders/banks may have different rules. And you definitely want a mortgage broker who knows FHA in and out. Mine knew most things... except for the 3 month reserve requirement on 3 & 4 units... a major caveat that almost derailed the whole deal a week before closing. (I was able to use gifted funds so it all worked out.)

Good luck! Please post again when you have an answer so others may learn as well. :-)

Erin

Great thread! Haven't read all the responses yet but have already taken down notes. Thanks!

I paint my units with the same interior paint (Home Depot's Behr Satin in "Natural Almond") and paint the trim & doors semi-gloss ultra white. Looks awesome, and I always have extra on hand for touch-ups between tenants regardless of which unit it is.

Definitely recommend lights on timers & mini blinds while units are vacant.

Hey @Jon S. ,

Congrats on deciding to take the REI plunge! How exciting! I have several thoughts to share.

1. How sure are you about buying in neighborhood that you wouldn't live in? Is it a matter of crime rate, distance from work, price point, architectural style? 

2. Yes, I'd agree that common advice to new investors would be to live in one of the units of your multifamily property. It isn't necessarily "bad" or "wrong" to rent while building your portfolio... but I bet you'd come up with another down payment a lot faster if you didn't! It's also an added monthly financial obligation and might lower the amount of any financing you could get. 

3. If you bought a SFR in a neighborhood you like, could you rent out the spare bedrooms or put them on Airbnb?

Good luck!