Has anyone here built wealth through FHA 3.5% downpayment 4-unit loan?

5 million's picture
Rank: King Kong | 1,878

FHA will finance a 4 unit home with only 3.5% down. The rental income of the 3 remaining units is calculated as income and assists buyer for qualifying. Like all FHA home loans this is for owner occupied homes only meaning you will need to live in the property.

There is no maximum sales price but there is a maximum loan amount for this type of property. The actual maximum loan amount will depend what state and county the property is located.

FHA's nationwide basic mortgage limits ("the floor") for a fourplex:

$521,250
and up to FHA maximum loan ceiling in high-cost* area's for fourplex is:

$1,202,925

Has anyone here done this? What was you experience?

Comments (48)

Oct 11, 2017

It obviously depends on the market. It isn't exactly passive income buy a friend of mine used a similar program (10% down) on a duplex for $170k. He rented one unit and had a roomate that he charged that he split the market rate with on his owner occupant unit. His CoC yield was about 45%. He is now looking to use FHA to buy the duplex next door with 3.5% down. He could do the same thing and his CoC will be about 70% on this deal (due to higher leverage). His tax consequences will be fairly minimal for now due to the amortization schedule but I could see him getting in a phantom income situation down the line if he doesn't refi.

I have thought about taking this route, but it seems like a lot of effort for something that isn't really that scalable. Once you get to a certain point you have to go with traditional financing, figure out management (full time DIY and quit your job or give up a lot of your yield).

The best case scenario is probably to guy one you can live in until you have a family, essentially live for free and make a little cash , hope for some appreciation and sell it.

    • 3
Oct 11, 2017

What are the limitations on this as far as who/what can apply for the loan?

Say a buddy of mine and I want to go in on the development of this complex, we both live in 2 of the 4 units, pay "half rent" so that it doesn't ruin the cash flow, and lease the other 2.

Could the LLC that he and I would form be eligible for the FHA loan, or does it have to be a single person?

    • 1
Oct 11, 2017

You're not going to borrower in any entity for resi loans. Not even a trust. No ground up development with FHA either.

FHA loans are a great start for a lot of people. I would think of it more as an equity building play then a cash flow play. If you do it right, you can be out of your FHA loan and into a conventional within two years. Monthly PMI on a 1mil FHA loan is around $800mo.

    • 1
Oct 11, 2017

Any chance you can walk through the "do it right" scenario a little more? Seems like a pretty good exit if you're on the note for two years (believe you only have to live in the deal for one year) and then refi out with a different structure (LLC, etc).

Oct 11, 2017
PacNumber:

You're not going to borrower in any entity for resi loans. Not even a trust. No ground up development with FHA either.

FHA loans are a great start for a lot of people. I would think of it more as an equity building play then a cash flow play. If you do it right, you can be out of your FHA loan and into a conventional within two years. Monthly PMI on a 1mil FHA loan is around $800mo.

Interesting. So it has to be an existing complex and it has to be an individual borrower.

Do upgrades/renovations factor into this at all? I'm imagining it difficult to buy something that fits under the FHA limit and it be nice enough or well located enough to make it a desirable place to live.

    • 1
Learn More

Side-by-side comparison of top modeling training courses + exclusive discount through WSO here.

Oct 12, 2017

you can buy jointly as tenancy-in-common, but if i recall correctly FHA won't let you do LLC's.

    • 1
Oct 16, 2017

Do they allow DST's?

Best Response
Oct 11, 2017

I bought my duplex 6 months after starting my first job out of college with 3.5% down. Stuck some money into upgrading my unit (literally paying for the improvements as my paychecks came in every 2 weeks) and refi'd all of my cash out 9 months later with conventional loan. Subsequently got a HELOC as the market value increased purely due to market conditions which I'm currently utilizing on a flip. But to shed light on one point, you cannot do ground-up, but you can get an FHA 203k for acquisition and renovation financing. Basically you put together your whole budget and can borrow 96.5% against the total budget. They have a streamlined 203k for smaller renovations and the traditional 203k for larger $ amounts. From my research, there just has to be a structure there - the renovation can be pretty extensive. From my personal experience, it is a great tool to utilize as long as you're not completely disregarding the fundamentals of the property due to access to high leverage. The rent from my tenant covers my mortgage & tax payments every month and I also have a roommate paying rent. My only regret is not doing one of these deals every year once you refi.

    • 7
Oct 11, 2017

203k's do exist but I've never seen one done.

Technically FHA has Title 1 home improvement loans that will go in 3rd position.

Oct 11, 2017

Why didn't you do one a year?

Oct 11, 2017

FHA Is for primary residences only. You can't have more than 1 FHA loan in your name at a time unless you had to move in which case the next property you purchase has to be more than 100 miles away from the first property.

Oct 11, 2017

Several reasons. I like my place/didn't want to downgrade to shittier finishes, etc which of course I could've renovated again to solve that. Was working in MM CRE lending at the time - two years later jumped to family office located over an hour from my house and I also travel all over the country pretty regularly. Point being don't have much free time to self manage a bunch of units (typing this from my hotel room 1,200 miles from home). But most importantly, the market got too hot and if you're familiar with 2-4 unit investing, these get bid up worse than commercial to the point where you can't even make a moderate return. Unsophisticated buyers forget/don't realize all the expenses that they'll incur besides property taxes and insurance. Since single family homes have been getting stronger, I jumped into a flip (also hard to manage contractors remotely, but it's been feasible). Overall not a bad strategy to start, but it's not scalable. I think you're limited to 4 FNMA/conventional loans in your name and a total of 10 financed properties in your name.

    • 2
Mar 29, 2018

Can you do an traditional FHA deal or FHA 203K every year? My understanding was there was a certain amount of time that had to lapse before being able to apply for an FHA loan again.

Oct 11, 2017

I don't have an answer for OP but want to know if there is a Canadian equivalent for such a loan?

    • 1
Oct 13, 2017
enterthemonkey:

I don't have an answer for OP but want to know if there is a Canadian equivalent for such a loan?

My guess is that it's quite possible that US is the only country in the world with a scheme like this.

Oct 13, 2017

Possibly only in the US is there something like this.

Basically FHA is broke. The upfront PMI (it's like 1.75% of the loan amount and added to your principle balance) and monthly PMI are still not enough to offset losses in the fund. So, if another country was willing to insure the first 20% of these loan dollars, which is what FHA basically does, this country will have to accept the fact that they will create deficits in an effort to promote home ownership and the real estate market in general.

In 2009 when conventional lending was dead, Gov'y loans like FHA and VA were cranking. I know a Gov'y loan broker down here who makes over a $1mil a year doing mostly FHA/VA deals. He's a retired pilot in the Navy. The rebates on these deals are huge. He pockets over 2pts on every deal. In a 500k loan market that's not bad.

    • 1
Oct 12, 2017

"@PacNumber

San Diego has a hard market to hit in doing these. I come from the underground economy, where everything is cash-based.

I had considered doing it, but very few lenders are willing to do these type of loans, from my understanding.

From the owners whom I have known over the years, you are better off purchasing an apartment complex and being a landlord via duplex route. There are no shortage of renters though, since San Diego is a desirable place to live.

Oct 12, 2017

Half my clients acquisitions are cash. I get it.

I think you could easily buy a four plex East of Hwy 5 within FHA loan limits.

Are you saying lenders aren't willing to do FHA 4 unit deals, or FHA 203k? Cause the 2-4 unit FHA loans are done all the time. 203k not so much.

Oct 12, 2017

203k deals are good in theory but when it comes down to it many times you end up paying more. To finance the renovations, the lender requires bids from a few GCs. Unless there are major structural issues, you can get the work done cheaper without the GC.

Oct 12, 2017

203k at face-value is not even plausible in San Diego, I could be wrong, but even doing a basic search for a duplex or apartment complex comes over 500k+.

Which part of the 5 HWY are we talking about? PB area or somewhere toward the ghetto?

I think I would say both, having some conversations with RE investors.

I'd be back in the game soon as soon as I am back at the big Q. Having said that, I would not mind owning a +$1m apartment complex of 10-14 units, and working FT. I have done landlord and lease/rental agreements for owners in the past. The 3.5% limit would be within my favor.

Oct 12, 2017

Que?

Oct 12, 2017

Each loan amount you see is for max dollars lent on that property type.

1 unit, max in SD County is $612,950
2 unit max in SD County is $784,700
Etc...

It's not per unit, it's per max dollars for each type of property. And at $300k+ a door you have extensive options across the county.

Oct 14, 2017

Quick question on condo loans (234c loans), since I can't find a consistent answer on the web. Does anyone know if you're required to live in the condo in a 234c loan or if you can rent it out?

Oct 16, 2017

This thread inspired me to go deep down the rabbit hole of potential 2-4 unit buildings in LA, where I live. Prices have appreciated so much that doing this type of deal where you put 3.5% down, invest $100k into renovating, and occupy one of the units doesn't seem to pencil -- your debt payment eats up all your NOI and then some. If you have the cash to put 20-25% down it might work, but then that's a different situation entirely. Am I right in assuming this type of arrangement really only works at the bottom of a market or shortly into a recovery, at least for major markets?

    • 2
Oct 16, 2017

LA County, yes, city, no.

There are plenty of people that have built wealth in Palmdale (LA County) with FHA loans as their first deal.

Here is how you do it guys, you check the box on loan app that you'll live there, then you don't live there and rent the thing out. Work in LA, buy in Palmdale. Sell 2yrs later with no gains on the first 250k. Boom done (timing matters here).

Don't ask about creative stuff regarding the property. FHA isn't there for that. FHA doesn't lend on N/O/O, development or even really fixers in general. FHA is creative on the down, credit and DTI. They'll allow gifted funds for the down and a non-occupying co-applicant for DTI purposes. What more could one want?

    • 2
Mar 29, 2018
PacNumber:

Don't ask about creative stuff regarding the property. FHA isn't there for that. FHA doesn't lend on N/O/O, development or even really fixers in general. FHA is creative on the down, credit and DTI. They'll allow gifted funds for the down and a non-occupying co-applicant for DTI purposes. What more could one want?

A few questions for you Pac:

  1. What's the risk in checking the box on the loan app? I have a friend who has successfully done exactly this. Still, how likely is it that FHA follows up on this?
  2. What is N/O/O - No Owner Occupied?
  3. Re: Allowance of Gifted Funds - does this mean that a family member can gift funds to the purchaser?
    • 1
Mar 29, 2018

Your reply is pretty much spot on. For full disclosure I havent done an FHA deal in decades...

Risk on checking the box....I don't know. It's minimal. The question is about intent, So, that's up to you. NOO, yep, Non Owner Occ. Yes, family can gift funds.

Edit: The non occupying applicants income can help you qualify for debt to income ratios. But I think they have to be your immediate family. So, even if they don't occupy the property, you can use their income to qualify. Hope that makes sense.

Oct 18, 2017

I was in contract to buy a 2 unit property with a FHA 203(k) loan. I was going to live in one unit while the other got fixed up and then rent both out when I moved out of the city i'm in now.

Purchase: $180k
Reno: $60k
ARV: $280-300k
Monthly NOI - $200-300

Here were the downfalls.

  1. You need a really experience general contractor who has done FHA renovations before. I used a smaller guy and found the subcontractors myself, which kept my cost to $60k rather than $70k. But you only get 5 draws when you go above $30k and you have a FHA inspector who issues them.
  2. FHA financing is a huge PIA. Your property has to meet FHA standard of living guidelines so you may have extra costs that you don't think about having to work on initially.
  3. The property was listed on the county website as a 2 unit, but a few days from closing it turned out the property didn't have its occupancy permit and the deal fell through. Make sure you/your agent check county records physically, don't make my mistake and eat all your inspection/closing costs.

Overall, it's a good loan to take out, but it takes a lot of work, time, and patience. Oh! And also it takes much, much longer to close, up to two months.

Someone said 1-4 unit owners bid up properties like idiots. They're right. The market is way too pricey to the point I'm thinking of saving cash for when I'm in LA. PMI payments eat up your monthly cash flow and your main play is on value-add.

If you find a property with a good basis, go for it. Live in one unit and fix the others up and after 1 year, move on to the next project.

    • 4
Oct 18, 2017

Great comment, thanks.

Oct 20, 2017
Comment