Start Investing Easily With An FHA Loan (House Hacking and FHA Investment Properties)

Certified Mortgage Advisor
NMLS 1701021
Published 
August 13, 2019

Is it possible to buy an investment property with an FHA?

Now, let's about how to buy an investment property with an FHA loan. In the investment community, you'll see this is called "House Hacking". So if you're interested in learning a little bit more about it just search for house hacking on YouTube or Google, and you can find more information about it because it's a big deal in the the investment community.

Let's Use FHA's rule for House Hacking

Basically what we're doing here with house hacking or buying an investment property with an FHA loan is using the rules of the FHA loan to help you acquire an investment property in the easiest way possible.

Think of how difficult it is

Because, frankly, it can be really difficult to get an investment property. They're more scrutinized through the underwriting process. Also most of the time for an investment property, you either need to have a history of being a landlord or managing rentals, or you have to already have a primary residence. So let's say maybe you're renting now, or you own a primary residence now, and you're wanting to jump into investing, but you're trying to get over a lot of hurdles. There's a lot of scrutiny.

Yes, investment properties are expensive

The biggest hurdle is the down payment. Because I have up here on the screen is Fannie Mae's LTV matrix, which is basically how much money do you have to put down based on how many units If you're going with either a primary residence that you'll live in or an investment property, the problem is you're going to be running into 15% down as a minimum for one unit and up to 25% down for any additional units on that.

So if you're looking at buying a quadruplex, you're going to put 25% down. That takes a lot of people out of the investment game. So what you're doing here with his house hacking of sorts is just following the FHA guidelines on how to get a mortgage.

Don't get a single unit, get two or more!

The basic premise of house hacking is you're going to go find a multi unit. It can be anywhere from two to four units, four units is going to be your max here. Obviously it's not going to be one unit because it's not investment property. If you're living in it, so two to four units. You find that you live in one unit and rent out the others.

Because even the title of this blog is a little bit not true, just because FHA does not let you purchase an investment property. FHA is alone backed by the government and it's only for primary residences. So if you get an FHA loan, you have to live in the property. No occupancy fraud is going to happen on an FHA loan. They're going to check and make sure that you live in the property by looking at tax returns and where you file.

Get an income by house hacking

You find a multiunit residence, duplex, triplex, quadruplex and then, what you're going to do is live in what unit rent out the others, and you're able to take that income. And that's a great way for you to start building your portfolio of houses that you're in investing in, and also to gain some income that's going to offset your mortgage payment and everyone calls this house hacking because a small profit on it, but a monthly cashflow you're most likely going to break even or close to it. But what's happening is you're having everyone else in the other units are paying off your mortgage for you. So that's free money that you get to collect later. So basically you're paying for people to pay down your. You might be able to even get it set up where you're making a small profit on it, but with a monthly cash flow, you're most likely going to break even or close to it. But what's happening is you're having everyone else in the other units are paying off your mortgage for you. So that's free money that you get to collect later.

Amazing Strategy!

So normally the strategy is you're living one, you rent out the others, and then after one year, if you have 25% equity in that property, then what you can do is go do the same with another property.

Go get another FHA loan, move into that one and do the same process over again. And there were quite a few people who have done this back to back until they have a nice set kind of going for them. But that's a good rule to keep in mind is when you're transferring the. Is you're going to go from you have to be in that house for at least a year, and then you have to have 25% equity in the property. So either you've paid down the mortgage to 25% or you have gained so much appreciation that you've got to that 25% equity mark.

Is it difficult to obtain?

So as far as actually getting the FHA loan for an investment property it's really not too difficult. I have some videos on FHA loans and when you're running into anything from a two to a four-unit, it's going to be very similar to purchasing an FHA loan for one unit. You're going to run into the same standards. Three and a half percent down as a minimum, no matter if you're doing one unit or a four-unit 3.5% down as a minimum, you are going to carry mortgage insurance monthly and you'll have upfront mortgage insurance on there as well.

Reserves

So it's something to be mindful of, but you should be able to get really good rates on that for an FHA loan something also that you'll need to be aware of when you're looking to apply for anything that has more than one unit. Are your lenders most likely going to want to ask for reserves and reserves are basically how much money is left in the bank after you close on the house.

Lenders want to make sure that when you close on a house, you don't wipe out your bank account, right? If you have 10 grand. And it costs 10 grand to buy the house. They don't feel really comfortable with that when you're buying a primary residence, they're normally more okay with it. But if you're purchasing something like a two-unit, two, a four-unit, then they normally want to see a few months of reserves.

Prepare for reserves

Normally this would look like anywhere from three to six months. So what you would do is you would take, however much of the mortgage payment is a times that amount. So let's say our reserve requirement was three months, which is normally the case. And our monthly payment was a thousand dollars. Then you need to make sure that you have $3,000 at least leftover in your bank account after you close on that deal, to make sure that everything goes smoothly.

Why?

So ultimately, why would you want to do this? Why would you want to take an FHA loan? Why would you want to rent out these other units? Again, it's a great introduction t investing. Not everyone in the investment world is super big on multi-family. There are a lot of people who are just on the single-family camp. There are some people who are on the multifamily camp and then there are some people who get into the apartment rental camp. So it depends on how you're wanting to set up investing.

Starting is always the difficult part, so don't give up

But really the biggest hurdle that you run into when you're looking at investing is just getting started. Just being able to start building equity, to start building some sort of cash flow in some sort of experience in the process.

FHA is a fantastic option

FHA loan is an awesome way to begin building up a little bit of your investment experience and portfolio because you get a place to live, you're most likely going to live for free in the process. People are paying down your mortgage, you're building equity there. And then in a year or two years hopefully you've hit that 25% equity mark, and you're able to either go and say, I want to sell this property and take out the equity and use that for another investment purchase, or maybe I want to keep getting the cashflow here and now I'm going to go live in something else.

There's a ton of different possibilities and strategies you can do with this type of investment strategy. But it's a fantastic option. I would really look into if you're wanting to start, look at investing, and maybe you're a little bit newer to the space, it's a really safe way for you to explore what that looks like because you're not committing to purchasing something that's in a remote location from you.

And you have to check-in and see what's going on. The nice thing is that you will live on the premises, which is great. If you have great tenants. Bad, if you don't have great tenants, but you're there, what's happening. You're able to keep up the building. So you know, you shouldn't have to have a manager to take care of the property, and is really a great introduction to investing.

How to move out of the FHA loan into another property

So after you purchased that investment property, and technically again, it's a primary residence, it's not an investment property. It's an income-producing primary residence. After you purchased that, you probably don't want to keep it forever. Like you don't want to live in one unit for the rest of your life.

Live in your FHA home for a year

You most likely want to get a house of your own and start acquiring other properties. So the process then of uptaking that FHA loan and making sure that you're able to do other things with is number one, you have to wait for a one-year seasoning requirement. You need to be in that property, living there for a year.

Just make sure that you don't commit occupancy fraud by only living in there for a few months and then trying to move out. You most likely will be found out and you can get your loan foreclosed on. So you obviously don't want that to happen. So make sure you live in that property for a year. You want to get to that 25% equity mark so that you have the freedom to then purchase other properties without refinancing that FHA loan.

Why refinance?

But one thing you will want to keep in mind is that once you hit that 25% equity mark, I would actually look at talking with a mortgage advisor and see if you can get options on a refinance for that property. The main reason why is because you're you bought it with an FHA loan. FHA loans are great, but they're loaded with mortgage insurance. Not only did you pay upfront mortgage insurance costs when you bought it, that's wrapped into the loan, but you also have monthly mortgage insurance that you obviously don't want to keep, because rentals are mainly about the cash flow. The more cash flow that you have, the more you can pay down equity or the more money that you have to build savings to buy another investment property.

Compare FHA to Conventional

So the FHA loan could cut into a bit of your cash flow. So once you get to about 20-25% equity in that rental, look at the comparison of the current FHA loan you have now versus refinancing into a conventional loan. What you're going to find if you do that is conventional loan's rate is going to be higher than the FHA loan will be because we switched from a primary residence to an investment property. But you're going to lose the mortgage insurance per month.

Don't think so much about the rate

Marketing has trained us a lot to think about rate and I, although rate is important, it's caused us to become blind to cashflow. It's causes become blind to what the rate actually means in dollars per month, and that's what really matters.

Your bank account doesn't see the rate, your bank account sees how many dollars it does not get per month. When you get to that point, look at the possibility of refinancing into a conventional investment loan. That way you can drop off some of that mortgage insurance.

FHA as an option to start investing without the headache

So all in all, FHA loans are a great option. If you're looking to get some landlord experience, start looking at building up equity and a little bit of income in investing without having the huge hurdle of having to have experience or already have a primary residence or being able to save up the down payment, or even having a lot of income.

Because you can use the FHA loan and the income that you get from the other units to help you offset that mortgage payment when you're qualifying. So let me know if you have any questions about FHA loans or are using them for investment properties as well as investment properties. And I'd love to help you out.

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