Does building a 4plex for my first investment property make sense

Question

Hello, I have a house currently worth $300,000 that I have around 50% equity in and I’ve got a 2.87 interest rate on a 15 year mortgage. Now recently finding out about bigger pockets I am very interested in owning multi family buildings. That being said I’ve come up with an idea that I want someone to pick apart the holes in the plan and possibly answer some of my concerns.

So my “plan/idea” would be to sell my house and build a fourplex apartment building with a residential loan at 3.5% down payment (lower the down payment the better return on investment I’d have). So I think this can be done for $500000 but that is just a guess based on my guess of the cost to build in my area (west Michigan).

So Live there for a year while renting out the other 3 units (live for free because the other units rent will cover the mortgage)… then after a year as I understand, I’ll be able to rent out the 4th unit as well and then build another 4plex and do the same thing so I can have multiple 4plex’s with very little money invested ($17,500 down payment plus closing costs). Then I’ll be able to keep my lower interest rate since I live in them for a year.

If there is someone whose done something similar I’d love to hear how that worked for you.

Please poke holes in this plan because I’m a beginner ans don’t have the knowledge.

A concern of mine would be interest rates rising multiple times through 2022 and by the time that I switch from a construction loan to a mortgage I could possibly be stuck with a much higher interest rate and how much would that affect me financially.

Account Closed · Answer

@Sam Moomey Welcome to BP! This could work but there are a few notes of consideration. First, I don't believe you will get a new construction loan with only 3.5% down, that rate is typically reserved for existing construction. New construction will run you in the 20-30% range. Also, new construction is a very difficult move right now IMO. Materials are very difficult to get, inflation and supply is making them very expensive and workers are hard to come by. Could you move into an existing four-plex and do some sweat equity to force appreciation? This would allow you to maintain a low down payment, add some value to the property and move much faster than a new construction project which has a whole slew of problems in itself. Please let me know how it goes!

Andrew Moore · Answer

A couple of things here to consider regarding building.You will need to acquire a parcel that is able to have multifamily housing developed on it. So you will need to ensure that the zoning is correct. If you aren't going to pay cash for the land, you will be hard pressed to find something at 3.5%. Then when it comes to construction; most places will require a pretty hefty deposit for the construction costs (I've seen 10% down with monthly draws from the owner, and as high as 25%-30%). Once the construction is complete, and you have your certificate of occupancy, you will essentially "refinance" both the vacant land financing & construction financing into 1 mortgage. This end loan will likely not be 96.5% LTV.It sounds like you are trying to use an FHA Loan to do this, which might not really work for a new build. Now, you can absolutely use an FHA loan to purchase an existing property, and accomplish the what you are talking about. However, a new build might be difficult. If there is anything I can do to be a resource for you, please don't hesitate to reach out!

Joe Fritton · Answer

I've been researching a similar idea. 3.5% down is for 1st time homebuyers. To qualify, my understanding is you can't have owned a property for the last 2 years. You're also not likely to find a conventional GUC loan that will allow more than 2 units. If you do, then you're probably looking at 10% down, minimum. I'm looking into buying a large enough lot to build 4 detached units. That way, I can get financing to put up a nice duplex. And then I can plan to place some SFRs in the future. I plan to build all of them panelized or with modular kits to cut lead time and labor costs. If the build site is near attractions and amenities, then you've got multiple exit strategies such as vacation rentals, long term leases, or sell a beautiful 4 unit to another investor.You can also look at private money investment loans. Almost all lenders of this type will want to see some relevant experience from you or a partner. Some will approve based on your financial profile and the experience of the GC, also considering the characteristics of the deal itself. Speaking from my experience as a loan officer, GUC loans require considerable equity contribution from the borrower. You'll max out at 80-85% loan-to-cost, so that's not going to leave much LTV for purchase. Have an excellent credit score and plenty of liquidity and you can find a way, though.Best,

Mark Fein · Answer

The basic premise of your plan would work for the purchase of an exesting 4-unit. You will have a hard time accomplishing the plan with new constructions for the reasons other people have mentioned. You could purcase an existing home with 3.5 % down with FHA financing, but you cannot carry two mortgage with FHA. So the second purchase you would need to use conventional financing.