Can an FHA loan buy cash flow?

[Matthew Elkin]

Hi,

I’m a new BP pro member and I’ve been putting in my reps on the rental property calculator. My problem is I’m trying to get out of my apartment with rent skyrocketing and I just don’t have any money for a big down payment at my 64k salary with 80-90% going straight to either rent or bills. If I scrounge and save for the next year or two I might be able to afford a 3.5% down fha loan but none of the calculations I’ve done in the Salem OR area have come close to being cash flow positive on Multifamily homes. Am I doing something wrong?

[Lawrence Potts]

Hey @Matthew Elkin, I agree with @Nathan Gesner, house hacking is a great route to go for you, especially when first getting started.

2-4 unit owner occupied can only use FHA 3.5% down or you're using a large down payment. There are also opportunities to buy a single family residence home that has an ADU that you can buy with 0% down products (contact @Grant Schroeder). But here's something to note:

I would disagree that you can't cashflow on the west coast. But I will stress that it is very hard to find something that can cashflow. But a quick mindset shift can make a big difference:

If you are renting right now for $2,000 but if you are able to buy a duplex with 3.5% down with a mortgage payment of $4,000 you can do some quick math and find out that you won't cashflow. However, if you are house hacking it, you are paying net $2,000 per month ($4,000 mortgage - $2,000 rent from the other unit). However, you are getting principal paydown. It's minimal in the first few years, but exponentially increases throughout the note. Then you're able to depreciate 50% of your home (or whatever percentage you are renting and not living in). You still get to write off the interest you are paying too as being a homeowner. And you will be owning an appreciating asset. 

So no, you are not directly receiving cashflow, but you are growing your net worth significantly and gaining experience. Let's say you live there for 5 years and your property value goes from $400,000 to $500,000. And your mortgage balance is now $350,000. You now have $150,000 in equity that you can tap into through refinancing or a HELOC. All of this while you are still living exactly the same as you are right now.

If your mortgage payment is $3,500 and you collect rent for $2,000, now you're only paying $1,500. That's like a $500 per month raise. That's if you take that $500 savings and save it, reinvest it, etc.

So it's a matter of perspective. Cashflow is very important but it's not the only thing that matter when you are looking for your first deal that will most likely be a house hack because of the limited capital. You can find down payment assistant programs as well. Most cities and counties will receive grants from the state for down payment assistance based off of income requirements, geographical location, work industries, etc. But I highly encourage talking to a lender as they are always (or good ones are) looking for these programs. 

I hope that helps! I am currently house hacking and it's a tremendous wealth builder. Next year I will be able to access my equity and start buying another house hack again and I am living for free (sometimes, right now I have 2 vacant units so I am paying the mortgage for the last 2 months) because of me house hacking.