FHA Financing Strategies - Owner Occupied Multi-Family

[Alex Ewing]

I'm new to investing but am excited to get started. 

I am exploring a strategy for multi family investing.  

I have many friends who are currently renting. What I would do is partner with one of these individuals to purchase a 4-family home. The partner would be an occupant of one of the units. We'd apply for FHA financing. I would provide cash for down payment / closing costs. I'd co-sign the loan. We'd own the property as tenants in common with me owning 75% of the property and she owning 25%. Hopefully the rents from the other 3 units would cover the mortgage/some repair costs.

The benefits for my partner would be a rent free apartment. Also, they'd get a piece of equity in the deal. I would benefit by having access to low down payment FHA financing. Also the occupant partner would be a de facto property manager.

I'm a first time investor.  The major hurdle for me is putting together 20+% for traditional financing.  I am looking for longer term investment goals (ie, have passive income for retirement 30 yrs from now). 

If anyone has ever done this type of deal, any insight would be greatly appreciated. 

[Albert Bui]

Originally posted by @Alex Ewing:

I'm new to investing but am excited to get started. 

I am exploring a strategy for multi family investing.  

I have many friends who are currently renting. What I would do is partner with one of these individuals to purchase a 4-family home. The partner would be an occupant of one of the units. We'd apply for FHA financing. I would provide cash for down payment / closing costs. I'd co-sign the loan. We'd own the property as tenants in common with me owning 75% of the property and she owning 25%. Hopefully the rents from the other 3 units would cover the mortgage/some repair costs.

The benefits for my partner would be a rent free apartment. Also, they'd get a piece of equity in the deal. I would benefit by having access to low down payment FHA financing. Also the occupant partner would be a de facto property manager.

I'm a first time investor.  The major hurdle for me is putting together 20+% for traditional financing.  I am looking for longer term investment goals (ie, have passive income for retirement 30 yrs from now). 

If anyone has ever done this type of deal, any insight would be greatly appreciated. 

 Hi Alex,

You could do this in theory however your issue is the co-signor co-borrower relationship usually FHA will only allow blood relative (maybe your cousin, brother, sister, aunt, uncle but friends will be hard but "not," impossible).

This strategy is usually called the kiddie condo strategy because parents would at times want to participate in the real estate market when their kids went to college. What they would do is use the kid as the surrogate occupant while the parents co-signed and provided the borrowing power and gifted 3.5% for down payment funds. The college student would most likely live in one of the units and the other 3 units would be rented.

The occupant borrower does not need to have any income or assets for down payment but, they do need to have at least acceptable credit/fico score of 580-620 min. There are methods of using no fico with FHA but you'd be fighting an uphill battle (possible but not fun or with out brain damage).

Conventional financing with Freddie Mac 5% down can be done with the above strategy as well. The only down side would be that with Freddie you could only use the above strategy with single family residences (SFR's) or condo's/townhomes because min down payment for 2-4 units is much higher (unless if you have the down payment then sure).