1st investment idea: fourplex

[Ben Backman]

So I'm about to graduate UofU in mining engineering in roughly a year. Upon graduation and saving up, I think it would be smart to invest in a fourplex, living in one of the units. I don't have much of a credit score, not bad just not good (I'm 22). Would this be a good path into the world of REI? What are somethings I can do now to help make it so can get approved in the future? How does student loan debt effect buying a multi family home? Any advice? I'm all ears, or eyes...

[Mark Douglas]

Hi Ben,

I just did an FHA loan a few months ago on a duplex for my first investment, and I'm renting the back unit out. It's working out so far without any major issues. Looking back, I would've just done a 4plex like you're looking to do. I was nervous about the whole thing, but it's really manageable. That's the first tidbit, go with your first instinct on the 4unit. I think it's a pretty solid way to start. You get in for 3.5% down (plus applicable closing costs, unless the seller & lender will spot you the costs) and if your numbers work well, you get to live for free or really close to it. Plus, the obvious principle pay down, land lording experience, and "seasoning". When you've gotten at least one year (most lenders want two years, but some will take one year) of consistent income from the property, they will be able to count that income as actual income :) which lowers the total debt ratio, and increases future eligibility amounts. Quite a few benefits to your plan, just make sure to buy at the right price.

As far as the credit, I totally know where you're coming from! I'm 23, and up until I applied for this FHA mortgage, I only had a car payment on my credit history. This tip ties into the next one, but talk to a few lenders, and ask what their requirements are for the score, number of active trade lines, how they view any derogatory accounts, etc. They're all different, and usually the smaller lenders (local banks, credit unions, portfolio lenders) will be a little more open to discussing different options.

The second part of your question, I would call a few lenders now just to see which ones you feel you'd be comfortable working with. Once you've got one you feel ok with, ask them their criteria for counting student loan repayment. I'm a mortgage underwriter for my 9-5 (until REI replaces my income haha), and I can tell you from experience, each lender will have different ways of looking at it. Some will honor the deferment status and won't count anything, some will count 1% of the balance as a monthly payment, some will count the higher of 1% or the actual payment, etc., etc. Also, when you ask the lender these things, keep in mind that they change every so often. If you call them today, but won't be ready to close for 6 months, their guidelines may have shifted a little.

If you can have these things already lined up before you need the loan (before you find that awesome deal and there are 3 other offers on it!) you want to be confident that you know the lender will need to see XYZ, and you've got XYZ already squared away.

(Last thing, I promise haha.  Be sure you've got at least $5k squirreled away for your property cash reserves!)

Hope this helps!