Moving from Minneapolis to Austin and 4plex

[Mani Poudel]

Hello All,

I bought a single home in Minneapolis 2 years ago. If I knew about REI or were I smart enough then , I would have chosen to buy multifamily.

Since I now know about what I should have done back then, here is a real question.

I am planning to move to Austin, Texas soon and thinking of buying a 4plex as Primary home to rent the rest. Can I do it while I still own SFH here in Minnesota?

Also, the multifamily homes in Austin seem pretty expensive and I do not want to go FHA route because of the PMI and do not posses huge amount to put down.

What are the chances to qualify for conventional with 5% down for 4plex and is it hard to find the lender?

I do not have any agents or lender currently to ask so any inputs are highly appreciated.

Thanks,

[Tim Swierczek]

@Mani Poudel As a lender I can tell you that no one can tell you if you do or don't qualify for a 4 plex in Austin without your detailed financial information.  That being said there are a few things we do know about lending rules that would give you some idea of qualification.  There are two main points as I see it that you are addressing.  

5% Down Conventional 4 Plex Loan

First, is it likely you would qualify for a $500K 4 plex using the 5% down conventional program?  Here, unfortunately, the answer is not likely.  I don't need to know too much about you or your finances because I do not a few key math facts that are against you when using the 5% Home Possible loan on a 4 plex.  Assuming that the 4 plex you buy starts at $500K as @Ryan Kelly stated which seems very reasonable.   I did a quick search on Realtor.com and did not find a 4 Plex for sale but I did find a 6 bed duplex for sale for $499K. 

So this is my baseline property  

Austin 2 plex, Price $499K, Property Taxes $8529/yr, My estimated Home Owners Insurance $1800/yr  https://www.realtor.com/realestateandhomes-detail/6505-Arnold-Dr_Austin_TX_78723_M75205-14793?view=qv

The major constraint with this loan program is that there are maximum income guidelines that are 80% of the HUD area median income. In Austin Texas, the HUD median income is $95,900 and so the maximum income you can make to qualify for a 5% down multifamily loan in Austin is $76,720. Here is where things get a bit uncertain, the automated system used to qualify these loans will treat each borrower differently but over the last 2 years, I have closed about 100 of these loans and run hundreds more through the system, what we have found is that most people are declined above 39% housing DTI with the highest approval 44.6% of gross income.

What this means to you, If you made the maximum income for the program $76,720 or 6,393.33/month, this includes all rental income from all properties.  NOTE:  You are not required to use the rental income to qualify but if you use any rental income you must use all rental income for that property.

6,393.33/month x .39 = 2,493.40 max PITI payment
6,393.33/month x .446 = 2,851.42 max PITI payment

2,493.40    2,851.42  max payment

-150.00      -150.00  est monthly insurance

-710.75      -710.75 property taxes 

1,632.65      1,990.67 maximum available for debt service

Max price estimatates
39% Housing payment 1,632.65 / 5 = $ 326,530

44.6% Housing payment 1,990.67 / 5 = $398,134

**The rule of thumb you should know for debt service is that every $1000 costs about $5/month (this is approximate but does include MI if the rate is low enough, your actual may vary slightly and could be as much as $5.5/month)

FHA Mortgage Insurance - The Big Scary Monster

Mani, you are not alone most consumers are afraid of FHA mortgage insurance but they shouldn't be afraid at all. I could write for days on this subject but I'll try to keep it simple. In 1996 my wife purchased a house using an FHA loan, in 2002 she sold the house after doing a live-in remodel and walked away with $101,000 after all costs. This would not have happened if she would have been afraid of that big scary FHA MI. This last year I had a client use FHA to purchase a duplex in Saint Paul MN. He sold the property after rehab and paid off all of his student loans a little more than $30K worth gone like the wind in 9 months using FHA financing.

The bottom line is that as an investor you cannot afford to focus on any one metric nor should you get emotional about your decisions and I would argue that most people who trash FHA for the mortgage insurance have not actually done the analysis to determine how many opportunities they are losing by avoiding FHA mortgage insurance. You need to start thinking about your real estate investing like a business and not as a consumer. Each property you buy will be its own small business a bit like its own franchise location. Your mortgage financing is a tool, no different than a tool for a contractor. Once you realize your mortgage financing is a tool you will see that the emotion disappears and you can analyze your financing for what it will bring you (ROI) for the marginal difference in costs.

Let's first say you were a contractor who was able to get a very profitable job.  One that required you to rent a specialized tool.  Let's just say if you owned this tool you would make $100K profit on this job but the rental cost of the tool is $40K on this job for 2 days of rental.  A consumer worries about how much the rental company is making "$20K a day is ridiculous"  the business owner focuses on the $60K return.  Is it worth the time, effort, and investment?  I don't know but don't let one metric stop you from making a fortune.

In closing, I highly recommend you contact @Jordan Moorhead and buy him a coffee.  He owns and invests in both Austin and Minneapolis and is a house hacking expert.  No one would be better for you to connect with before you move.

Good Luck!