Pros and cons of buying a duplex with or without an FHA loan

[Account Closed]

Hi guys! I'm new to the investing world and I'm debating on whether or not an FHA loan would be beneficial or if maybe its not for me and will cause me to slow down in buying more properties in the future. For instance, the plan would be to rent out one unit and live in the other unit for three years like they require. However in the long run, this property would be under my name and not under an LLC. Would I not be protecting myself if after the three years I'd like to rent out both units? Am I better off going without out FHA loan? Any articles that I could read would be great too. Thank you!

[Mark Douglas]

@Account Closed  For me, the pros and cons are:

Pros:

- 3.5% down payment 

- Up to 4 units (The more the better! I got an FHA loan for a duplex that I'm living in/renting, and I should've gone with a 4plex I was looking at!)

- You don't lose the FHA loan when you move out (You mentioned living there for 3 years; most lenders only require 1 year, but it may be a particular requirement of the lender you're working with?) and it's fixed for 30yrs

               - Some people will mention that the private mortgage insurance is prohibitive to getting the loan, but I just look at it as being part of the total monthly mortgage payment, so it wasn't a deal-breaker for me.

Cons:

- 3.5% down payment (lol....) You can obviously put down more if you'd like, but going with this 3.5% will significantly reduce how much equity you've got built in, from day one, which means it'll take longer to cash out refi or take out a HELOC down the road. One caveat to this, would be if you bought the property at a steep enough discount that would leave some equity built in due to the relatively high market value. Also, it'll take longer to pay off, which may not matter much, since the tenants will be the ones paying down the principal, but it's still accruing interest, which is money lost until the note is paid in full...

- Another less obvious downside to going with an FHA loan is that once you have an active FA trade line reporting to the credit bureaus, you're not able to open up another (buy another property) with FHA until the first is paid off (by refinancing, or paying the balance off with cash) There are 4 exceptions to having multiple FHA loans at once --->

https://portal.hud.gov/hudportal/documents/huddoc?id=4155-1_4_secB.pdf (pages 7-8) but they don't apply very often. If you're able to and comfortable putting the standard 20-25% down on an investment property (some lenders may let you go with less, since you're owner occupying, but they may want to see at least ~15%) you may be better off doing that, and keeping the FHA loan in your toolbox, to use when you find a really good deal...? Just a personal preference though.

Overall, it's working out for me, and I really don't see any glaring downsides, but you'll want to consider all of your options and see what will work best for you.

(Try and talk to a few CPAs and real estate attorneys about the benefits of forming an LLC or other such entity for your property...there are sooo many opinions about this lol)

Hope this helps !

Mark