Maximizing FHA loan profit.

[Joshua Lidberg]

Since you are able to carry only 1 FHA loan at a time, I thought that it would be reasonable to maximize its potential. I will briefly describe what I am referring to. Through an FHA loan, you are permitted to purchase from 1-4 units, up to various USD amounts, depending on whether the area of the planned purchase in considered floor, ceiling, or special exception. As required, there is intent to reside in one of the units for a period of 1 year.

Let's assume that the borrower is able to qualify with their income, creditworthiness and down payment for the maximum permitted FHA loan, for their respective area. Let's also assume, that the deal makes financial sense, and speculatory assumptions, such as appreciation, are not taken into account. By deal making making sense, I am referring to a one that is priced below market value and is cashflow positive, after accounting for PITI, PMI, maintenance, utilities, vacancies, capital expenditures, acquisition & disposition costs, etc. ; further, a deal that after conservative calculations can yield an above-market cash on cash ROI.

Assuming that the conditions above are satisfied, wouldn't it be the best option to search for a deal that is as close as possible to the maximum FHA limit, and the one that has 4 units? For an area defined by FHA as the ceiling, the maximum loan amount should be around $1.4M. When a borrower is able to enter into a deal, with an incredibly low barrier to entry of 3.5% (+ additional acquisition costs), wouldn't it make more sense to enter a deal that will bring the largest possible asset at the date of maturity of the loan? If the borrower qualifies for a large deal, I do not see why one would waste a 3.5% down payment entry opportunity on a low-cost asset.

To sum up, my perspective is that since the borrower is permitted to take out only 1 FHA loan at a time, at such low barrier of entry, it would be reasonable to acquire the largest asset (in terms of USD), permitted by such loan. If one buys a 1-unit residence for $100K, I believe, that they are loosing out on a largest opportunity of buying a 4-unit, for $1.4M, for example. If we take into account the above assumptions that the deal make sense, in 30 years, when the loan is paid off, the larger deal would have generated a substantially higher amount of profit and net worth to the owner.

The only downsides that I was able to think of, are fixed, with regards to an FHA loan in general, and not tied to the amount of such loan.

Any opinions on this matter?