Financing a First Time Owner-Occupancy

Buying & Selling Real Estate
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Financing a First Time Owner-Occupancy

Zachary Schnautz
Real Estate Broker · Bothell, WA · Member since 2019 · 17 posts · 11 votes

Hey everybody,

Newbie investor here seeking some guidance. Like many here, I'd really like to get the ball rolling and purchase my first deal. Specifically, a 2-4 unit fixer upper I can fix up and rent out. I've worked in residential remodeling for the last 4-5 years, so most of the rehab I'm hoping to be able to accomplish with as much sweat equity as I can. Where I'm needing guidance the most is in terms of financing the initial purchase. I'm still talking to different lenders to get pre-approved and learning about loans but from my understanding there's not many loans for a low down 2-4 unit owner occupancy, especially for a property in enough of a disrepair for significant value add. The FHA loan is one that keeps being brought up, which I have a few concerns about. First of all it's sounding like FHA loans/appraisers can be sticklers about the physical condition of the property, which is counter intuitive to the goal of finding a property that's not in great condition. The other concern I have for 3-4 unit properties is the self sufficiency test. In my market (greater Seattle area, specifically Everett) it seems to be generally accepted by the REI scene that most properties just don't cash flow as well as they do in many other parts of the country. When it comes to self sufficiency and the supposed 25% vacancy factor FHA appraisers account for it seems like any given 3-4 unit could easily fail this test.

Unfortunately, given the price of properties in my market, I don't think I'll be able to come up with anything greater than 3.5% anytime soon. I did just pass my brokers exam and a looking for a firm to work with so being able to represent myself as the buyer will hopefully allow me to leverage my agent status to my advantage. I'm hoping to get some guidance or advice from anyone who has done the same or faced the same challenged and how they overcame them.


I'm still new to this world and don't have a deal under my belt so I have a lot to learn, so any input will surely help out!

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  • Brady Potts
    Developer · Missoula, MT · Member since 2015 · 60 posts · 28 votes
    6y

    Hey @Zachary Schnautz, 


    My wife and I went through this same situation. Fortunately, I was able to use a VA loan. However, we seriously considered using an FHA Construction loan, which sounds like the best option for you.

    Basically, any federal program loan for owner-occupied properties is going to have strict condition requirements, meaning no fixer-uppers. You may get away with a structurally sound building that's just ugly, but anything in need of moderate repairs usually wont pass the inspection requirements for those types of loans (VA, FHA, RD, etc.). However, there is an FHA Construction loan that is designed to fix up/build homes for owner-occupied properties, but the down payment is usually about 5%. That's not too far above the standard 3.5%, which would only take you a bit longer to save up.

    You could also look at properties that are not in need of significant repairs but have the opportunity to add value later on. EX) Basement without proper egress windows, large family/dining rooms converted to bedrooms, too many bedrooms with no enough bathrooms, etc.)

    Keep in mind that low down payment owner-occupied loan programs won't leave you a ton of room for cash flow on properties. They are not designed to be that way. What you can do though is get started. With some research and diligence, you could probably find a property that at least breaks even after you move out. You may need to purchase an MF building and still have to pay yourself rent while you live in it. But, after you move out and move in another tenant, they pay the rent and you are breaking even (using the proper calculations). This is a great way to get into the game. If the tenants can cover your costs, you can use the tax benefits to offset other income, and you get to enjoy the loan pay down and appreciation. Its not an immediate cash return, but you would be building wealth. 

    Feel free to shoot me a message if you want to chat further. 

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  • Jason Johnson
    Rental Property Investor · Lake Stevens, WA · Member since 2015 · 46 posts · 13 votes
    6y

    @Zachary Schnautz. Welcome to the group Zachary! Having remodeling skills and time to unleash them on a property is awesome and can be an advantage to you with something you can get into locally. With that said, the snohomish county & surounding market can be a challenge if you're in search of cash flow & leverage. For the residential market I've seen folks with idle cash parking it in a 4 family in Everett at a 4 cap. This creates a barrier of entry for folks starting out with a smaller bank roll.

    Starting out with your primary residence can give you lending and tax benefits, however, as you pointed out, you may not have access to highly distressed assests that you can force appreciation into with your rehab skills.

    So, now what? Find your real estate identity! Are you an agent, marketer, rehaber, investor, deal maker, landlord, entrepreneur? Why this? Are you looking for a full time profession/business or a side hussle? There are many things you can do, but what do you want to do? Once you figure this out you will be better positioned to select a market and asset type that best suits your goals and resources.

    Best to you,

    Jason

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