Realistic to find Multi-family in Maryland with FHA Loan?

Question

Hi BP,

Is it possible find a multi-family home in Harford County, Baltimore County, Cecil County, or a safe place in Baltimore for roughly 150k to 200k that will pass FHA inspection requirements?

I've been viewing the multi's in these area's for months now, and it seems like none of them would pass FHA inspection requirements and would need work. I did find one or two in Aberdeen, but they wouldn't necessarily cash flow when I plug in all the numbers (Which, is that a bad thing if you just break even and can live rent free and bank your money for your next property?).

Anyone in these area's have experience or any luck finding multi's that can pass FHA inspections?

If finding a multi with my numbers is not realistic, has anyone in my area used a FHA 203K to purchase and live in a multi? Would like to hear your experiences if you have.

I'm ready to pull this trigger on my first deal, and any advice would be greatly appreciated.

John Fiastro · Answer

@Juan Rodriguez I purchased my house using a  203k loan in August 2013.  I was extremely happy with the purchase and the loan.  However, I must admit that there were times during the loan approval process that I wanted to tear my hair out.

If you are new to property investment, than a 203k is a great way to go for several reasons.  First,FHA's requirements are there to protect the homebuyer, so there is a method to the madness.  Most folks are not familiar with what it takes to renovate/rehab a property, so the FHA system provides a great and safe framework to ensure that it is successful.  Because, FHA requires just 3.5% you can be into the property for very little money and remember, the 3.5% is only on the purchase price not the rehab budget.

First, contact your mortgage lender and ask if they can recommend someone that specifically does 203k loans.  Some mortgage folks don't do them, because they find it too complicated.  I have found that some lenders have carved out a  nitch in the market for these loans.  The closing process can take a little bit longer, in my case it took about 75 days.  Some of that was my fault though.

Once under contract, your lender will assign you a consultant.  The consultant will walk the property with you and assemble a list of all the projects you wish to have completed.  They can include bathrooms, kitchens, roof, etc.  The consultant will provide you with a bid sheet for your contractors and one for you to see his estimated project costs.  The contractors bid sheet is left blank and they can fill it in to make the bid.

The next step is to find a contractor.  I remember having to get bids from three different contractors.  I selected one and submitted the contractor's bid sheet to the mortgage lender.

At this point, the lender underwrites the entire loan both purchase and renovation price.  Be prepared for numerous requests for documents.

After the property settles and becomes yours you have 6 months to finish the property.  The contractor must start work, but does not take draws until the consultant comes back and inspects the work.  There are 5 available draws.  Both the borrower and the consultant must sign off on the work in order for the contractor to get their check.

In my case, I bought a 2 bed, 1.5 bath and went through the process.  The property was under contract in mid-June 2013 and I settled on the property at the very end of August. The contractor started working in October and was finished by the end of January.

I purchased the property for $80k put in about $55k in rehab, which in retrospect was a little on the high side.  Recently, I refinanced out of the FHA loan and lowered my monthly payment by eliminating my mortgage insurance, because now i have about $30k+ in equity.  You can sell the house after 1 year from purchase.

The 203k loan is an incredible opportunity to buy a house and fix it up to your own taste with the banks money and with safeguards in place to protect you if this is your first rehab.

I would highly recommend it.

Kim Coleman · Answer

yes @Juan Rodriguez exactly. And screen hard,  hold out for the perfect tenant. Get a place you can afford on your own so you're not forced to compromise on the quality of your tenant selection.  Also look up house hacking this is what this is commonly called on BP.

Juan Rodriguez · Answer

@Russell Brazil Thanks for the input. Good to get confirmation on what I was pretty much suspecting after reviewing the properties.

@Kim Coleman I would consider renting out a basement in a single family home. I think I would feel a little apprehensive about that at first since it is so close, but I would sacrifice it if it meant me moving closer to my goals. I'm guessing you completely blocked off any doors leading to your house?

Kim Coleman · Answer

@John Fiastro thank you for this in depth explanation of the process you went through on 203k.  I PM'd you for your lenders info. Thanks!

Juan Rodriguez · Answer

@John Fiastro Awesome to hear an actual experience of someone who has completed one of these recently.

I do like the fact that I will gain experience with contractors and rehab while under the safety net fha requires.

I am looking at properties now, and most likely will do a 203k.

Thanks for sharing your experience!

Juan Rodriguez · Answer

@Andy Gross, @Stephanie Dobbs I would absolutely consider a 203K loan. I would do a 203k in a duplex if I could live rent free. It would still allow me to bank money and I know that the experience I would get with having tenants and learning this side would be invaluable for me.

Thanks for the feedback everyone. Gonna PM you Stephanie.

Stephanie Dobbs · Answer

Thanks @Andy Gross, I was going to suggest the same thing! For the price range you can find some great opportunities in baltimore that may exceed 3 units, but the challenge will be fixing them up within that budget, and as Andy said, living there expecting to cash flow. Maybe a duplex would be the best consideration? If you are open to other possible solutions in MD, send me a PM.

Andy Gross · Answer

@Juan Rodriguez have you considered a 203K loan? This would allow you to fix something up and bring it into compliance with FHA standards. It's a great product.

Even if you can't cashflow, living rent free is certainly not bad. Cash flowing on a 1-4 unit property AND living there is going to be a challenge.

Kim Coleman · Answer

I understand your desire to live "rent" free. Many in this area say multi family's don't cash flow as well as single family units. Have you considered buying a single family with and basement and renting it out? That's what I do and the rent pays for 2/3rds of my mortgage.

Russell Brazil · Answer

The Maryland, DC and VA have a severe lack of multifamily housing compared to other areas. The few places that have some in DC and Baltimore, usually arnt in great condition. You will be very hard pressed to find one that will pass an FHA inspection.

Realistic to find Multi-family in Maryland with FHA Loan?

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