Multi-Family Refinancing/Strategy Question

[Nick Vought]

Hey everyone,

I bought my first property a four-plex in March, and I am trying to figure out the best strategy for my next step and how to get ready for it when that oppurtunity comes. I got an FHA loan for the property which was 450k and put down 3.5% on it. It is in good condition but needs some cosmetic work. I am currently getting 875 per unit, all 2 bedroom 1 bath. I have updated the unit I am living in and believe I can get between 1000-1100 in rent for it, going off of similar 2 bed 1 bath units in the area. I would like to use the BRRRR strategy and use the refinance money to purchase my next property after I have lived there for a year. After I have lived at the property for a year, I plan on just moving to an apartment and not doing another FHA loan for at least the near future.

So my questions are:

1. Do I have to convert my FHA loan to a conventional loan in order to use the refinance money on my current property to purchase my second?

2. Does the refinance go off of just the appraisal value of the four-plex or does it also go off of the amount I am getting in rent?

3. With the rehab just being cosmetic like I said, how much should the min/max I should spend updating units? FYI I spent about 6k updating the unit I am in, but basically did everything myself. New floors, molding, LED recessed lighting throughout house, new paint, new kitchen countertops/sink, bathroom/laundry room floor tiled, shower wall tile, new vanity, new doors. 

4. Last question, would it be a better strategy to convert my FHA to a conventional loan instead of using the refi money on a second property. I crunched the numbers and I believe my mortgage payment would go down about give or take 1k a month.

Any information would be greatly appreciated, thank you!

[Jacob Murphy]

@Nick Vought I think this is a great question. You may be able to prove me wrong but this is my 2 cents.

1. Do I have to convert my FHA loan to a conventional loan in order to use the refinance money on my current property to purchase my second? - Yes, you will need a investment property loan since you will no longer be owner occupying the property. Typically, lenders are looking to refinance at a max LTV of 75%. Meaning you will need to increase the value of your property from 450K to at least 562.5K to break even on the refinance. This will be tough to do unless you can really increase rents, then convince the bank to go off of income rather than comparable properties sold.

2. Does the refinance go off of just the appraisal value of the four-plex or does it also go off of the amount I am getting in rent? - Depends on the bank. I'd suggest using a small local bank's commercial lending department because they will have more flexibility in making this work for you circumstance.

3. With the rehab just being cosmetic like I said, how much should the min/max I should spend updating units? FYI I spent about 6k updating the unit I am in, but basically did everything myself. New floors, molding, LED recessed lighting throughout house, new paint, new kitchen countertops/sink, bathroom/laundry room floor tiled, shower wall tile, new vanity, new doors. - I say calculate how much you think your time is worth in the calculation. Then look at your rate of return for your time value + the material costs vs annual increase in rent. If I can get a 10% return or more then I am all in.

4. Last question, would it be a better strategy to convert my FHA to a conventional loan instead of using the refi money on a second property. I crunched the numbers and I believe my mortgage payment would go down about give or take 1k a month. - If I were in your shoes, I would refinance into an investment property loan at 75% LTV after fulfilling your 1 year requirment of living at the property. Then get another FHA loan for a triplex at 3.5% down and live there for a year. Next, either move to your dream house and fill your coffers from your passive income, or keep it going and buy another investment property with conventional financing (remember you are limited to 7 units using the FHA loan. That is why I suggested a triplex instead of a fourplex)