Failed FHA multifamily option that cash flows 2,000+

Multi-Family and Apartment Investing
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Failed FHA multifamily option that cash flows 2,000+

Ben Burnap
Member since 2017 · 5 posts · 0 votes

Looking for some advice here - I am in a bit of a time crunch so just looking for some fast advice. Any help is greatly appreciated!

Ill try to make this as brief as possible. I found a 3 family in my area in hopes of house hacking it. I settled on a FHA 203k loan for multiple reasons, the main being that I don't have enough money for a down payment on a conventional loan and to build equity in the renovation.

My numbers were as follows with a FHA loan with 3.5% down and a rate of 4.99

Total rent - apprised at 5100 (low due to lack of comps in the area) - Actual would be 5400-5600

Monthly payment (everything included) - 4200 (420 PMI)

Would have built ~50k worth of equity in the rehab. 

I went through the whole FHA 203k process and then right before closing ran into the self sufficiency rule about (payment can't be above 75% of total rent). I went back and took 50k off the rehab and put 10k more into so it would lower my payment enough to meet these guidelines, and although this would have passed I realized I didn't have enough cash to close. After discussing other options with several mortgage brokers (I don't qualify for a conventional loan and an FHA loan wouldn't work either) I realized this deal is going to fall through. I don't think any sort of financing with just me is going to work.

I still have the house under contract and with some basic math I know this house will cash flow 2,000+ a month if you do the necessary renovations and put down anything even close to 20%. I also have it under contract for an amount that I believe is less than what it could sell for. The first thing that came to my mind was wholesaling (which I know very little about, and have no experience with), and also going into the deal with a partner (which I have never done and know very little about.) If anyone has any other suggestions for me I am open to anything, thanks!

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Chris MasonPro Member
Moderator
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
7y

Unless you are a blogger in Colorado and the year is 2011 and you're trying to get a website like floggerblackets.com going with some content, nothing 3-4 unit and priced to be on the MLS is going to pass the FHA self-sufficiency test... complete waste of time in the SF Bay Area including Oakland and SoCal, and I'm pretty sure most of the country. Stacking 203k on top of that is completely crazy. There are lots of viable options, but this ain't one of them.

EDIT: Of course, the MLS isn't the only place to buy real estate. What's your monthly time and/or money marketing budget?

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  • Tchaka Owen
    Real Estate Agent · Merritt Island, FL · Member since 2017 · 974 posts · 1k+ votes
    7y

    @Ben Burnap - do you have any family members who could give a small helping hand? Cut them into the deal too.

    0Reply
  • Todd Nurnberger
    Rental Property Investor · Boerne, TX · Member since 2015 · 94 posts · 52 votes
    7y

    @Ben Burnap  Ben your frustration is coming through loud and clear in your post, and I feel for your situation.  I think you are on the right track with asking your self how can I get this deal done rather than simply giving up, and as @Tchaka Owen mentioned a family member could partner with you on the deal.

    One thing to remember is that this is a competitive market for investors in most areas and good deals are a little harder to find than a few years ago. 

    You might want to try sharing the deal (you have under contract) with your local REIA members, and if it is really a "good" deal someone may have a partnership structure that could help you take down the deal.

    If the deal is only "OK" and you may be trying to push the numbers a bit, the underwriting guidelines may be telling you the deal is tight.  Once again feedback from your local rental investors should help you vet the deal and find a path forward.

    Please let us know how this turns out for you!

    1Reply
  • Ruel K.
    Investor · Mission Viejo, CA · Member since 2016 · 78 posts · 36 votes
    7y

    @Ben Burnap Hey Ben! I am a numbers guy and hopefully I can shed more light. Could you provide the NOI, down payment (3.5%), selling price, and loan amount. We can actually look at the cashflow. Thanks and good luck!

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  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    7y

    Unless you are a blogger in Colorado and the year is 2011 and you're trying to get a website like floggerblackets.com going with some content, nothing 3-4 unit and priced to be on the MLS is going to pass the FHA self-sufficiency test... complete waste of time in the SF Bay Area including Oakland and SoCal, and I'm pretty sure most of the country. Stacking 203k on top of that is completely crazy. There are lots of viable options, but this ain't one of them.

    EDIT: Of course, the MLS isn't the only place to buy real estate. What's your monthly time and/or money marketing budget?

    3Reply
  • Oleg Shalumov
    Rental Property Investor · Teaneck, NJ · Member since 2016 · 567 posts · 291 votes
    7y

    @Ben Burnap don’t give up on this ... 

    Try asking any relatives on a small loan or to partner in like 50/50 (hey, you will still get $1,000 a month). 

    Do you have any retirement plans? You can take a loan against your retirement plans, or if you have an IRA that could also be an option.

    Finally try talking to the seller, maybe they can give you a portion of seller financing. 

    Please note that any of the options above you could try if you are positive that you are going to get a good positive cash flow. 

    Message me if you any additional questions. 

    0Reply
  • Bill S.Pro Member
    Moderator
    Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
    7y
    Originally posted by @Ben Burnap:

    Looking for some advice here - I am in a bit of a time crunch so just looking for some fast advice. Any help is greatly appreciated!

    Ill try to make this as brief as possible. I found a 3 family in my area in hopes of house hacking it. I settled on a FHA 203k loan for multiple reasons, the main being that I don't have enough money for a down payment on a conventional loan and to build equity in the renovation.

    My numbers were as follows with a FHA loan with 3.5% down and a rate of 4.99

    Total rent - apprised at 5100 (low due to lack of comps in the area) - Actual would be 5400-5600

    Monthly payment (everything included) - 4200 (420 PMI)

    Would have built ~50k worth of equity in the rehab. 

    I went through the whole FHA 203k process and then right before closing ran into the self sufficiency rule about (payment can't be above 75% of total rent). I went back and took 50k off the rehab and put 10k more into so it would lower my payment enough to meet these guidelines, and although this would have passed I realized I didn't have enough cash to close. After discussing other options with several mortgage brokers (I don't qualify for a conventional loan and an FHA loan wouldn't work either) I realized this deal is going to fall through. I don't think any sort of financing with just me is going to work.

    I still have the house under contract and with some basic math I know this house will cash flow 2,000+ a month if you do the necessary renovations and put down anything even close to 20%. I also have it under contract for an amount that I believe is less than what it could sell for. The first thing that came to my mind was wholesaling (which I know very little about, and have no experience with), and also going into the deal with a partner (which I have never done and know very little about.) If anyone has any other suggestions for me I am open to anything, thanks!

     Saving more money (more down payment, more reserves, more fixup budget) is not giving up. It's planning wisely. Everything you have pointed to says you need more resources. Get that piece figured out.

    1Reply
  • Kevin Grinstead
    Realtor · Denver, CO · Member since 2016 · 499 posts · 129 votes
    7y

    I don't know about your overall qualifications and purchase price but Maybe you can partner with a flipper that will buy the property and then do the repairs for you (which will be cheaper than a 203k) and they can sell it to you when it is done for a price you know you can qualify for.  

    Also you might be able to do a short term hard money lender as a "flipper" and then in 6 months try to roll it into an FHA loan. (This might require too much cash to close)

    Good Luck and Happy Investing!

    0Reply
  • Todd Dexheimer
    Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
    7y

    I'm not sure how you are considering this deal? If the gross rent is $5400/month and the mortgage is $4200, you will lose money every month. You still need to pay taxes, insurance, utilities, repairs and maintenance, reserves and misc expenses. Usually on a triplex, expenses will run a minimum of 35% of the income. You also don't seem to be factoring in a vacancy rate, which should be 7-10%. 

    0Reply
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