FHA loan or wait until I can afford a conventional
Investor · Madison, WI · Member since 2016 · 20 posts · 3 votes
FHA loan or wait until I can afford a conventional
Most Popular Reply
Investor · Springfield, MO · Member since 2016 · 88 posts · 29 votes
9yI'm by NO means an expert, but i would probably wait. It sounds like you might over extend yourself. To me the risk for reward isn't really there, cash flow wise. Now if you think the duplex might experience some major appreciation over the next few years it might be a different story, but i don't really see that happening in the midwest.
10 Replies
- Investor · Springfield, MO · Member since 2016 · 88 posts · 29 votes9y
I'm by NO means an expert, but i would probably wait. It sounds like you might over extend yourself. To me the risk for reward isn't really there, cash flow wise. Now if you think the duplex might experience some major appreciation over the next few years it might be a different story, but i don't really see that happening in the midwest.
- Investor · Madison, WI · Member since 2016 · 20 posts · 3 votes9y
Originally posted by @Matt Moldenhauer:
I'm by NO means an expert, but i would probably wait. It sounds like you might over extend yourself. To me the risk for reward isn't really there, cash flow wise. Now if you think the duplex might experience some major appreciation over the next few years it might be a different story, but i don't really see that happening in the midwest.
I asked a very similar question a week or so ago but wanted some more input so I appreciate the response, thank you. Being 26 years old, I guess the thing keeping me interested is that I plan on keeping the duplex for 30+ years. So with only investing ~10k now and expenses along the way, I'm thinking the return in 30 years will be worth it, but I understand that is a long wait for return.
- 9yPeter MckernanBusiness MemberResidential Real Estate Agent · Irvine, CA · Member since 2013 · 2k+ posts · 1k+ votes
Hello @Account Closed
I would first find out the true numbers prior to going into the deal (i.e. what the numbers truly are for the duplex). This will give you better knowledge and confidence to make a better decision on the topic, and I think that you should either save over and above the FHA down payment for an emergency fund, or wait a little bit longer to pile up more cash. Either one would help you make the decision a lot easier.
The McKernan Group4.957 Reviews - Investor · Madison, WI · Member since 2016 · 20 posts · 3 votes9y
Originally posted by @Peter Mckernan:
Hello @Account Closed
I would first find out the true numbers prior to going into the deal (i.e. what the numbers truly are for the duplex). This will give you better knowledge and confidence to make a better decision on the topic, and I think that you should either save over and above the FHA down payment for an emergency fund, or wait a little bit longer to pile up more cash. Either one would help you make the decision a lot easier.
Thank you for the response. My calculations were actually based off of taking out a line of credit on my first duplex, which would cover the purchase of the second duplex. If I use my personal savings for the second purchase, which I could since I have the funds (barely), than my postive cash flow would amount to $265 instead of $200. I'm also looking for opinions as to why I should or shouldn't use the line of credit if I were to move forward with the purchase. I guess I could always use the line of credit later on if I needed for repairs and maintenance, so I should probably use personal savings for the purchase which would give me the higher positive cash flow of $265...
- Investor · Springfield, MO · Member since 2016 · 88 posts · 29 votes9y
Without knowing the numbers, it might be a decent cash on cash return, but over the short term it might eat your lunch. What happens when the unit sits empty for several months or needs a new roof, HVAC system, water heater or a tenant destroys the floors because of an unreported water leak. If the one duplex was paying you $600/month, to me it might be worth it. For just $200 though i'd rather not have the headaches.
I personally would not look at your investment as "in 30 years i'm going to have a pile of cash". I'd rather buy an $80,000 single family home, spend $18,000 on the down payment, closing costs and minor repairs, that's going to cash flow $300/month.
- Investor · Madison, WI · Member since 2016 · 20 posts · 3 votes9y
Originally posted by @Matt Moldenhauer:
Without knowing the numbers, it might be a decent cash on cash return, but over the short term it might eat your lunch. What happens when the unit sits empty for several months or needs a new roof, HVAC system, water heater or a tenant destroys the floors because of an unreported water leak. If the one duplex was paying you $600/month, to me it might be worth it. For just $200 though i'd rather not have the headaches.
I personally would not look at your investment as "in 30 years i'm going to have a pile of cash". I'd rather buy an $80,000 single family home, spend $18,000 on the down payment, closing costs and minor repairs, that's going to cash flow $300/month.
Great response and I appreciate the examples and your opinion on cash flow now versus a pile of cash in 30 years. Thank you.
- Investor · Warner Robins, GA · Member since 2015 · 1k+ posts · 490 votes9y
Use an FHA loan on a new duplex and rent out the one you'e in now.
Just refinance down the road for better rates. - Investor · Springfield, MO · Member since 2016 · 88 posts · 29 votes9y
Here are some things to remember when financing an investment property:
You'll need 20-25% down.
You'll need to pay the closing costs. I believe you can work 1-1.5% of the cost into the loan.
You'll need to have six months reserves in the bank or a retirement account you can cash out if need be.
I personally try and shoot for a COC return of 20% or higher AND monthly CF of at least $250. This works well in my area. I would think it would be pretty close for the midwest as whole and probably way off base for the east or west coast.
I would be somewhat hesitant to keep buying homes with FHA loans in hopes of the value of your property increasing and interest rates lowering or staying low in five years to refinance. I just refinanced my primary from an FHA loan to increase cash flow for when i buy another primary house. It worked out well for me because i had paid down my loan enough that i was able to drop PMI, due to buying it right and got a lower interest rate. I would NOT buy another property right now with the same intentions though.
Hope this helps!
- Investor · Madison, WI · Member since 2016 · 20 posts · 3 votes9y
Originally posted by @Matt Moldenhauer:
Here are some things to remember when financing an investment property:
You'll need 20-25% down.
You'll need to pay the closing costs. I believe you can work 1-1.5% of the cost into the loan.
You'll need to have six months reserves in the bank or a retirement account you can cash out if need be.
I personally try and shoot for a COC return of 20% or higher AND monthly CF of at least $250. This works well in my area. I would think it would be pretty close for the midwest as whole and probably way off base for the east or west coast.
I would be somewhat hesitant to keep buying homes with FHA loans in hopes of the value of your property increasing and interest rates lowering or staying low in five years to refinance. I just refinanced my primary from an FHA loan to increase cash flow for when i buy another primary house. It worked out well for me because i had paid down my loan enough that i was able to drop PMI, due to buying it right and got a lower interest rate. I would NOT buy another property right now with the same intentions though.
Hope this helps!
This does help thanks! Although, I still don't completely understand the COC return. What would be the COC return and CF of my current duplex that I owner occupy? I had a down payment of 20% or $23k, repairs of $16k, my mortgage is $745/month which include taxes/P&I/insurance, rent for the tenant is $900/month and the tenant pays their utilities, I pay my utilites which equal about $100/month, I do yardwork/snow removal.
I'm not sure how to properly calculate the COC return even after doing some research....
Would the CF be $155? Or would I need to subtract the utilites of $100 that I pay out of pocket for my side, making my CF only $55 minus yardwork/snow removal expenses.
Thanks for the help!
- Investor · Springfield, MO · Member since 2016 · 88 posts · 29 votes9y
Here is a very good explanation/example of COCR: http://www.propertymetrics.com/blog/2013/11/14/cas...
COCR is just one of the MANY things to consider when evaluating a potential purchase.
Cash Flow is what you're left with at the end of the month after all expenses have been paid.
I'm not exactly sure what the correct way to calculate an owner occupied duplex.
*bump for someone smarter lol
Join the conversationCreate a free account to reply, vote on answers and follow this thread.