FHA Loan

[Kyle Spinale]

Does anybody have experience taking out an FHA loan? If so, could you please describe the process of getting it (i.e. requirements/screening process). Also, how has it treated you? By that I mean, would you prefer this over a traditional mortgage. Why or why not? Thank you.

[Zach F.]

@Kyle Spinale I have experience with FHA loans on 4 unit buildings. In my opinion, this is one of the best ways to get started in real estate. The process of getting it is the same for conventional. Network with your local REI's and get referrals on a solid banker. Go sit down with them and explain your scenario and exactly what you are trying to accomplish. It'll be intimidating at first, but after each meeting you'll learn more and more.

In regards to FHA vs conventional financing, there really isn't a "right" answer in my opinion. It all depends on the person, their personal finances, their goals with regards to real estate, their goals with regards to other financial obligations, credit score, and many other factors. For me, however, I absolutely love FHA over conventional financing if you buy properly.

On the FHA deals, you only need 3.5% of the purchase price to bring to the closing table. On a past deal I closed on with an FHA loan, this is allowing for me to see a cash - on - cash return that is extremely favorable. I purchased a 4-unit building for $115,000 and only brought $3,800 down to the closing table. The building should rent for close to $700/unit after the leases are turned over and rents are brought to market value. We closed early in the month so the prorated rents helped out quite a bit, dropping the total cash-to-close. The prorated rents is definitely something to keep in mind.

All said and done, a $115,000 cash producing asset was acquired for a $3,800 down payment.  Two fantastic things have just been created.  The first thing is I had completely eliminated the cost of living from the previous living situation.  If you are a renter and paying $750/month in rent, you have just eliminated this expense from your personal finances.  Secondly, you are getting paid to live in 1 of the 4 units in the building from the other 3 residents.  

This is a bread & butter example of how to eliminate/reduce expenses and invest in assets.