Hard Money lending ,FHA Or Conventional Loan for first rent prop?

Question

Hello everyone!

I need advice on which type of funding to use to get  my first rental property in Houston, Texas ? Help please. I have information overload and just need to get started.

Julie Sisnroy · Answer

It depends on a lot of factors.  Do you have a down payment? Is your credit good?  Are you in a market where "cash is king?"  Do you want to use it for a long term buy and hold?  Will it need rehab? There are pros and cons to all financing.  Of course, in the perfect world, we would all have cash, and keep it simple.  But most of us don't have 300K lying around, so we turn to financing.  It comes down to risk as well and your living situation.  Are you able to house hack or do you already have a primary you call home?  Many people assume house hacking is an option for everyone, and it is not always the case (I have a family so it would not work). Do you think you could do a refi if you followed the hard money option?

Figure out what you want to do, then you can start figuring out what your options might be.

Matthew Rolf · Answer

Hey @Franchell Bryant!  Are you planning on buying turnkey, house hack, fixer upper?  Your strategy will dictate which loan makes the most sense.

Jim Cummings · Answer

@Franchell Bryant. You didn't give a lot of info to formulate advice from. You may have given more in-depth thoughts about your situation, but your question doesn't reflect a broad understanding of what you want to do. Not a problem and not unusual when you are just starting out.

Best piece of advice - Talk to several LOCAL Lenders, and find a LOCAL Lender you feel comfortable with. Some of the internet Lenders advertise fabulous rates, but may in the end not deliver on the promises, and responsiveness is a common complaint. I can't emphasize enough LOCAL Lender you feel COMFORTABLE with.

Discuss with them your specific situation and aspirations. Generally - what you want to do and where you are financially. Don't hide negative credit you may be aware of - most likely Lender will find it in your credit records. So, put all the eggs on the table so the lender can understand your specific situation. Without insight into your specific credit qualification, financial assets & liabilities, it's difficult to give sound reasonable advice.

In general terms, if your situation fits into a typical first time investor box - you are planning to buy a Single Family Residential (SFR), the best avenue might be a standard 30-year Conventional Loan. Expect to put down about 25% as Down Payment, and rate will be somewhere around 4.00% assuming reasonable credit. Overall, out of pocket $$ you would need is about 30% of the Sales Price. The loan will be in your personal name - NOT an LLC.

On the other hand, if you are planning on a Duplex or other Multi-Family Residential (MFR) property, and you intend to live in one of the units and rent out the others, your best avenue might be an FHA loan that would allow you to get into the property with a 3.5% Down Payment, and an overall out of pocket of Approximately 7.00% Of the Sales price. Expect the rate to be around 3.25% depending on credit worthiness.

Be happy to speak personally with you if interested - DM me off the forum and we'll find a time to talk.

JIM

Jinhee Hann · Answer

@Franchell Bryant

Congrats!

Just briefly, looking back, here’s what I would have done.

Buy a 2-4 unit property as owner occupied with FHA using 3.5% down. Fha is the only way to buy a multi unit with such small down payment.  And fha only applies to owner occupied so buy a multi unit first using fha. Because if you buy a single family home using fha first, convincing an underwriter that you’re willing to love into a smaller multi unit building with 3 other units to live in after you’ve been living at a larger single family home is more difficult. Most likely they won’t buy your claim that it will really be your primary residence.

So start with a fha multi unit property.

Conventional loans for multi unit will require from 15-25% down depending on occupancy and number of units.

Then, try to get conventional financing always over fha (unless you’re buying a multi unit with 3.5% down). Conventional loan can have minimum 5% down with lower monthly mortgage insurnace premium than fha so generally it’s always better than a fha loan. Fha mortgage insurance is for life whereas MI for conventional loan drops off when you have 20-25% equity in the house.