FHA or 20% as down payment? STRs & LTRs?

Question

Hello everyone!

I have 0 properties yet and I'm at my starting point. Any advice is great advice and I appreciate it. I'm debating whether I want to do long term rental of multifamily or short term rentals for airbnb. I can do an FHA loan but have also heard of the 15% down payment rather than the 20% any idea of this?

Question: Can I also purchase an investment property with 20% down and then purchase a primary residence with an FHA?

Also, what are your guys opinions on STRs or LTRs? what has been more beneficial for you guys? I just want to get my foot in the door but don't want to rush the process. Any advice is kindly a gratefully appreciated :)

Nathan Gesner · Answer

First off, welcome to Biggerpockets! It appears you're at the beginning stages, so I highly recommend you start by reading some books and listening to podcasts to build a foundational understanding of how real estate investing works, what makes a good deal, the different types of investments, etc. Then you can use the forum to refine your understanding through Q&A.

What works best for me may not work best for you. STR is constantly turning over, which means I'm constantly looking at it, making repairs, buying new linens, replacing broken items, landscaping, etc. STR was shut down during the "pandemic" when nobody could travel and now it's going to lose reservations because flooding is shutting down Yellowstone, the main attraction to my area. My STR makes double what I could earn with a LTR but I bought it before the market went crazy. If it were on the market with today's prices, I wouldn't give it a second glance and the same holds true for every vacation market I've looked at (Florida, South Carolina, Tennessee, etc.). There are pros and cons to each option. You need to educate yourself on what those are and decide what will work best for your finances, your goals, your time, etc.

You can purchase multiple properties. You can purchase a LTR and a STR and a personal residence. All depends on your financing. There's nothing legally stopping you from doing this.

Here's some generic advise for anyone starting out. It may or may not apply.

1. Start with BiggerPockets Ultimate Beginners Guide (free). It will familiarize you with the basic terminology and benefits. Then you can read a more in-depth book like The Book On Rental Property Investing by Brandon Turneror The Unofficial Guide to Real Estate Investing by Spencer Strauss.

2. Get your finances in order. Get rid of debt, build a budget, and save. The idea that you can build wealth without putting any money into it is a recipe for disaster and the sales pitch of gurus trying to steal your money. A wise investor will not try to get rich quick with shortcuts. If you can't keep control of your personal finances, you are highly unlikely to succeed in real estate investing. Check out my personal favorite, Set For Life by Scott Trench , or The Total Money Makeover by Dave Ramsey.

3. As you read these books, watch the biggerpockets podcasts. This will help clarify and reinforce what you are reading. You can hear real-world examples of how others have built their investment portfolio and (hopefully) learn to avoid their mistakes.

4. Now you need to figure out how to find deals and pay for them. Again, the BiggerPockets store has some books for this or you can learn by watching podcasts, reading blogs, and interacting on the forum. There is a handy search bar in the upper right that makes it easy to find previous discussions, blogs, podcasts, and other resources. Biggerpockets also has a calculator you can use to analyze deals and I highly recommend you start this as soon as possible, even if you are not ready to buy. If you consistently analyze properties, it will be much easier to recognize a good deal when it shows up. Find Brandon's videos on YouTube for the "four square" method of analyzing homes and practice. It doesn't take long to learn how to spot a good deal.

5. Study the market. You can learn to do this on your own or get a rockstar REALTOR to lead the way. I highly recommend a well-qualified REALTOR that works with investors and knows how to best help you.

6. Jump in! Far too many get stuck in the "paralysis by analysis" stage, thinking they just don't know enough to get started. The truth is, you could read 100 books and still not know enough because certain things need to be learned through trial-and-error. You don't need to know everything to get started; you just need a foundation to build on and the rest will come through experience and then refining your education.

You can build a basic understanding of investing in 3-6 months. How long it takes to be financially ready is different for everyone. Once you're ready, create a goal (e.g. "I will buy at least one single-family home, duplex, triplex, or fourplex before the end of 2019") and then do it. Real estate investing is a pretty forgiving world and the average person can still make money even with some pretty big mistakes.

Drew Sygit · Answer

@Amery Castaneda as @Nathan G. stated, what works for one, or even many, may not work for you.

That aside, if I had to start all over again, I'd look to acquire a 2-4 unit property with an FHA low-down payment mortgage.

Getting it under market value would be a bonus.

So, would using an FHA 203k renovation loan, which would allow me to buy something unqualified for a standard mortgage, which would weed out a lot of competition and push the price lower.

Hopefully, I would increase the value of the property in 1-2 years and be able to refi out of the FHA mortgage. I'd also learn a lot about maintenance and managing tenants.

Then, with my hands-on experience, I could decide if I wanted to repeat the process or target 5+ units - which my experience would help with lenders.

Good luck with whatever you decide to do!

Nicole Masters · Answer

Amery, if you're willing to do a rent by the room househack there are a lot of really good opportunities in Sacramento! My husband and I do a rent by the room househack out of our single family house - we have 6 roommates but you don't have to be that extreme obviously haha. We make $4,375 in rental income monthly from our rooms, but share living space with everyone. It's worth it to us! It is also significantly easier to find a single family home than multi-family in such a competitive market.

Michael Cheng · Answer

* I am located in San Francisco not deciding to do a short term rental route .

Michael Cheng · Answer

Amery ,

You are headed in the correct path ,   if you do decided to go with a short term rental in San Francisco , as I am too. Be mindful that  the City and County of San Francisco  has strict codes for short term rentals and love to fine/ penalize property owners   even  in code violation  if you decided to go that route. If you don't pay to purchase in San Francisco or locally in the Bay Area  each county is different .

Now FHA or 20% down . If you decide to go the FHA route  low down payment but higher PMI  cost  but allows you to free up reserves  for any unforeseen cost. Large down payment of 20%  won't have PMI.

The most difficult phase is obtaining your first deal , but in my experience was a wonderful phase in learning.

Nicholas L. · Answer

@Amery Castaneda we are starting to get into very personal decisions like commuting... if your whole life is in the Bay Area I don't see how you'd house hack in Sacramento.

Unpopular opinion - wait until you have enough saved up to put down 20% on an investment property within driving distance.

Amery Castaneda · Answer

@Nicholas L. Not really I am always willing to house hack but the bay area is out of my budget however, my first option for investing is a duplex but 2 hours( Sacramento CA) away from where I'm located. I was thinking of purchasing with an FHA, rent one unit and have the other unit vacant until 1 year where I can then rent it (FHA guidelines).  My job, home and Childs school is located near the Bay area. The market in the Bay area is out of my budget. Any recommendations?

Amery Castaneda · Answer

Thank you so much for this information I have purchased books from bigger pockets and I love all the information I receive! I guess now my next step is knowing what market I want to invest in? any recommendations? I was thinking duplex in Sacramento CA. Regardless thank you so much for taking the time to respond!

Caio Gansauskas Pavanelli · Answer

Hi Amery Castaneda,

Today STR is in a great moment. Travel restrictions are been revoked, so people are looking to travel more, since they were almost 2 years unable to travel. Looking at my area (Clearwater, FL) we used to have around 589 AirBNBs available in the first quarter of 2019 and now we have almost 1000 (only Clearwater zip code). In St. Pete, it went from 4762 to 7182 in the same period. And in St. Pete, the occupancy rate is now around 94% - Clearwater almost 90%. So you are getting a "long term" ocuppancy with the earnings of short term - which are way higher than long term.

The main issue about short term is that if you manage by yourself you will have a lot of work to do. As other guys said here, you have check ins, check outs, maintenance, housekeeping, taxes, bookeeping etc. And sometimes the stays are of 2-3 days, so maybe in this case you should look for a great property management company that can help you with that. They have tools to improve occupancy, advertise your house in many channels and help with all this logistics between guests. But even so I believe you will make a freat profit doing STR instead of Long Terms.

Regards,

Caio PavanelliPMI Clearwater

FHA or 20% as down payment? STRs & LTRs?

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