Multi family, owner occupied investing

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Multi family, owner occupied investing

Christian M.
Accountant · Marshfield, MA · Member since 2016 · 19 posts · 3 votes

Hey guys,

I was curious about an investing strategy I plan to follow and was wondering if anyone on here has attempted this strategy and if you could let me know any flaws you find in my strategy. I am a 23 year old accountant looking to invest in the Boston area, which is a pretty expensive market. Since the prices are so high my plan is to build my portfolio through owner occupancy for the first few homes I invest in so that I can afford the down payments. My strategy is to put 3.5% down on an FHA loan on my first multi-family (mainly looking at 3 families). The goal is to cash flow $0 while owner occupying so that when I move out the unit I was living in is pure profit. After living in the first property for a year I plan to buy a second multi-family and owner occupy that as well so that I can put less down than a typical investment home. I want to follow this strategy and purchase 3 homes in three years and owner occupy each one for a year so that I don't have to put down 20-25%. I also want to make sure each home cash flows $0 or close to it while I am living there so that I can use the savings from not paying rent to save up for me next home. Being as young as I am I really don't mind moving around to new places in the city each year so I thought this would be a good way to put down as little $ as possible and take advantage of my willingness to move and explore new areas. I am not necessarily concerned with finding the cash flowing properties because I have been analyzing properties for a while in my area and have found multiple locations that would cash flow $0 and even positive cash flows while owner occupying the home. I am more concerned with the financing. What is the minimal down payment you guys think ill be able to make on my second and 3rd owner occupied investments? Keep in mind I have very good credit (high 700s). Please let me know any improvements you think I could make to my strategy and any bumbs in the road you think I may encounter. I haven't really seen many people trying to use this strategy which is why I feel there may be some flaws in it, or maybe people just aren't willing to move around for a few years as much as I am.

Thanks!

Christian

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  • John Pauler
    Investor · Somerville, MA · Member since 2015 · 34 posts · 7 votes
    10y

    Hi @Christian M. - fellow Boston investor here. Glad to hear you want to get started! 

    The FHA loan is a great option for your first property, as you can do 1-4 units with as little 3.5% down. It's an excellent way to get started if you can make the numbers work. The downside is you'll be carrying a big loan, with pretty substantial monthly costs, so you need to run the numbers and make sure you can still hit your $0 cash flow goal while living in one of the units.

    My (limited) experience with lenders makes me think that you might have a difficult time doing that second loan with 3.5% down. The lender may not want you to be so leveraged on two properties, both of which you are claiming as your primary residence. I am not saying it cannot be done, just that it might be tricky. Find a lender who is willing to speak in hypotheticals with you... "what if someday down the road I wanted to buy a second property, could I use an FHA loan again?" etc.

    One option you might want to consider is an FHA 203k loan, if you are open to doing a rehab on your first property. The 203k loan allows you to finance not only the property, but a planned renovation as well, all with 3.5% down. If you can find a deal on a MF property that needs work, you may be able to add value through a rehab and end up with a property in which you have more than 3.5% equity, even though you only put 3.5% cash into it. If you can do that, you won't be as leveraged on this first property, and it will make using more leverage on property #2 a lot easier. If you do like this idea, Jim Bain at Wells Fargo is an excellent lender. He lives and breathes the 203k, so he's great at walking you through all the details.

    Disclaimer - while I have made offers where I would use the 203k, I have never actually closed a deal with one. Also, rehab is not for everyone. This is just one option out there, IF you think adding value through rehab is attractive to you. 

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  • Blair F.
    New Orleans, LA · Member since 2013 · 47 posts · 36 votes
    10y
    Christian McGourty Hi Christian, in general I think this a a very good strategy and one I and trying to do as well. I few things that came to mind on your post. Have you talked this through with a lender? You can only have one FHA mortgage at a time. Therefore after a year you would need to refinance your 1st property before you could get a second one for a 3.5% down payment. (I recently refinanced my duplex from an FHA to conventional with improvements to property and market going up). Secondly I believe you need 2 years of rental history on your tax returns for the income from your first rental to count in your debt to income ratio. (someone can confirm as no first hand experience yet). You will need that income to count to qualify for your next mortgage.
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  • Christian M.
    OP
    Accountant · Marshfield, MA · Member since 2016 · 19 posts · 3 votes
    10y

    Thanks for your reply @John Pauler. I haven't really looked into the 203K loans before but that does sound like a very viable option. I love the idea of having more equity and putting minimal money down. The less cash coming out of my pocket upfront the better... and I'm not necessarily opposed to rehabbing. My original idea was to use a conventional loan on the 2nd and 3rd because I have read that you can put as low as 5% down on an owner occupied home with a conventional loan. I just don't know if it is likely that a lender will allow me to put 5% down on the second and third properties or if they would require a larger down payment and if so I'm curious what percentage of the home price they would require for those properties. 

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  • Christian Allen
    Investor · Providence, RI · Member since 2016 · 77 posts · 65 votes
    10y

    @Christian M. I am following a similar approach to my investing here in Providence and just closed on my first MF last week. I agree with the others that you should consider buying a MF with potential equity to be gained from rehabbing so you can refinance into a conventional loan with >20% equity. If you can refinance out of the FHA loan, you shouldn't have a problem with getting another 3.5% down loan if you have a DSCR >1 and the banks are willing to work with you.

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  • Christian M.
    OP
    Accountant · Marshfield, MA · Member since 2016 · 19 posts · 3 votes
    10y

    Thanks @Blair F.. How long did you own your duplex before you refinanced out of an FHA loan? I was originally thinking about going that route but I read it can be difficult to refinance out of it after just 1 year. How much equity did you have in the home when you refinanced? No I have not spoke with a lender yet. I'm planning to buy my first property the beginning of next summer but I want to refine my strategy in the mean time. Also that you for pointing out the 2 year rental history for the debt to equity ratio. That isn't something I considered yet but something I will definitely have to look into.

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  • Christian M.
    OP
    Accountant · Marshfield, MA · Member since 2016 · 19 posts · 3 votes
    10y

    @Blair F. debt to income ratio* whoops

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  • Stephen RenehanPro Member
    Providence, RI · Member since 2016 · 73 posts · 36 votes
    10y

    I live in Providence, too and that was the strategy I utilized when I purchased my duplex. I only used a small down payment, but by making extra payments, I reached 25% equity in 14 months. I subsequently refinanced w/ a conventional loan to get rid of the PMI. Now I just need to find another multifamily and try this 'trick' again. Good luck!

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  • Blair F.
    New Orleans, LA · Member since 2013 · 47 posts · 36 votes
    10y
    Christian McGourty I refinanced out of my FHA after 19 months, probably could of done sooner but I waited until a few improvements were complete. I'm in a hot zip code, property went up 21% with improvements. I think that was just lucky with the market. Also few other points. I asked about 5 or 10% down conventional in my area and they would only do it on a single family home, not multi-family. Also, back to counting income for debt to income, with 2 year rental history I believe only 75% of income is counted. That may vary by lender but something to be aware of. Don't buy too much on the first one.
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  • John Pauler
    Investor · Somerville, MA · Member since 2015 · 34 posts · 7 votes
    10y

    @Christian M., my understanding is that currently you can use a conventional loan with 5% down on an owner occupied condo or SF, but if you want to use a conventional loan on a 2F you'll need to put 20% down, and 3F/4F properties will require 25% down, even if you owner occupy the multi-families. You should confirm with your lender. This is what I have been told recently by the lenders I work with. 

    If you can create some equity by buying at a discount and/or doing some rehab to add value (whether through the 203k or not) you may create options for yourself, where you can later refinance a couple of different ways to position yourself for your second deal: 

    1) a cash out HELOC, which would require you keeping 15% equity in the property, and that you are owner occupying it. This can be a good way to pull cash out to buy a second property as an investment, but you probably couldn't use the FHA loan on property #2.

    2) a conventional loan, with a substantial amount of equity (per requirements above, specific to the property type). If you do this, THEN you could use the FHA for property #2.

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  • Christian M.
    OP
    Accountant · Marshfield, MA · Member since 2016 · 19 posts · 3 votes
    10y

    Thank you everyone! I am really starting to like the idea of the 203K loan and building equity through improving the property. That seems to be the quickest and most cost efficient way to build equity quickly in order to refinance into a conventional and use another FHA loan.

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  • Mike HurneyPro Member
    Real Estate Investor · Boston, MA · Member since 2009 · 2k+ posts · 545 votes
    10y

    @Christian M. Welcome.

    I didn't see anything in your plan about sweat equity or a discounted purchase price because of needed work, which you may want to factor in and increase equity for the refi?

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