FHA loan vs. cash refi 20% down conventional loan analysis

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FHA loan vs. cash refi 20% down conventional loan analysis

Roy C.
Rental Property Investor · NC · Member since 2014 · 132 posts · 40 votes

I have been analyzing FHA and conventional loan, and I just want to double check with you guys on my thought process.

I created a hypothetical property with following info:

2nd property to own- Duplex

Purchase price: 200k 

Monthly rent: $1000/unit

Property Tax: $3000/year

All the mortgages are 30 years long with buy/hold strategy

First let's check out FHA loan option with 5% down. According my calculation,

P&I: $963.00

MMI: $206.00

Total monthly payment on mortgage: $1469.00 

One time up front MIP: $3325.00

Down payment: $10k

Closing fee + title fee: $10k 

Total initial capital required not including improvement: $23k

After factoring in PM(15%), occupancy rate(95%), maintenance(10%) cash flow turns out to be $-440/month. 

Next with a conventional loan with 20%down 30 yrs:

P&I: $810.00

Down payment: $40k

Closing fee + title fee: $10k

Total initial capital required not including improvement: $50k

After factoring in PM(15%), occupancy rate(95%), maintenance(10%) cash flow turns out to be $150/month. 

Now let's take another step and assume after one year of conventional loan, the property will cash out refinance:

new loan: $228k ( initial 200k +.7(40k) cash out refi)

new P&I: $924

Closing fee for refi: $6840

After factoring in PM(15%), occupancy rate(95%), maintenance(10%) new cash flow turns out to be $33/month  and cash out of 28k. 

Now here are my questions:

1. Does this analysis look remotely close to how you usually analyze a deal? I know there is a lot of approximation and estimation involved, but does this look reasonable?

2. I know cash flow is the king, and in this case, conventional loan outweigh FHA by far. However with conventional loan, your initial capital is multiples of the initial capital of FHA loan. Would you recommend getting a conventional loan for a long term?

3. Does maintenance of 10% including CapEx sound reasonable or do i need to increase the %?

4. I currently do not have two years of working experience, but I got a job in the same field I have been studying in college. I know I can be qualify for FHA loan, but do I qualify for a conventional loan with just one year of tax return?

Thanks!

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Jamal Atwell
Real Estate Agent, Real Estate Investor · Arlington, VA · Member since 2014 · 62 posts · 15 votes
11y

@Roy C. I'm going to agree with Paul. Although I don't have any deals under my belt I've done a ton of research. I personally would be looking at my Cash on Cash return. Positive cash flow on less of your money is better to me that Cash flow on more of my money. When I get to keep more money it means I can diversify my investments i.e. buy more properties.

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  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    11y

    Unless you plan to live in the property you can not get an FHA loan unless your gonna live there.

    Curt Davis - KAIZEN Realty538 Reviews
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  • Roy C.
    OP
    Rental Property Investor · NC · Member since 2014 · 132 posts · 40 votes
    11y

    @Curt Davis Yup this scenario is assuming that I move into the property and claim as my primary resident

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  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    11y

    ok got it, sorry if I missed that. 

    Curt Davis - KAIZEN Realty538 Reviews
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  • Paul Spangler
    Renter · Tigard, OR · Member since 2014 · 28 posts · 6 votes
    11y
    You also want to look at your cash on cash return. If you can get a positive cash flow on 3.5% down then I'd say it's more worth it than getting a higher cash flow on 20% down. Use that 16.5% to put it into another property and get 2 for the price of one. Cash flow is only part of the equation. You gain equity in 2 properties instead of one. Use other people's money rather than your own. The bad thing about FHA is the PMI, but other than that the 3.5% down is pretty sweet. Plus, they are cutting the PMI by 0.5% here soon.
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  • Jamal Atwell
    Real Estate Agent, Real Estate Investor · Arlington, VA · Member since 2014 · 62 posts · 15 votes
    11y

    @Roy C. I'm going to agree with Paul. Although I don't have any deals under my belt I've done a ton of research. I personally would be looking at my Cash on Cash return. Positive cash flow on less of your money is better to me that Cash flow on more of my money. When I get to keep more money it means I can diversify my investments i.e. buy more properties.

    1Reply
  • Roy C.
    OP
    Rental Property Investor · NC · Member since 2014 · 132 posts · 40 votes
    11y
    Originally posted by @Paul Spangler:

    You also want to look at your cash on cash return. If you can get a positive cash flow on 3.5% down then I'd say it's more worth it than getting a higher cash flow on 20% down. Use that 16.5% to put it into another property and get 2 for the price of one. Cash flow is only part of the equation. You gain equity in 2 properties instead of one. Use other people's money rather than your own.

    The bad thing about FHA is the PMI, but other than that the 3.5% down is pretty sweet. Plus, they are cutting the PMI by 0.5% here soon.

    Thank you for your response. I would love to chooae FHA deal that has positive cash flow but what if FHA deal around my area is mostly negatively cash flow? I have done analysis and with monthly MPI which lasts for loans life, the FHA deal eats up cash flow and coc doesn't look good either

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  • Roy C.
    OP
    Rental Property Investor · NC · Member since 2014 · 132 posts · 40 votes
    11y

    I realized coc return for this scenario is terrible. I should chosen better numbers. I was focusing on cash flow when I picked these numbers

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  • Jamal Atwell
    Real Estate Agent, Real Estate Investor · Arlington, VA · Member since 2014 · 62 posts · 15 votes
    11y

    That's the hustle of real estate. Often those kinds of places aren't easy to find in your backyard. I live in DC for example where these numbers are wayyyyyy off from achievable in my searches, especially with $500 condo fees. The only alternative I see is invest in markets where this is achievable and pick duplexes or triplexes. You're usually able to generate nice cash flow $300+ with those. You can also keep searching till you find the gem in your backyard.

    1Reply
  • Dan B.
    Rental Property Investor · St Paul, MN · Member since 2013 · 91 posts · 45 votes
    11y

    @Roy C. I don't think FHA loans are that great anymore because the PMI never goes away, so you have to refinance once you have equity, or sell. You can get conventional loans where you only have to put 5% down, that extra 1.5% isn't much more and you can lock in a great rate if you are owner-occupying. Then, as Paul mentioned, you have the rest to put toward a second property and can do so immediately. Your 1 year of tax returns should be enough to qualify you if you meet the rest of the lenders requirements.

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  • Roy C.
    OP
    Rental Property Investor · NC · Member since 2014 · 132 posts · 40 votes
    11y

    @Dan B. I like your approach. See, FHA loan just didn't make sense for me. I guess it's good if you have low initial capital but I would hold on until I have enough capital and go with conventional loan to avoid those ridiculous fees and PMI. I understand that if your LTV value is greater than 80%, you will have PMI on conventional loan but you can get rid of PMI once LTV value reaches 80%. I am def going to stay away from FHA for sure.

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  • Paul Spangler
    Renter · Tigard, OR · Member since 2014 · 28 posts · 6 votes
    11y
    I was told by my lender that a conventional loan for a 2/3/4 plex would require 20% down, even if I occupy a unit, whereas an FHA loan would be 3.5%. A SFH would be 5% if I occupy with conventional though. That's the advantage of FHA for me because I don't have 20% of $400k for a 4-plex.
    1Reply
  • Roy C.
    OP
    Rental Property Investor · NC · Member since 2014 · 132 posts · 40 votes
    11y

    @Paul Spangler Oops. I think you are right on that one. I will probably have to stick with a conventional loan with 20% down path. My wife and I have decided to live below our means to save up for the down payment. 

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  • Dan B.
    Rental Property Investor · St Paul, MN · Member since 2013 · 91 posts · 45 votes
    11y

    @Roy C. That may be true for some lenders but I would ask around. I think you can still find lenders that will do 5-10% down for owner occ multi-family props. 

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