FHA or 30-year Conventional?

Question

I am currently saving up to buy my first deal. In an ideal world, it would be a "house-hack" but I'm not optimistic that I will find a Duplex or Triplex that my wife will be thrilled to call "home". With that being the case, I want to purchase a nice/small SFH, condo or townhouse that will make sense as a rental property for later on when we decide to move.

My question: should I get an FHA loan and put less down in order to jumpstart my savings towards another property or should I get a conventional loan (20% down) to get a better rate/lower mortgage rate so that it will cash flow better once we rent it out.

For context: we both have solid jobs and will likely be able to save 18-25k each year to invest in real estate. My goal is to use a buy-and-hold strategy to accumulate 10-20 rental properties in the next decade. Ultimately, I'd like to have $10,000 per month in passive income by age 40 (14 years from now)

Any advice/feedback would be appreciated!

Michael Craig · Answer

@Benjamin Kennel I recommend listening to BP podcast #223 if you have not already. House hacking is probably the most forgiving, most educational and has the lowest barriers to entry form of REI. I think you will find that you will sacrifice the least by going this route.To answer your question though, FHA has the most favorable interest rates. Shop around, but I think you will find FHA to be most desirable for what you are looking for. How much to put down depends on what you are trying to achieve. If you are looking for a fixer upper and plan on refinancing out in 6-12 months put the minimum down but if you are looking for a a buy and hold with little value add put the 20% down to eliminate the PMI. Also, with the high down payment, your cash flow numbers will look more favorable, making your first years of REI more forgiving.

Frank Wong · Answer

Hi Gus,If you have the means I suggest you go with a conventional loan and not FHA. You can put down 5-10% and still get a conventional loan. This will give you more options when buying a house since you won't have strict appraisal issues with FHA. I suggest you talk to a lender and they will give you different options. A house hack doesn't have to be a big project and a complete gut job. It can be a house that has good bones to it but needs updating of kitchen, floors, bath. This way you can move to live in the house and remodel it over the years. It doesn't have to be all done at once.

Jon Crosby · Answer

Just my 2 cents @Benjamin Kennel, I would always try and avoid over-leveraging yourself where you can. I love that you have a plan and that plan is actually realistic and not overly aggressive (although remember $10k in 14 years will not buy you what it does today so plan accordingly). An FHA will probably require PMI anyway so you your cash flows might be the same either way on whatever you decide so I would just go with the conventional with 20-25% down and it will be ready to roll as rental when you are ready to move on. Good luck!

Benjamin Kennel · Answer

@Jon Crosby Thanks for your two cents. I agree that it is wise not to overleverage if possible. Maybe if I had a goal of hundreds of units as soon as possible it would be necessary, but I think buying rentals with 20% down will allow me to achieve my goal in a risk-free fashion. Besides, once I've accumulated my target number of properties I will want to get them paid off asap, so more equity up front will hasten that process. Thanks!

Andres Garcia · Answer

I feel very strongly that your goals will be attained faster and easier if you take advantage of the FHA Lending program to acquire the MAXIMUM amount of units possible (4)...I also see that you feel very strongly that if your wife isn't happy then you are not willing to go that route.First... remember that it is a very temporary sacrifice. 12 Months... that's it... 1 year living in less than optimal conditions... Realistically, I know that once people have their really made up about something it's hard to convince them otherwise.With that said, I must stick to my guns ACQUIRE 4 Units... if the issue is that you'll have less than optimal living conditions for a year then... BUILD 4 UNITS and make your unit as nice as you want... FHA has a construction to perm option available which you can take a look at.*HINT: If you explore this route keep the future in mind. Build something that can be converted to condos or separate units relatively easily (A la 4 2 story units that look like exactly like townhouses but you call a 4 plex for the time being)... so you can maximize profits

Gus Kazek · Answer

@Benjamin Kennel FHA all the way! It gives more wiggle room for repairs on your first property in case any unexpected occurances may happen when you buy. I would reconsider talking to your wife and convincing her it will only be ten loving in a duplex/triplex and that the end goal will be expdiated by house hacking!

Benjamin Kennel · Answer

@Michael Craig I know, such a great way to get started. But my wife and I are a team so she needs to be on board. I have some time before I have enough saved up so maybe the stars will align and a nice duplex will hit the market when we're ready to buy!

Michael Craig · Answer

@Benjamin Kennel go for the house hack