Rental Property Investor · Raleigh, NC · Member since 2015 · 17 posts · 4 votes
I have approximately 5 years renting SFH and am looking to scale, so a younger family member and I are looking to partner on some deals moving forward. The basic structure is similar to the deal Ashley Kehr described with her sister on pod #348 - my younger sibling would live in a MFH, we'd get an FHA loan together as she would live in the property, and I would fund the deal.
How should we structure things, basically who should get what? Is everything 50/50 fair?
How will we be able to repeat this strategy yearly? Constrained to having to live in an FHA for a year (and only being able to have one FHA at a time), how can we refinance out of the existing FHA yearly, to something creative, so we can rinse and repeat yearly?
@Ned Carey I was assuming a refinance would be preferred in order to "Free up" the FHA loan bullet. If the strategy was built on serially purchasing 4-plexes using owner-occupant financing I figured that would be their hope, but I bet holding it on the FHA loan and using a conventional lowdown loan for the next one would work out cheaper and better overall.
Hey @Account Closed! This is a cool tag-team your describing here. In my purely brainstorming, not a professional in this, thinking what I can imagine is having a joint LLC with your sibling wherein you both own 50%. That business would service the whole building (basically an asset manager) and would give seed money (magically the down payment amount or however much you are needing to fund) in exchange for 50% of the cashflow.
The tricky part is going to be having a rinse-and-repeat process that relies on an FHA loan. For starters, one year into a 3.5% down FHA loan you've gained roughly . . . peanuts in equity. So, you'll have a Loan to Value ratio of about 96% and you'll be wanting to refinance. Unless you've added significant value it is unlikely that your refinance is going to do anything other than require you to put a lot more money into the property in order to clear your FHA loan. It would be simpler just to buy a 4plex in that case.
However, if you did find a great value-add opportunity and could refinance in a year and not affect your "cash-in-as#2set" amount, then you'd have a fresh FHA loan to use. Enter hurdle #2 -- the underwriters are not going to love this. They can outright refuse to loan if they think this is being systematically used for investments.
My advise would be to focus on value-add deals where you'll be able to use a straight-forward BRRRR cycle to buy, add value, stabilize, pull money out, and then do it again.
Thanks for asking, @Account Closed. I think I got distracted and forgot to elaborate on that. I meant it would be simpler just to buy a 4plex outright using a 25% down conventional loan rather than the complexity of house-hacking with a low downpayment loan and then refinancing and having to put more capital into it because the equity gained and value added didn't add up to the 25% equity position you'll need in order to have a refinance that frees up your FHA loan AND minimizes the cash you have left parked in the investment.
@Will Fraser why are you thinking three needs to be a refinance? Why wouldn't you keep the FHA loan?
@Account Closed What split is a appropriate, is a negotiation. It depends on what both parties expect and can get out of the deal. I don't see why your your younger family member should get 50% of the deal. It sounds like the only thing he or she is contributing is choosing to live in the investment for beneficial financing. You can address that by giving that person a discounted rent.
@Ned Carey I was assuming a refinance would be preferred in order to "Free up" the FHA loan bullet. If the strategy was built on serially purchasing 4-plexes using owner-occupant financing I figured that would be their hope, but I bet holding it on the FHA loan and using a conventional lowdown loan for the next one would work out cheaper and better overall.