FHA Fourplex Opportunity anaysis: FHA 3.5% vs Conventional 25%

[Gary Thao]

I have the opportunity to purchase a fourplex using an FHA loan. A decent fourplex is ~$345k here in Portland, Oregon. Yes, it's high and that's just the way the market is. Typical rents are in the $725.00+ for a 2bed/1bath or $2,900.00 total for a fourplex in the area that I'm interested in. The problem is that it will not meet the 1% of total monthly rents rule nor cashflow due to myself only putting down 3.5% per FHA. The scenarios below do not involve myself owner occupying just for the sake of if I were to move out. Of course I could learn the ropes of property management (in which I plan to) and save some costs also, but I just want to list all related costs that may occur.

Purchase Price: $345,000.00
3.5% FHA Down Payment: -$12,075.00
Total Loan Amount: $332,925.00
1% rule: $3,329.25?monthly rents required (I’m only making $2,900.00 which is a -$429.25 per the 1% rule)
Monthly Rents: $2,900.00
Expenses: $880.00 (PM, Waste, Water, 10% vacancy, landscaping, insurance)
NOI: $2,020.00
Monthly Mortgage (3.125%): ~$2,267.00
Monthly Cashflow: -$247.00

Yes, if I had the 25% down payment, then it would cashflow.

Purchase Price: $345,000.00
25% Down Payment: -$86,250.00
Total Loan Amount: $258,750.00
1% rule: $2,587.50?monthly rents required (I’m only making $2,900.00 which is a +$312.50 per the 1% rule)
Monthly Rents: $2,900.00
Expenses: $900.00 (PM, Waste, Water, 10% vacancy, landscaping, insurance)
NOI: $2,020.00
Monthly Mortgage: ~$1,950.00
Monthly Cash flow: +$70.00

There are discussions regarding leverage and how it’s great to put as little down as possible, but I’m questioning this decision. It is good, but at the same time, I’m relying on appreciation, equity, and taxes. Getting something that can cash flow from the start is nice, but requires the 25% downpayment ($87,500.00). Can anyone give an opinion on pros and cons or am I just destined to purchase a single family home for myself and not reap the benefits of this multiplex opportunity?

[Nicholas Stevens]

If you believe in real estate and can afford/willing to pay the monthly costs that rents don't cover then I would say to go head with something like that. With the low 3.5% downpayment, you're essentially acquiring a $385k asset and having tenants pay for 90% of the cost of it. Just because it doesn't meet a magical 1% rule or 2% rule doesn't mean it's a horrible decision to go forward with it. If you purchased and lived in a single family home its instantly a negative cash flow situation that you pay for 100% of all expenses. The 1 and 2% rules are good reference points but make sure you don't let it drive all of your decisions.