Buying 4-unit Rental Property with 3.5% down

[Brendan Finney]

Hello, 

I am 23yrs old & currently saving money to purchase my first rental property using an FHA loan. I have a few years to go but I have been doing research for a few months now and want to be fully prepared before jumping in. I am wondering a few things below. Thank you!

- Where can I find an accurate mortgage calculator to find out my estimated monthly mortgage costs + insurance?

- What are the most important methods/metrics I should be focusing on to evaluate an investment with this amount of debt? (96.5% leverage) 

- is using an FHA loan a realistic option in such a competitive / expensive market such as Boston?

- How much of the purchase price do I really need to have saved up? i.e if the home is $1M I have to put down 35k plus costing costs, but how much should I really have saved?

- What is the minimum required annual income to qualify for this loan program? Again, say if I would like to purchase a million dollar home using the FHA program, what would my minimum annual income need to be?

I appreciate any help. 

Best,

Brendan

[Andrew Valeri]

Hey @Brendan Finney,

Congrats on deciding to take the step into RE world. 

If you're good with numbers - just having MLS listings sent to you by an agent makes its easy to run the numbers.

1. The mortgage calculators on MLS pulls in the taxes for the property you are viewing. It calculates the mortgage with the different PMI/different rates/different % put as down payment so you can understand what range you would be looking at for monthly payments depending on what the circumstance is. It depends based on your specific market/factors (i.e you're in a flood zone, are pets allowed in building, what level of ins you want, etc.) to determine the cost of insurance. I found when I was first looking to buy - realtors would show me numbers of how much insurance cost and other misc cost would be and they were all significantly lower than the actual cost. Personally I like to forecast Expenses high and income conservatively.

I found playing with the numbers myself and understanding what ranges were possible made me much more confident come time to offer and move forward after having offers accepted.

2.  Realistically, your first step is to talk to multiple lenders - let them know you are a new investor. Ask what products they offer. If you don't hear what you are looking for don't be discouraged. Let them know what you are looking to do and ask "How can I make this happen?" If they say its not possible - It's not possible at their bank. Ask if they know of any other banks from their experience that lend on. I made a list of 10 banks/credit unions in my area when I was looking to buy (during Covid when many banks lowered rates and stopped doing creative financing solutions.) None of those banks did what I wanted but one bank suggested 2 different banks that could possibly help. One of those banks found a solution similar to what i was looking for.

Being highly leveraged you will likely want to have a high reserve balance in place. Be sure to include high CapX/reserve/maintenance cost in your calculations. 

3. That will have to be something you will have to find out from your conversations with lenders. Some sellers are not interest in FHA because its a longer closing process (usually) and they may not want to fix the small items that FHA loans will require to pass inspection.

You may find that your current plan is "not practical" and you need to shift your priorities to align with what is possible or more likely to get you to your true goal.

Is there a reason you have to be in Boston or a direct suburb of Boston? Could you push out a bit further from Boston to a price point that will allow you to be more competitive.

Determine the difference between a want vs a need. Sometime it is hard to evaluate on your own and this is where a mentor can help. It is a sliding scale - you have to sacrifice in the "would be nice categories" for what is needed. 

4. What repairs are needed? There are much more cost to owning out side of just the purchase price and monthly payments. There is no right or wrong answer here. You must understand your own tolerance for risk. If the goal for real estate ownership for you is to get financially free and live a life by design then being super stressed and scraping by - living in fear of the next repair that is needed and how to make mortgage payments isn't a solid plan. I bought in Attleboro, MA a Triplex for $485k and my closing cost was about $12k. I wanted to be able to have 18 months of PITI payments in the bank ~$40k after my down payment because that made me comfortable. I also knew there would be a light rehab needed once vacating one unit.

Feel free to message me bout any questions you have!