FHA, How big should I go?

Question

So the plan is to Buy a property with up to 4 units with an FHA loan, while also acting as my own agent. The question is since FHA requires little money down, does it make sense to find one of the most expensive property's that still cashflows? My thought is that it will allow you to get into a large loan that will in the end make you more when the time comes to cash out refi? Is this a bad idea?

ps. I understand that FHA has limits

David M. · Answer

@Bryce Kennebeck

.. just because you can use the FHA, doesn't mean you have to...  You do realize that conventional is generally cheaper if you qualify?  You do realize that the PMI can come off a conventional loan?  The MI never comes off a FHA loan.

Lets face it...  the FHA loan is those who can't "afford" a conventional the loan.  You need the Gov't to back you...  I'm not sure what you mean about the "premium insurance."  "Premium" probably isn't meaning good as in "premium gasoline," its means you are getting charged more.

Like the I said, the main exception is higher LTV for multi's.  So, if your idea is that since you need/have to use a FHA loan to get a 4fam property, then your 'cause and effect' is backwards...

Bryce Kennebeck · Answer

Yeah I'll be staying in Tampa for good. Yes, I have 100k saved and that'd also about my annual salary after tax.

I've looked at conventional with less than 20% but I feel like I should take advantage of the FHA loan as I probably won't ever use it again and if I still have the premium insurance I figured that I might as well take advantage of FHA for a year or two until I can cash out refi or get a better interest rate.

Right now my plan is to put part of the 100k towards the FHA/Househack while the remaining cash will go towards a conventional loan on a residential at probably close to 20%.

That's my current rough idea, but like you said, depending on the property available at the time.

David M. · Answer

@Bryce Kennebeck

Honestly, not really sure.  Don't know your market.

Depends on whatever deal you can find.  Depends on your strategy.

Are you not going to be moving around anymore?  Do you not qualify for a conventional loan?  Are you only doing multi where the FHA has the ltv benefit?  Conventional can do as low as 95% ltv for single family when owner occupied anyway.

Bryce Kennebeck · Answer

What do you recommend for the best strategy for long term gains while first using an FHA loan? This is probably the only time I will use FHA so I want to maximize its use before I do more standard 20% down single family properties. And I'm in the St. Petersburg market where the single family's start around 280k.

David M. · Answer

@Bryce Kennebeck

sure...  I'm fine with that, its just counter to the constant "must cashflow" concept.  Your idea is trying to maximize the power of leverage.  This is part of the seemingly now "old school" concept of buying a property and make sure the rent covers your expenses plus a bit.  After 20 to 30 years, you have a paid off property, paid off with rent money, and a property that hopefully has appreciated 2x or more.

But, nowadays it has to cashflow...  Its said that the old way is too speculative...  Its all speculative.  Even if the property cashflows today, there is no guarantee it will cashflow "tomorrow."

I would say that in my experience / market, multifamilies don't appreciate as well as a single family (granted, you are going after "amortization" gains vs appreciation).  The buyer of a multi is automatically an investor and the value will be dependent on what rent the property will fetch.

But more directly to your question, if you maximize the value of this purchase, will you have sufficent funds and credit to scale to another deal?  Assuming this is part of your investing goal?

Happy to chat.  I hope this helps, good luck.