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Great resource post! I saw a small video clip you stated you offer 15% down payment for investors? This is fantastic! What is the lowest amount you will lend on? What range interest rates can investors expect? Finally, do you charge any upfront points for investor loans?
Question, Say I finance a multifamily home with an FHA loan with the 3 1/2 percent down as an owner occupant of course, then say I leave that apartment and rent it out, I'm assuming I have the other units rented. Could I again go get an FHA 203k loan with the same 3/ 12 down and get a single family that may need some cosmetic work? or is it that I have to refinance on the multifamily in order to make that happen.
Your thoughts,
Rashidi Brown
Rashidi-
You will not be able to do this in parallel with an existing unit, you can although get a conventional investor renovation loan, you will not be able to do 3.5% down, but you may be able to get as low as 15% down. The rental income + savings from your "house hack" technique, should lend you the ability to hopefully save some $$$'s and make your next investment. Hopefully, if you buy right you may even have some residual equity post your renovation on your FHA Multi Family, you can even consider using some of your equity in a equity line position play or you experience enough growth coupled with the equity that you can refi to a conventional 15, reduce your interest responsibility, get a more favorable rate and climate your PMI, this is a little more complex and requires an intricate series of ballot steps to achieve the ultimate outcome, but very doable.
@Joe W., I feel like you're exactly where I was a year ago.
I am in Los Angeles. Like Phoenix, it perfectly fits your description of "a market where you're having a hard time finding properties to buy and hold that cash flow."
Like you as a mortgage underwriter, I have many years of experience being a professional supporting real estate investors as a CPA, but I now wanted to become a real estate investor myself.
In late November of last year, like you're doing this November, I wrestled with the question of investing locally with a 4-unit purchased with FHA financing vs. investing out-of-state and got a lot of great advice.
Like you, my goal is to retire within the next 10-15 years via real estate investing.
As a result of some of the advice I've read through the forums (I would recommend you pay attention to guys who have been in real estate for decades like @Jay Hinrichs rather than the younger folks who are often just pushing their turnkey products) and speaking to investors at local real estate groups, I decided that given my place in life I would be wiser to place my bets on California appreciation over the next 20-30 years rather than investing in some beat-down property in Cleveland for an extra $400 or whatever in cash flow per month.
Given the facts that (1) I could get into a property for a measly 3.5% down, which would free up cash to invest in other places if I so chose, (2) I was already throwing away rent every month such that I could still be cash flow negative of $650/month (what I was paying in rent) and still be better off because a portion of my monthly payment would be building my equity and the rest would be tax deductible, and (3) I'm in my 20s and have the time to take a long-term view of appreciation potential, it was a no-brainer to go the FHA 4-plex route in LA, despite the fact that it is one of the most expensive markets in the country.
This isn't to say that the process was easy. It took time. I just closed in September. But I eventually found my property on the MLS. This was the listing. Purchase price was $435,000, and the seller gave me a credit for $15,000 to cover various repair costs, particularly roofwork in anticipation of El Ni
Logan, all great points, I think that the local 4-plex move is the way to go! In-fact, I think it is a good move in any territory, regardless of where you are in the country (LA, PHX, NY, CLE, etc.) it is a good way to build wealth long-term, hopefully reduce the cost of your living and begin building wealth for a very low cost relative to your purchase price. You may want to consider even using a FHA Renovation Loan and seeking out a fixer upper.
I cannot agree with you anymore that people like @Jay Hinrichs are extraordinary resources. I can assure you though, that some of the young guys on BP really know what they are talking about, especially when discussing their hyper local markets. Being a young guy out of Cleveland, with more than 1,000+ RE SFR & Multi transactions, in numerous capacities completed, my track record is vast and knowledge capacity is wide. I think your vision statement in your response was narrow. You have picked Cleveland as the victim city in your response, Cleveland is a strong RE Investment space, it all boils down to the same logic as anything else, no matter where you are in the country, you need to have a good plan, team, asset in place for your out of state investment to be a success. Yes, do I beef in turnkey, yes I do, because it can work if the process in place with your operator is correct.
Buying a local multi to live in, collect rent and use your spare cash to invest out of state. Spread your risk, if you are young, experienced, old, novice does not matter RE investing is all about doing your homework, working with a good contact, partner, operator. Many different ways you can do it, if you do want to invest out of state, outside of your personal hyper local space, why not work with a reliable and experienced operator / Turnkey Company.
Turnkey brings you efficiency, experience, knowledge, capacity, savings, security and beyond all in one package, if you want to be passive RE investor building wealth, you can use a reputable Turnkey operator to do your dirty work for you and collect your passive income. Build your wealth, spread your risk, use the economies of scale of local operators to make more ROI.
I really think you may want to take another look at Cleveland and reconsider, we are an amazing space:
Did you know:
CLE - home to the 2016 Republican National Convention
CLE - Superman was created here
CLE - Cleveland Clinic #1 Heart Surgery Center in the World
CLE - Over a dizen Fortune 500 Companies
CLE - Second largest theatre district in the Country
CLE - Epicenter for BioMed Research & Development
CLE - A great place for the WHOLE family/
CLE - A great place for investing come check out the beautiful things CLE has.
I live in the Phoenix area and I've been looking for a 2-4 unit property here with the intentions of buying it through FHA and living in it for a year or two and then moving out.
I'm running in to a number of problems:
1) There are not many 2-4 unit properties in the Phoenix area relative to areas like the midwest and/or east coast and for the most part the multi-family homes here seem to be located in less than desirable areas.
2) It seems to be very difficult to find one that will cash flow. I don't necessarily want to live in a mulit-family home but I would do so for a year or 2 if I can find something where the numbers work.
I'm sure if I look long enough I will find something that makes sense and if I do I will definitely jump on it but I'm also considering investing out of state in a market I am very familiar with and where I have a few trusted contacts. I believe I can find properties quicker there that will cash flow and the purchase price is about a 1/3rd on average of what I would pay in the Phoenix area.
I know I'm far from the 1st person here to run in to this issue so I guess my question would be if you're in a market where you're having a hard time finding properties to buy and hold that cash flow did you ultimately invest out of state and how has it worked out for you?
Joe, great decision, not only should you consider buying using FHA, perhaps consider buying a fixer upper and using a FHA203k Loan to acquire and renovate at the same time. I am not certain based on what you have written if you have employed this tactic yet, if you have not, this can be a very easy way to achieve your goals.
If you are considering of living in the multi, you will achieve ultimate financial benefit of having a decreased living exposure, this should be the goal. If you have the ability to do multi I say do it!
Out of state investing can be very successful as long as you have a good reliable contact or team in place.
Your question poses a good argument, if you can define something in your hyper local market that is a multi, you do not mind living in it, even perhaps buying a fixer upper, I think you can make it work anywhere you live. The next phase of your investing may have to extend out of state, if the housing cost are to high in your immediate local market, their are ample markets where housing is very affordable and investment opportunities can be very fruitful. I think that risk spread os a major component to a successful investment portfolio. Yes, maybe you can buy (1) or (2) in your local market, but, if you can get some high quality turnkey or investment assets in alternate out of state markets where you can purchase 2-4, 6-12 etc. assets, you have what should be a safer play. It all comes back to not placing all your eggs in one basket.
I think you will find a lot of wise arguments on BP, just note, its all about the team, individual, contact that you have in place that is a reliable, trustworthy, and transparent contact, so do your homework complete your due diligence, all people and assets are not alike.
@Steven Gesis Anyone living on the West coast should absolutly do this before they buy ANY OTHER real estate.
A prime west coast 2 to 4 plex will hold value rents will be super high and your tenants will pay it off and you will not have the issues of low end tenants generally.
At the end of the day IF you DID NOTHING ELSE in real estate most folks who bought a 300 to 800k duplex to 4 plex on the west cost will have it paid for in 20 to 30 years and it will be worth and ACTUALLY be able to sell for probably 1 to 2 million... now thats an asset
Jay, as always, you are right on point! Make good decisions on the front end and reap the rewards thought the entire life term. How much easier can they make it for people, this is a no brainer, just need the right team to execute it.
@Shane H. and @Adam Pierce, former OC guy here. I would definitely take a look at the Antelope Valley. It's two hours from LA. I just picked up a rental up here for $75k that rents below market for $700/month, and the tenants who have a sense of ownership in the property take care of all my repair work free of charge (I just buy the parts).
Is $700 / $75k on par with Cleveland turnkey numbers? Nope. But if it's a cash-flowing product you're looking for, you'd better believe that this house built in the mid-1980s with a new roof in a mild California climate will beat the heck out of a 1930s-build Cleveland home over the long run.
Just my two cents.
I have been following this conversation pretty closely, I certainly appreciate a lot of the insight provided. I think @Jay Hinrichs has said it best, a rental is a rental is a rental, no matter where you are in the country you will have items you will need to deal with. Now with that out of the way, I am a Cleveland Pro, I think we have alot ot bring the table. Yes, you are correct we have some older stock homes, we also have newer stock homes and everything in between. You mentioned some flaws in our climate, you must be cognizant of the fact that our building materials and methodologies are designed to meet the demands of our climate, as are the homes built in California. Cleveland is considered to be one of the most risk adverse geographical locations as it relates to natural disasters. I have also bring up the fact that Cleveland is situated on one of the largest fresh bodies of water in the world. Anyhow, I do not think we need to blast Cleveland, on the contrary, Cleveland is a family friendly city, we have a lot of value to bring to the table. Lastly, it is important to keep in mind what it is you are buying and who it is you are working with. We have many clients that come with horror stories, we have noticed that these horror stories are not isolated to one geographic location int he country but wide spread. Again, I emphasize doing your due diligence whether it is Cleveland or California, define a strategic partnership with a reliable and trustworthy operator. Travel, see and meet the people you intend on working with. I think if you define a good plan you can make it work anywhere in the country, it just so happens that Cleveland is one of those great places to. I encourage you to check us out closer, I think you will be very impressed and have a whole new perception of the possibilities that Cleveland can bring investors.
If you plan to purchase a fixer-upper or need to make improvements to your existing home, an FHA 203(k) loan may be the perfect rehab loan for you. By combining a construction loan with your home mortgage, an FHA 203(k) loan limits your loan closing costs because it's just one loan and simplifies the home renovation process. FHA 203(k) loans are backed by the federal government, and are typically given to buyers who want to purchase a home and perform upgrades, repairs, remodel or customize to their needs and wants.
Max, great point, this is if you are purchasing a SFR for owner occupant or you can apply this logic to a multi-family up to 4 unit, live in one and rent the others. It is not very easy to use this product for your own existing home though. You would be better off probably trying to get and equity loan for your existing property. Anyone looking to acquire property and use this product, this is an awesome product. Use it, it is designed for fixer uppers and it lets you use someones else money, keep your cash and buy and investment home.
FHA 203K mortgages are not available for investment properties.
Richard-
You can purchase a duplex, triple or quad, live in one unit and use the other units as rental income or investment property. In some cases I have even seen loan officers apply 70% of the rental income to the DTI for consumers to offset the new exposure, as the rental units within the property are all new income streams.
Also, they do have renovation loans for investors, however, it is 20% down and not a 203k product.
@Steven Gesis what % if any of your tenants are sec 8 or other subsidized housing ?
@John Hodson I always use 50% as James stated if you do better go buy yourself a nice dinner.. but your not dissapointed or shocked if you set your margins so tight and you don't hit them.
There is only so much that can be done ... at the end of the day a poor tenant can throw those numbers right out the window.
My current portfolio ( and am liquidating all my holdings currently) has 7 A class SFR's left. generally you can get pretty lean with this tenant base top of the spectrum on rents etc..
However last year I had one tenant go banana's on me.. no fight or argument and they destroyed the house. did 40k in damage.. Now I got insruance to cover it because the insurance adjustor agreed it was not normal were and tear and it was intential.. they also went after this tenant criminally not sure what happened but it can happen in the business.
Renters are Renters are Renters always remember that.. we do the best we can. but some wacko's do slip through the most stringent systems.
Hi Jay, great question! We have 0% section 8 or subsidized housing, voucher, eden, etc. We do not operate in this space, we only have cash paying tenants. Section 8 is just not our business, we place a LOT of love into the units on the front end. It is not to say section 8 is bad, it is just to big of a gamble for our system We have a very strict screening and placement policy, obviously all within the equal housing parameters.
You could not have said it any better, you certainly want to set achievable and realistic parameters on your projections. Again, you have to consider the overall existing condition and be very honest about it. Do NOT trick yourself or fool yourself you have age if you really do not have a top notch and well maintained property. Give yourself a real view into your property hire a property inspection service to give you a report. One of the ways we always test ourselves and make sure we have all the loose ends buttoned up and all the screws tightened is by encoring our investors to conduct 3rd party home inspections. You still want to give yourself some cap space for maintenance and continued support. Keep in mind that you will be covering some of the continual maintenance during your tenant turn-over. The more realistic you are with yourself the better the outcome no doubt. I think it important to note that you should not cut corners on your improvements, the better you complete them the more compelled your tenants will be to stay longer as well.
So critical to note, a poor "bad" tenant can ruin everything and more, this is a hyper important element that must not be taken lightly, you do not just want to place a tenant you want to place a high quality tenant. A high quality tenant will not only stay longer, be timely with their payment responsibility but will also typically leave your unit in much better condition on the way out. A high quality tenant will not have area on to leave if your home is well maintained and offers the necessary competitive amenities as expected with modern living.
Never had a severe case as you have encountered Jay, however, this is not something that is within anyones control you will always have outliers and unexpected conditions, you must be prepared for the bad as such as you are anxious to only have good. Being protected and handing the stain is key.
You say it best, renters are renters and things happen, its about how you handle the situation and yourself when things do happen.
Currently I do not have the best credit (fair) and not so much extra cash. For those of you that have already made at least their first investment. Where did you get the money? Own cash, 401k, hard money lenders, bank.. Etc. tell me your story would like to learn different ways money can be found and used and how it went. Thanks
Christian-
Many ways to capitalize using someones else's money. First always remember you will still need some of your own skin in the game no matter how you go about it, so you will need to make money and save money, so you can make money on your saved money :)
You can consider a credible house hacking technique:
1) Find a duplex at a favorable reduced price point below market value
2) Apply for a 203k loan (considering the home has an appraised value acquisition + construction)
3)You only need a 600ish credit score to get a 203k loan - you only need 3.5% down
4) Live on one side & rent the other = free rent (this is minimum goal)
5) save money you would be using for rent to buy your next asset
This is a very rough guide, but very achievable and very simple, especially if you are just begging. If you need anymore detail on it, feel free to PM me.
