I'm going to be going over how to purchase a multifamily apartment building with an FHA
loan and this is something I have firsthand experience with because obviously I did it.
I purchased a four-unit apartment building in Washington, D.C. a few years ago with an FHA
loan. So I'm going to tell you everything you need to know in about 10 minutes and that being said,
let's jump into it. For starters, the property has to be under five units.
So most people when they do FHA Multifamily, it's a duplex up to a four-unit. Like I mentioned,
the one I purchased was a four-unit and people always ask, "What's better, two-unit
or four-unit?" Generally speaking, I would say the more units, the better. You don't want to
be the person 10 years from now that's only doing the small deals. You want to eventually scale up.
However, sometimes a duplex might be a complete steal. I'm trying to do bigger apartment buildings
however, I just came across a duplex where it was a 100K, 150K in equity. So obviously I'm not going
to turn that down. If you can find a steal at a duplex, that's great. Sometimes the four units
might be overpriced and we'll talk about how to really quickly evaluate these deals as well,
but generally speaking, more units, the better. As far as other requirements,
you do have to live there for at least a year or at least it has to be your intention to live there
for a year. Now, obviously that's kind of a gray area, but that's what the lender requires. In
terms of financial qualifications, FHA loans for multifamily are actually very good for you as the
buyer and you can have literally a 500 credit score and still qualify for FHA Multifamily.
Now, if you have a 500 credit score, you do have to put 10% down and always check with your lender.
However, if you have just a 580 credit score, you would still qualify for the three and a half
percent down, which is what most people think of when they think of multifamily with FHA. Not only
that, but let's say you purchase a four-unit, one of the units does have to be vacant. So
let's say you purchase a four-unit, three are occupied. That's actually what I did. The bank
will actually use the other three tenants paying the rent towards your qualifications
so they'll take the gross rent from the three tenants and multiply that usually by 0.75,
and that will help you qualify for the property. So that's a really cool thing about FHA loans
and actually most rental property loans. The next thing to know about FHA loans is that most people
think you have to be a first time home buyer. While it is designed for first time home buyers,
you can own a hundred houses so long as you haven't used that actual FHA loan program yet you
can still use it and obviously always talk to your lender about your loan options, but as long as
you have that loan still available, go ahead and use it. As far as the condition of the property,
FHA loans are typically a little bit stricter, but they're not like... People make too big of
a deal out it. The FHA lender, the appraiser, when they go there, they don't want to see
shattered windows and the roof leaking and just really egregious type stuff. So it's possible
they might ask you to fix some things here and there, but the property that I purchased,
it definitely needed a little bit of work. I mean, if this thing had a home inspection,
there would probably be a list of things on there. I would say it's in overall was in good condition,
but it definitely wasn't fully renovated or anything. So with FHA, you're not allowed to
buy a complete gut job renovation. It has to be a livable, nice property with nothing egregious,
but with multifamily you can often still find some pretty good value-adds,
even though they're not complete gut jobs. Another cool thing about FHA loans is that the price point
on the properties that you can buy for multifamily goes up quite a bit, especially if you're
in an expensive area. So you can get into the millions and millions of dollar range in terms
of purchasing a property and that could be a great opportunity to live in one of the units,
rent the other ones out and potentially cover your mortgage and then eventually rent out the building
fully and then move on to the next property. Before we jump into the next section,
if you're interested in seeing all the real estate investing resources that I use on a daily
basis in my business, check out the links below, and if you're interested in getting mentored,
if you're interested in real estate investing mentorship definitely reach out to me in one
of the links below as well and we can have a quick chat and see if it's for you. Now,
the numbers on my deal, I paid 495 for... This was in Washington, D.C. and an up and
coming neighborhood. And like I mentioned, one of the units was vacant and three were occupied,
which was perfect for me. The total rent that was coming in was $3,300 per month. The bank
used that obviously to help me qualify, multiplied at times 0.75, and that helped me to get the loan.
Now, one thing to know about the deal so, I paid 495 for a four-unit in Washington, D.C.
Now that might sound a little bit low and it was in pretty good condition,
needed a little bit of TLC, but nothing crazy. I was basically paying market value
and if it's your first multifamily deal, you don't need to get some amazing steal. You don't want to
obviously overpay for a deal, but the great thing about multifamily is once you do your first deal
this whole world of multifamily investing opens up. Right now, I have five multifamily
properties and probably many more in the near future. There's an investor, Michael Blank,
who does, I think he owns thousands and thousands of units. He calls it the law of the first deal,
which basically states that after you do your first multifamily deal of any size within the next
two to three to four years you'll be financially free from multifamily investing and it's because,
just, I don't know, it just sets off this thing in the universe, if we want to get all metaphysical
and everything, but basically people will start bringing you deals, wholesalers, different
agents. People will know that you can close on deals and you'll also have a comfort level.
You would've bought that first deal. Maybe it was a little uncomfortable, like four-units
or two-units. That's a lot to take on, but then all of a sudden you realize you can handle that
and then you start doing bigger and bigger units and as far as evaluating these multifamily deals,
you can get really into cap rates and NOI and everything like that. I would just say,
I would just try to keep it simple. Pull up the last five to 10 most comparable multifamily
properties that have sold in that vicinity and then make sure you're not paying the highest
amount. If you are paying the highest amount make sure yours is significantly nicer or maybe has
more bedrooms than the other ones. I knew with my deal that it was an up and coming neighborhood so
it was likely that the values could appreciate, and I also had some room to increase the rents.
I could basically rent this out for $5,000 a month. I'm working on increasing the rents,
doing some improvements, things like that. But at the very least make sure that the potential rental
income will easily cover your mortgage. For me, the way I did that was I just looked on Section
8's website because I'm going to eventually put this entire building on Section 8 and I just saw
what the potential rent could be. My mortgage is this amount and there's a pretty good margin in
between. As far as which lender you should use for your FHA loan, I would strongly recommend
going with a local mortgage broker. It has a good reputation that you can call on their cell phone,
everything like that because with multifamily there's a little bit more back and forth,
and you need the lender to really be flexible and really be on top of things.
The lender's going to need to look at the lease agreements and it's going to be helpful
if the lender is nearby. Don't try to use some online discount lender. You can always refinance
with them if you really need to, but I would strongly recommend going with a local lender.
A couple additional things to know about FHA loans is the PMI or the mortgage insurance.
Because you're putting so little down, it's going to be a riskier loan from the lender's standpoint.
They need you to pay this PMI fee, mortgage insurance premium, whatever you want to call it,
which comes out to basically 0.085% per year and unfortunately you can't really get rid of this PMI
until after 11 years. Some lenders and some types of loans after the property has 20%
equity you might not have the PMI anymore. With this, even though my property,
I have way more than 20% equity however, just the way the FHA loan is set up,
I have to wait 11 years before that falls off. My loan amount was about 475. I think, 480, and I pay
about $320 every single month for this PMI. So 320 a month, that's like a car payment. However,
I'm very happy with my FHA loan and another thing to keep in mind with FHA loans is the closing
timeframes. Sometimes FHA loans can take a little bit longer to close, maybe 35 to 45 days. However,
if you get with a recommended local lender and I have many that I can refer you to if you reach
out to me, they can potentially get it done in as little as 30 days or that they'll let you know,
just depending on the type of property. That's another reason why you really want
to go with a local lender because these big banks, credit unions they'll take easily 45 days to close
an FHA loan, which in a hot market is extremely long. A good thing about multifamily deals is
that oftentimes the seller is not going to expect you to close as quickly as if it was just like a
single family house, just because there's more moving pieces. So that gives you a little bit
more flexibility with FHA, but just generally speaking, you want to be able to at least
offer a fast closing, if you can. One thing that's cool about FHA is that they have, what's called an
FHA Streamline Refinance, which is a refinance program only through FHA that allows you to
easily and quickly refinance your loan. So if you had a pretty high interest rate, I actually had,
I think a 3.5 and then I refinanced to basically a 2.5 with the FHA Streamline Refinance program.
And unlike most refinances, this is like the easiest process ever. With FHA
Streamline Refinancing I don't even think you literally don't even have to prove or show, or
they don't even care if you have a job or not. The whole point of this is really to make your monthly
payment lower. So it's like a very minimal, I think it's like a soft credit check. I'd have to
confirm that. They don't really check too much documentation. It's basically like, do you have
an FHA loan? Are you alive? And do you want a lower monthly payment? It's a pretty easy process
and through that process I saved about $330 per month. So it's basically the same as my PMI.
I still have the PMI with the new streamline program however, I drop my payment by almost
350 per month, which is not bad. I meant to add with the refinance program, you're
not allowed to take cash out, so you can't do a cash out refinance and they also don't even do an
appraisal because FHA person already appraised it so the value is usually pretty good.
It's a very easy and simple process. So now how do you find these amazing FHA
Multifamily deals? Well, I'm going to give you three strategies that I've used
all three of these to purchase properties in a competitive market. Everyone says their market's
competitive. I think Washington, D.C. is pretty competitive, but maybe your market is as well
and drop in the comment section which market you're in and so the very first way is really
just the MLS. There's a lot of inefficiencies with multifamily properties in terms of listings, in
terms of the owners, there's a lot of mom-and-pop owners that don't really know what they're doing,
and they're not really maximizing the rents or maximizing the values. The MLS is actually a great
place to find multifamily deals and you can also, this was a way I just found a deal recently, you
can just look at the expired, withdrawn, canceled, temporarily off multifamily listings in your area
and oftentimes those people want to sell. They're just waiting for different things
to happen. The deal that I bought recently, this wasn't FHA, but this was multifamily,
could have been FHA. The guy had some repairs that he wanted to do, which in my opinion weren't even
that bad and he just didn't have the money or just didn't have the energy to do it.
I reached out to the listing agent, she sent me the home inspection report. I made an offer and
we got it done. The next way to find FHA deals and this is actually how I found my first one. This is
how I found my first FHA Multifamily property, was through PropStream and I sent direct mail
to different owners in up and coming areas. This person contacted me and I actually have a video
below on exactly how to use this step by step. It's only about 10 minutes. So I'll check out that
video after we're done here. You can start sending out direct mail or start contacting these sellers
directly because that's where you're going to find the best deals is with the off market ones.
The third strategy for finding these FHA Multifamily deals is just make a list of
every single real estate agent who has done a multifamily transaction in the last year,
whether it's on the buy side, listing side, whatever it is, make a list. There might be 50,
60, a hundred agents, and just literally reach out to every single one, say, look, I'm
approved for multifamily. I'm looking for two to four-units in these neighborhoods for this price.
It can't be a complete gut job, but I'm okay if it needs a little bit of work. And that is a great
way to find deals. You will have people, if you build a list of 50 agents, you'll have five or 10
deals to look at as soon as you reach out to them. I could almost guarantee you of that. So if you're
interested in the real estate investing resources I use on a daily basis, check out the links below.
Additionally, if you're looking for a mentorship, reach out to me in one of the links below as well.
I do nationwide real estate investing mentoring, and I'll see you on the next video. Bye.