I admit, that title is a bit sensational. I’m not going to sell you some magic bullet where the government will give you a six figure grant or tell you about some loophole that will save you thousands in taxes (but if anyone has access to these items send me a note immediately!). What I am going to tell you about is one of the best kept secrets to buying an investment property for very little money down.
Most likely you have heard about the FHA loan program, especially recently because it’s one of the few mortgage products still readily available. However, did you know that you can buy an investment property with an FHA loan and it only requires 3% down? It’s pretty amazing to think of owning an income producing asset and only having to come up with 3% of the purchase price!
Like anything government related, there are a few stipulations. The main hiccup being this: you must occupy one of the units that you’re buying. So, basically this means if you buy an investment property with an FHA loan it must have 2-4 units. Some people might balk at the idea of living in an attached home for a while, but if you can tough it out for a few years I’m sure you’ll end up quite a bit wealthier than your single family friends. (If you buy the right property it won’t be tough at all!) Also, you’ll be able to qualify for a bigger mortgage if you desire because 75% of the renal unit income can be applied to your monthly income. View your county’s FHA loan limits here.
Just for a quick illustration, let’s do some calculations to figure out just how rich you can get by buying an investment property with an FHA loan. Mathematicians out there, this is just for illustrative purposes so don’t kill me based on my assumptions. For my made up scenario you’re 25 years old and decide that you would like to buy a nice duplex to live in for 7 years at which time you sell and move into a single family home. In my neck of the woods, and most of the midwest, that means spending about $300,000 so that leaves you with a mortgage of $291,000 after putting 3% down.
Since this is a nice duplex, you could probably get $1200 rent per month and we’ll say it’s occupied all but one month per year, giving you $1100 per month in income from your pals next door. Based on a 30 year loan at 6% your total payment is going to be $1744.69 and we’ll add a bit on for taxes and insurance to make it an even $2000 per month. This means that you get to live in a nice duplex, which would be $1200 to rent, for just $900 per month. So in the short term your monthly housing expense is pretty cheap but the long term is where it starts to get really sweet!
After 7 years is up and it’s time to move out, you will be left with a mortgage balance of $267,607. And, since you bought a nice place in a good area, your home has appreciated at 5% per year to a value of $422,130. That’s a whopping $150,000+ in equity over just 7 short years! At this point you could choose to sell the home to capture the equity or just rent out both units and enjoy a monthly cash flow of around $1,000.
Are you starting to see why it might be so lucrative to share some walls for a few years? As always, I’m not your mortgage professional or tax guy (speaking of taxes I didn’t even address all the tax benefits you’d enjoy from having an investment property) so be sure to consult an expert in your area before making any decisions. Best of luck in your investing and don’t forget to consider the FHA route to riches!
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This article was written by Brandon of Mortgage Loan Place, the nationwide experts in FHA loan financing and jumbo mortgages.
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