By Melissa Dorman, February 20, 2021
FHA is a fantastic loan product for first time home buyers who have good credit but don’t have a lot of money saved up. The buyer is able to put as little as 3.5% down to buy the home and they must agree to live there for at least 12 months.
Since many of my clients are investors, they often ask me if they can use an FHA to buy small multifamily properties. I quickly tell them “Not unless you want to fail sale”. Let me explain why.
FHA Self Sufficiency Test
The FHA wants to know that a multi-unit property is self-sufficient. In other words, the total rent that you receive for the units you do not occupy must be equal to or greater than the mortgage payment. This means the total mortgage payment, which includes principal, interest, real estate taxes, and insurance. Additionally, lenders usually reduce the rent amounts by factoring in a vacancy rate and other expenses, leaving about 75% of the remaining rents as net rental income. If the mortgage is more than the net rent you could bring in, the property is not self-sufficient.
Portland 4 Plex Example
Let’s say you find a great deal on a 4 plex in Portland for a meager $800,000. And the rents of that property are all a whopping $1,500 each unit. You plan to live in one unit, so the rental income is $4,500 on the remaining units. Now we apply the 25% lender reduction to those rents to account for vacancy and other expenses. Now you are left with $3,375 as the net rental income.
Let’s see if that is enough to cover the principal, interest, taxes and insurance for this property to meet the self-sufficiency rule. After a 5% down payment, the monthly mortgage on $760,000 at 2.5% is already $3,002.92 ….that’s just principal and interest. We still need to account for PMI, taxes, and insurance (which vary property to property). Even with minimal property taxes at $5,000 a year ($418 a month), we already failed the test. Do you see the problem for this test in Portland?
The Solution
Since I specialize in helping owner occupied buyer’s into small multi-family properties, I had to find a solution! Umpqua bank, a local lender, offers a portfolio loan for owner occupants that allows for borrowers to put as little as 5% down! They do not require the self-sustainability test AND they allow the borrower to receive up to 3% back from the seller in a credit for closing costs and prepaid costs. Another amazing aspect to this loan is they allow you to pay the PMI in a single payment upfront at closing, which can be part of that 3% credit from the seller. This allows most of my client’s to cash flow immediately on a 3-4 unit property with only 5% down out of pocket.
Reach out if you want to learn more by emailing me at melissa@livingroomre.com or calling me at (503) 567-4697.
Melissa Dorman
Broker | OR & WA
She/They
Ten years ago, Melissa was living in a slum in Kolkata, India, helping over 200 women escape sex trafficking by providing alternative work at a social business.
It was there she discovered her passion for financial education as a means of empowering people to move out of poverty. After graduating from UCLA with a Masters, Melissa spent 5 years working as a Social Worker; assisting clients facing homelessness, in jail, or at a psychiatric facility.
As much as she loved the work, imagining saving for retirement on the meager salary of a social worker was becoming grim. That's when Melissa discovered "passive income." In no time, she fell in LOVE with real estate as a vehicle for wealth. Soon after, Melissa began locating off-market multi-family properties to purchase through creative financing strategies and win-win opportunities. Two years into investing, Melissa quit her day job as a Social Worker to become a full-time broker and investor. Initially, she was drawn to people in difficult circumstances, so she developed extensive experience assisting families facing foreclosure, short sales, and probate. Melissa is well versed in helping her clients overcome complex real estate challenges.
Currently, Melissa is teamed up with Super Broker, Yascha Noonberg at Living Room Realty. Together they assist clients to achieve their real estate dreams, including how to strategically buy and sell a personal residence to maximize profits. Far from the slums of Kolkata, her greatest passion now is empowering other working professionals to develop passive forms of income through buying multi-family properties in Portland.
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- T: 503-567-4697
- melissa@livingroomre.com
