FHA loans can be extremely useful for homebuyers. With generous terms and relatively-simple qualification standards, this type of loan is used by thousands of people every year, equalling over $245 billion in volume on an annual basis.
In most cases, an FHA loan is associated with purchasing a single-family, owner-occupied home. People generally think of FHA loans as a way to purchase their personal house, not a way to purchase an investment property. But you can invest in real estate using an FHA loan. With the right strategy, using these types of loans for your investment will make the entire process swift and easy.
How to Invest in Real Estate Using an FHA Loan
What is an “FHA Loan?”
It helps to take a step back and examine what an FHA loan really is. While the name suggest that the Federal Housing Administration (the FHA) is lending money to homebuyers, this is not the case. Instead, the FHA is providing mortgage insurance to the lender, supporting their loan in the event of a default. (A “default” is when the borrower can’t repay.)
From the lender or lending agent’s perspective, it is highly beneficial to have this mortgage insurance, but the FHA has a specific set of standards for loans that receive their backing. If the borrower meets these standards, the lender can write the loan and receive mortgage insurance from the FHA.
By providing support for loans, the FHA is encouraging homeownership for more Americans. But FHA loans, while mostly used for owner-occupied purchases, can also be used for investments.
Using FHA Loans to Purchase Your First Investment Property
FHA loans are intended for the purchase of a personal home; in real estate jargon, an “owner-occupied” home. However, the program does have a few details that allow buyers to purchase an investment property.
First of all, when using a typical FHA loan to purchase an investment property, you will likely have to live in the home for roughly a year. This means that if you purchase a single-family home, it will have to be your primary residence for at least 12 months. Once the 12 months have passed, you can place the home on the rental market and use it to make a regular income.
This means that creating an investment portfolio using an FHA loan requires you to wait a year. But what if you want to start your rental-property empire right away? There is a way around this impactful detail, and it’s not a tricky, complex, or even unethical loophole. The solution is simple and straightforward: purchase a multiunit property, such as a duplex.
The FHA allows for the purchase of properties with up to four units. While the owner-occupancy requirements remain, this allows you to begin renting out portions of your property right away.
If you were to use an FHA loan to purchase a multiunit property, you would have one unit for your own personal use and up to three units that can start generating an income. After a year, you could move out of the unit and turn the entire property into an income-generating investment.
Advantage of Using FHA Loan for Investment Properties
When you are looking to start a collection of investment properties, you have a few different options for your loan. So why should you select an FHA loan? The most important benefit to using this loan to invest in real estate is the low downpayment. If you have the appropriate credit score, you can secure financing for an investment property with only 3.5% down. This is far less than the 10% of even 20% required by some investment-property loans.
How much is 3.5% in relationship to the purchase? Essentially, this represents $3,500 for every $100,000 borrowed. So if you purchase a duplex for $300,000, the cost would be $10,500. If you were to use a loan that required 10%, you would need $30,000. That’s a big difference in entry costs.
Here’s an analysis of downpayments by purchase price:
|
Purchase Price |
3.5% (FHA Loan) |
5% (Low-credit FHA Loan) |
10% |
20% |
|
$200,000 |
$7,000 |
$10,000 |
$20,000 |
$40,000 |
|
$300,000 |
$10,500 |
$15,000 |
$30,000 |
$60,000 |
|
$400,000 |
$14,000 |
$20,000 |
$40,000 |
$80,000 |
|
$500,000 |
$17,500 |
$25,000 |
$50,000 |
$100,000 |
|
$600,000 |
$21,000 |
$30,000 |
$60,000 |
$120,000 |
As you can see, having a low percentage for your downpayment can make the entry point for investment properties much more affordable. If you only have about $10,000 for a downpayment, you can still invest in real estate using an FHA loan.
The other advantage is that you can make a purchase even if you have a low credit score. Investment loans tend to be higher risk than loans on single-family primary homes. Therefore, lenders are often more strict about credit requirements. If you have a score between 580 and 500, an FHA loan may be your only option. However, borrowers in this range will have to bring a 5% downpayment. (See table above.) This is, however, still much lower than other investment properties.
Disadvantages of FHA Loan for Investment
The only significant disadvantage to investing in real estate with an FHA loan is the stipulation (in most cases) that you have to live in the property for a year. Yes, there is the option of purchasing a duplex or multiunit facility, but you still have to occupy the property for a year. This means you will be living right next to your tenants. This allows you to monitor the property closely, but it also means you are nearby, and immediately accessible, if there is any issue with the property, no matter how small.
Invest in Real Estate Using an FHA Loan from San Diego Purchase Loans
You can invest in real estate using an FHA loan, but you need to work with the right team. Contact our staff today and we’ll show you the advantages of an FHA loan for your investment, and we’ll review any other options that might fit your needs.
With a dedication to service and support, we are proud to be your source for affordable investment-property loans.
