Did You Know? You Can Invest in Real Estate Using an FHA Loan!

Investment property

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.

Small home on a sunny day
Using an FHA loan for your first investment is a good strategy.

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.

CONTACT SAN DIEGO PURCHASE LOANS TODAY!

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When looking for a house, we had couple recommendations for a lender. After talking with all the lenders, many were difficult to work with and couldn’t get it done as quickly as we needed. I was referred to Chad Baker’s team and I am glad we did. Not only did they get the things done quickly for us, they were very easily to get ahold of. It wasn’t rare to get a response within 15 minutes whenever an email was sent. I could not express how friendly and outgoing this team is. And on top of that, they came back with the best offer for us amongst all the other brokers. I am glad I worked with these guys. If you are looking for a lender…MAKE SURE TO CALL CHAD BAKER AND TEAM!!! Thanks Chad for all your hard work. Next time we buy another house I am calling you first!

“Hi Juliann and Chad, I wanted to take a moment and thank you guys for what would have been impossible for us to do without you. We wouldn’t have our keys in hand if it had not been for your help in navigating the financing, and Juliann’s perseverance in getting the rest of the players in the transaction to deliver. Out of everything, our interaction with your office has been a highlight – and your customer service has been beyond everything we’ve experienced in the real estate industry. Is there a way we can provide any reviews, ratings, testimonials, or other statements that can express to your potential future customers how much you guys do to make the customer’s life easy? Please let us know how we can share our great experience with you to the rest of the public. Whether we refinance this under a VA, or get in a bigger/better house in a few years, we’re not going to go anywhere else for financing. We are customers of yours as long as you are in business. Thanks again for getting us in a house!”

Thank you Chad and Team

Chad and his team have been a pleasure to work with. I’m a 3rd time home owner. Wish I had known Chad and team a lot sooner. He made my 3rd home purchase very easy. There were a lot of moving pieces and they handled with professionalism and care. Juliann was a pleasure to work with too. The whole team made it possible for us to move into our dream home. Thanks you Chad and Team!