If you’re thinking about a new home, you want to know that buying a home…
An FHA Loan for Rental Property Investment? It Is Possible!
Many of my clients ask me about what it takes to buy a rental property. I tell them that, if done correctly, it can be a great way to build wealth. Most people, however, don’t have the cash to place on a down payment, let alone purchase a multifamily outright.
Don’t worry- If you’re looking to buy a rental property, there’s a popular mortgage option available to you that can push you towards your goal.
An FHA loan for rental property investments is a solid way to get on the path to homeownership while generating income from tenants.
In this blog, I’ll show you how to use an FHA loan to finance a rental property. I’ll also show you what to look out for so that you can make the most out of your real estate investment.
First, what’s an FHA loan?
An FHA loan is a mortgage that the federal government guarantees, meaning they will cover any potential losses accrued by the borrower. This a key advantage when borrowing money for a home since lenders are more likely to extend a mortgage to you.
There are other reasons why an FHA loan can make sense:
- Lenders will accept a relatively lower credit score
- There is a lower down payment requirement (typically 3.5%)
For these reasons, an FHA mortgage can be a great option for a first-time home buyer. But does an FHA loan for rental property investment make sense?
The short answer is yes. However, as with most things, there are important things to keep in mind before setting off on your rental property adventure.
Let’s dig in and discover whether an FHA loan is the right move for investing in a rental property.
Your ticket to investing in a multifamily comes with a catch
Now that you’re interested in an accessible, government-backed mortgage that requires little money down, you may be wondering whether this is the right course for you to take on your investment journey.
It can be, but there is a big consideration to keep in mind before going property hunting. What is it?
- You must live in the rental property you are financing through the FHA loan
- A total of four units is permitted when using an FHA loan; otherwise, a commercial loan is required
Perhaps you’ve heard of this as “owner-occupied,” which is what it sounds like. As the owner, you must occupy one of the units for at least 12 months after closing. Don’t worry. There are tax benefits to doing this.
Let’s say you rent a three-family home. You could live in one and rent the other two out for market value. Or you could have your family live there to help cover expenses. Whatever arrangement you have in mind, you still must occupy at least one unit at the address you are buying for the loan to be legitimate.
Now, what happens after the 12 months? After that, you can keep the loan and rent out all the units if you choose. But remember, an FHA loan only applies to the property you are buying to live in.
Let’s say that you take out an FHA loan for rental property investment and then move out after 12 months. You’ll only be able to apply for an FHA loan for the next property if you plan on living there.
These loans are great for anyone who’s looking to live in the property they are buying. And for someone hoping to subsidize their living expenses with rental income, it can be a dream come true if planned correctly.
What are the downsides to using an FHA loan to buy a multifamily?
There are several things to consider when pursuing this option, and the first among them have to do with you.
Firstly, do you want to be a landlord? It’s not for everyone, especially if you’re planning on living there. Things break down, tenants have needs, and sometimes they are unable to pay. This can create some tension if not addressed properly. Yet, even with the best people skills, life as a landlord can have unavoidable challenges.
Secondly, there’s the issue of privacy. Do you want to have neighbors? Are you buying a home to have more privacy and independence? If so, living above (or below) your paying tenants may not be an ideal way to secure your privacy.
Thirdly, even though FHA loans offer a convenient way to get started, your monthly payment should be looked at closely. Is the amount your borrowing worth it to own a multifamily? Are two units enough in total, or would you need three?
These are all important questions to bring to your local mortgage broker when planning your financial future with such an investment.
Speak with a professional to see if an FHA loan for rental property investments makes sense for you
Now that you have the basics down, your next move is to connect with a local mortgage broker who can help you plan your next move.
Speak to them about your financial goals, why you’re buying a rental property, and how many units you should consider buying. Also, speak with them about whether you’re comfortable being a landlord, especially in an owner-occupied scenario for at least 12 months.
A local mortgage broker will help you match your personal goals with the market you’re interested in buying in. It’s always best to go to someone who has a deep knowledge of the area you’re looking into.
We help people buy multi-family properties in the Bristol County area. We’re no stranger to what it takes to get you pre-approved for a mortgage that will kickstart your investment goals.
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