FHA Loans can be used to purchase a multi-family building as long as the buyer is occupying one of the units. This is a great way for a first time buyer to make a great investment, take advantage of great rates and have someone else pay the mortgage while living rent free, or pay down the mortgage in approximately 10 years and start collecting over $30,000 in passive income. It's not too good to be true.
I recently ran the numbers on a completely rehabbed 2 unit building in the University City section of Philadelphia. The rent for the larger unit would nearly cover the entire mortgage including taxes and insurance. This would leave a 2 bedroom unit with a full basement available for the owner who would only need to chip in $150 to cover the difference between the rents they are receiving and the mortgage. If the owner decided to bring in a roomate the average rent is $550 + utilities so the owner would now be banking about $400 per month. If I were the owner I would take $200 and pay down the principal each month because this will set you up to pay off the building in 16 years instead of 30. The other $200 I would put in the bank so there are some funds to use for maintenance.
The best part of this is that a young buyer would be able to swing this because FHA only requires a 3.5% down payment so the total funds needed to purchase are under $25,000. If we were able to negotiate a seller assist we could potentially bring the total funds needed to purchase down to around $13,000. Because the buyer has leveraged more money using an FHA Loan the ROI goes way up. In fact, when running the numbers conservatively so only expecting Real Estate to appreciate at 3% per year, accounting for a 10% vacancy rate, maintenance costs of $5,000 per year, and homeowners insurance at $1,500 per year the ROI is over 20%.
This is a great way to leverage buying your new place into a fantastic investment at a time when the economy is still struggling. If this were my new home and investment I would kick in extra each month just like I was paying rent so I could payoff the home even sooner. It could be done in under 10 years pretty easily. Then I would move out and collect the $30,000 + per year as passive income, or reinvest it into some more properties. I know some of you are thinking, but what happens if I need more space due to life changes, but haven't held on to the property long enough to sell it for a decent profit. Well the upstairs unit is a 4 bedroom 2 bath.
There are some great ways to make money in Real Estate as long as you have someone with experience to guide you through the process. As a seasoned investor who knows both Philadelphia and Bucks County very well I can help you find the right home or investment for your specific situation. If you have any questions please don't hesiatte to ask.
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