I’ve always thought it incredibly financially intelligent for a new home buyer just getting started to buy a 2-4 unit property as a their primary residence and then live in one of the units and rent out the others. This way a large part of your total housing payment can be offset by the rental income you collect from your tenants. And as you move a long in life and become more financially robust, you can move out of the 2-4 unit property to buy a single-family home, but still retain the 2-4 unit as an investment property that will provide you cash flow and future equity growth.
In this article I’m going to discuss a specific niche within this idea of buying a 2-4 units property as a primary residence. This is to buy a duplex that requires updating with the special FHA 203k fixer-upper loan. A duplex is especially interesting because you can buy it with only 3.5% down payment with an FHA loan if you occupy it as your primary residence. You can also get the same record low FHA home loan 30 year fixed interest rates on a duplex as you can on a single-family or condo. Whereas if you buy a triplex or fourplex as a primary residence with an FHA loan you need to put 15% down, and the interest rates are not quite as favorable. Additionally, using a FHA 203k rehab loan you can get a great deal on a duplex that may be overlooked by other buyers in the market becuase it needs work, but then you can go in and fix it up with this special loan thus creating equity.
I have another article that I have written on this web site describing the FHA 203k rehab loan, but here is a quick review of the highlights:
- Property has to be your primary residence
- The lender will lend you the cost to purchase PLUS the cost the renovate all in one loan
- When you close your new FHA loan will pay off the seller and then the funds to renovate will stay in an escrow account to be drawn upon when you need them
- 3.5% down payment is required, but that can be a gift from a relative or lifelong friend
Another reason using the FHA 203k rehab loan can be really effective is that it can enable you to be able to get mortgage financing on a property that wouldn’t qualify for a regular FHA or conventional loan because of the property condition. Because this property won’t qualify for regular financing, you are in position to negotiate a big discount with the seller, because the seller does not have as many buyers to sell it to. Then you can go in and make the improvements for much less than the discount you recieved from the seller and build a nice chunk of equity.
The best way to get started on a FHA 203k loan is to first get pre-approved. The next step is to start searching for properties. Once you find a property that you would like to make an offer on, it is best to find a contractor that can walk through the property with you and put together a cost break-down of what you are planning to fix and the labor and material costs associated with that. Most of the time it’s best to stick with fixing cosmetic items such as painting the interior and exterior, updating the kitchen and bathrooms and putting in new flooring for example. Those are the most cost effective while at the same time adding the most to your properties value.
In summary, I believe buying a duplex as your primary residence and using a FHA 203k rehab loan to purchase and renovate can be a very smart financial decision. If you have any questions, feel free to call or email me, my contact info is below.
Warm Regards,
Rob Chomentowski
Sr. Loan Officer and FHA specialist
858-922-7899 (direct)
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