Live/Income -- FHA or Traditional Mortgage?

[Zoebird]

DH and I were doing some dream-planning for our move, and one thing that we hit upon was the option of moving from a rental to a live/income property where we would own the two-to-four flats, live i one and rent out the others.

I did a bit of research and learned that FHA loans are available for this, as are traditional loans. The differences are really in the down payments and the fees/insurance over time.

The benefit is getting in for less down payment and getting the benefit of someone else paying part or most of the mortgage, then refinancing to traditional down the track (to save on fees and interest and such). And ideally, paying down the mortgage quickly using the rent plus paying our own mortgage payment.

The thing that I find exciting is that a friend of mine is an agent in PGH, and she's been flicking us a few properties that interest us a lot that are *super* affordable. As in, wow. I mean, we could just go straight for the traditional mortgage with this. But then, I wonder, is it better to go FHA first anyway?

My mind is racing with possibilities and opportunities. It's very exciting, really. :D

Anyone else do this?

[iris lilies]

.. But then, I wonder, is it better to go FHA first anyway?

I don't know of anything inherently good about an FHA loan for the buy. I did read on the web, as you probably did, that FHA loans are assumable. I suppose that could be an advantage down the road but that would be when you are selling.

If you are willing to be a landlord and live with your tenants and all that comes with it, having a 4 plex is a good investment plan. It needs to be in a decent neighborhood.

[fidgiegirl]

I am not super well versed but I know that properties have to be in good condition to qualify for FHA loans. So sometimes there are properties that you could finance with a traditional mortgage but not an FHA. Our house would have been one of those, I believe, and there was not serious stuff wrong here - mostly cosmetic.

[Zoebird]

My thought is this:

1. i'm renting a place in PGH (or my parents are), and t's in a building with a lot of tenants. I already live in a place with tenants, so why not own the place?

2. a lot of home-income properties are good in that -- if you can keep your place tenanted, then that can basically pay the majority of the mortgage (cutting costs), and then we are also building equity and ultimately passive income;

3. we are looking at neighborhoods where the rental market is competitive, but are also the neighborhoods where we want to live (near the universities). I don't mind living around students -- our first year here was spent in a "student" neighborhood, which is no problem for us. I actually enjoy their exuberance. But, we could also rent to graduate students and professors and the like (particualrly the adjuncts) -- so we could hit a more mature market.

Of course, we're not buying anything right away. Our plan is to move into the place my family found, live there for about a year or so (saving up as we do), and spend some time in different neighborhoods and get a feel for where we will want to be, and then look for the right property.

I found one in our top three neighborhoods -- a duplex at $200k, that's in really nice condition (refinished hardwood floors, etc). So, I think we'll be able to find something that qualifies for all the things.

[SteveinMN]

Kelli is correct: an FHA mortgage on a house requires meeting some building/safety standards that conventional mortgages do not require. This also would affect someone else's ability to assume an FHA mortgage. FHA also will require mortgage insurance, which you will be paying on for quite some time because of your low-percentage down payment. IMHO mortgage insurance is money down a hole. It protects the lender, not you. So between the extra amount you're financing (because of the lower-percentage down payment) and the money you will throw away on mortgage insurance, you should run some numbers to see if it's really worth it to you in the long run to avoid a conventional mortgage.

[EDIT] And you will be a landlord. Pulling in the money every month is attractive, but it is predicated on finding good tenants, keeping good tenants so you're not suffering the money woes of an empty 'plex for however many months that's the case, and being able to fix the things that go wrong (or pay someone else to do so) plus whatever capital improvements the place needs (roof, furnace, etc.).

[Minz]

If you live in a tourist-y type place you can also do the vacation-rental thing.

[Zoebird]

[EDIT] And you will be a landlord. Pulling in the money every month is attractive, but it is predicated on finding good tenants, keeping good tenants so you're not suffering the money woes of an empty 'plex for however many months that's the case, and being able to fix the things that go wrong (or pay someone else to do so) plus whatever capital improvements the place needs (roof, furnace, etc.).

Yes, which requires it's own business plan and financial planning progress -- as well as understanding the legal issues.

We're not buying anything right away. The plan right now is to be on the ground for the first year -- pay off any outstanding debt or what not, build up as much savings as we can, and then use that time to educate ourselves. I'm also a landlord now, technically (well, sub-leasing person) -- so I understand the tensions of getting and keeping tenants, too -- even in an ideal location and a good price. And what damage tenants can cause and how to mitigate that.

We are looking at purchasing a place within our means to cover 100% of the mortgage ourselves (on a single income). We've found places that are in good neighborhoods (again, to start understanding the market) and in good condition (by the description anyway -- from the real estate agent friend), in areas where rentals are competitive (due to universities and other opportunities) but also where we want to live (neighborhoods that we prefer -- based on our current experience/understanding).

This way, if we can't find tenants or can't keep them, then we can cover the payment, and if we can (and I believe we will without too much trouble just as we have done here), then we're doing well.

I think it's much smarter than just buying a single family dwelling for the same money (or even less) -- simply because there's no income coming on the spending, there's just equity. While that's beneficial, income bearing aspects of the property are exciting to me in addition to the equity.

[Zoebird]

MINZ,

Ideally, down the track, we'd like to build a vacation home at a local-ish lake or other vacation spot. We like to holiday in off-seasons (always have), and so we could definitely rent the place out in high-seasons. Again, something we want to do affordably/within our means -- after the home/income is paid off. then the vacation that will garnish income, and then probably a single family dwelling because DH has serious class issues and wants that. LOL (I kid. it's ok to want things).

I also want to do my investing in index funds, stocks, and some commercial property ivestments that would be managed by other people (like, you buy shares in the company that runs local commercial stuff). I'm going to be focusing on learning about this in-depth over the next year so that we can start experimenting in the years to come -- and grow our wealth.

I've gotten as excited about this "busienss" as I am about the business of running my yoga business. :)

[Zoebird]

I'm still very excited about this, and DH is 100% on board. We even extended our search area a bit -- decided to look in the neighborhood where we have the apartment waiting for us.

We found so many two-apartment homes that would only be 1.5X DH's income and in *excellent* condition (move-in). We already have 10% down ear-marked from our savings in the US, and will probably take the next year to get up to 20% down (once DH is in his job, of course). So, we're going to try for a traditional, 15 yr mortgage. :)

My friend who is a real estate agent in the area said that there's always some good stock on the market there, and that in a year, we should have o problem finding what we want.

I want two flats: a two-bedroom ground-floor flat with a fenced-yard access (back yard) for our family, plus one flat to rent out. So far, most of what we are finding matches this description!

So, i find that exciting.