Posted: 2018-07-12 | Author: Richard Simon
Maybe you have heard that financing was tougher for non-owner occupied (investment) properties. Historically, it is true that mortgage lenders have more strict requirements for investment properties, often requiring a down payment of 20% or more. If you are looking to invest in real estate in the Phoenix market, I’d like to share with you a unique financing strategy that will allow you to purchase an investment property with an FHA loan.
Why Finance an Investment Property with an FHA Loan
With the exception of a VA loan, the FHA loan requires a much lower down payment than any other loan type available (usually 3.5%). An FHA loan is a home loan that is guaranteed by the government (the Federal Housing Authority – FHA) so it gives lenders some protection against default. This protection also allows lenders to be a little more lenient with the underwriting guidelines such as credit score requirements and debt to income ratios which ultimately helps more borrowers qualify.
There Are 2 Options for Using an FHA Loan to Purchase an Investment Property
Option 1 - Buy a Home and Live In It
There are some savvy real estate investors that will buy a home as their primary residence and live in it for two years (to avoid capital gains taxes), then convert it into a rental property. This allows them to purchase the home using an FHA loan with a minimal down payment (roughly 3.5%) and ultimately convert the home to a property that they rent out. If they have seen enough increase in value during that time, they can also choose to sell the property for a profit.
Borrowers are not allowed to have more than one FHA loan at a time, so if you want to use this strategy, you would need to either purchase your next home with non-FHA financing, or refinance the existing home with a conventional mortgage before you convert it into a rental property.
If you happen to buy in a market where values increase significantly in a short period of time, you can certainly sell prior to two years, but you may be subject to paying taxes on the profit you make. We are not accountants, so we recommend checking with your accountant if you have any questions about the tax implications of buying or selling investment properties.
Option 2 - Buy a Multi-Unit Property
Many people don’t realize that they can purchase a multi-unit property and use an FHA loan as long as they live in one of the units. This is pretty significant because it still only requires the standard 3.5% FHA down payment.
There are loan limit restrictions, which means you will need to work with a trusted local real estate agent to find a multi-unit property in the Phoenix market that meets the criteria (we can refer you to one if you need one). Here are the FHA loan limits in the Phoenix (Maricopa County) market:
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