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Why an FHA-Financed Duplex is an Ideal First Investment Property

Recently, I sold a property on Formosa Ave in Los Angeles, to a First Time Home Buyer with an FHA loan with as little as 5% down, and she now owns a duplex generating income while she lives in the other side.

Here is a breakdown of why an FHA-financed duplex is an ideal first investment property:

"First things first, duplexes are almost always cheaper and bring in more rental income than single family homes of the same size. If you plan on investing, it’s a good idea to start with a duplex anyway.

FHA is the only owner occupied loan you can get for a duplex that will allow a low down payment (3.5% as of March 2015), that doesn’t require landlord experience and that will count the future rental income from the other half of the duplex to help you qualify for a loan. Yes, you will be able to buy more than you can afford because you can rent the other side. How awesome is that?

Not only will you be able to buy more going this route, you will also gain the 2 years landlord experience needed to buy the next property. The reason you need two years experience renting that house is because they need to see how much you get in rent to be able to use that as income when you want to buy another house. Less than two years experience, and they won’t count your rent as income, and you’ll have to qualify for both homes at the same time to buy the second property.

When you do decide to move out after two years, all you need to do is get a lease on the half you are moving out of and turn that in to the lender. You will then be able to use 75% of the total rental income to qualify for the next loan.

Example: Your mortgage is $1,500 a month and you receive $1,000 a month from the rented side of the duplex while living in the other side. After 2 years you move out and get a signed lease on the side you were living in for another $1,000 a month, bringing your total rental income $2,000 a month. The lender will credit you 75% of that as income (25% is estimated to go to vacancies and repair costs). In the lender’s eyes you are now have a $1,500/month mortgage debt and a $1,500/month rental credit. You break even.

If there were a surplus, the extra would be added to your income and help you buy the next property. If it’s a deficit, they will take that amount away from your total income and it would hurt you when buying the next property.

That brings us to the 25% rule. You want to try to make 25% more than the mortgage every month so the house doesn’t count against you when you when you get the next loan.

Lenders also require you have at least 6 months’ mortgage payment saved up as a safety net before you buy the next place. That’s a good idea anyway.

If you buy a single family home, you won’t be able to count the rental income until you have lived there for a year (owner occupied requirement) and then rented the entire place for two more years to get the required experience as a landlord.

If you buy a duplex with an FHA loan, you can buy more houses, use rental income from the other side when you buy it and after two years of living there, you meet the owner occupied requirement and the two years’ experience. If the rental income after you move out is 25% more than the mortgage, you will be in a much better position for buying the next one."


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