Looking for Feedback - Weighing Options, Leveraging up on fourplexes, FHA, WA St

[sammybiker]

Folks,

I'm looking for some feedback.  My situation may be a bit unique and while not new to real estate, I'm new to traditional financing.  I appreciate your patience, humor and input.

Background

I'm a US expat and have been abroad for the last 40+ months and will likely maintain this for the foreseeable future.  I work in industrial construction, my living expenses are paid.  My home base is Washington State (no state income tax) although I've yet to purchase a primary residence yet.  I have good income, excellent credit & no debt.

Thinking Aloud

I've been playing with the idea of buying up a few fourplexes (over the next few years, making each one my primary residence for the minimum time period of 12mo) in Spokane, WA, using an FHA loan (primary residence, 3.5% down) to achieve the following:

- Take advantage of historically low interest rates

- Take advantage of my income, credit & debt situation to control a good bit of cash flowing RE with very little down.

- Lock-in long term cash flow once properties are paid-off (by tenants) in 15-30yrs (reinvest cashflow for early payoff) or provide solid profits with shorter-term hold and then end-sale (after 10yrs - appreciation, mortgage paydown & rent cash flow).

Numbers

- Fourplex purchase at $180,000
- $10,000 down
- Mortgage amount of $170,000
- Gross Rents of $29,000 annual
- Net Cash Flow (50% Rule less Mortgage Payment) $4,000 annual

Game Plans

Plan A:  Hold forever, let the tenants pay-off the mortgage, contribute cash flow to mortgage paydown to expedite pay-off, never sell.  In 15-30 years, I have a great cash-flowing property that's paid off.

Plan B:  Hold for ~10yrs (pending market cycles) and then sell retail (or provide seller-fi, lease option or something else creative) and realize the following potential:


- Net cash flow from rents ($4k annually *10yrs) = $40,000

- Mortgage paydown (thanks tenants!) *10yrs = $34,000

- Appreciation (if I'm so lucky!) @ 3% annual vs $180,000 purchase price = $62,000

Assuming I have to put $10,000 down, I'm seeing a potential return of $136,000 after the sale in 10yrs or an annual cash on cash ROI of 136%. 

As I'm not a fan of anticipating any appreciation, looking at the hard numbers (cash flow and mortgage paydown) still leaves me with $74,000 return after 10yrs or an annual cash on cash ROI of 74%.

**These numbers exclude very obvious mortgage fees, selling costs, etc for simplicity sake.

***Actual forecasted (speculated) appreciation is 3.5% annually

****These numbers exclude any possible tax benefits, something that's a large benefit to me as single w/no dependents and good income.

Question

What am I missing here?  It's hard for me to find true, convincing downsides.

The only thing I don't appreciate is taking on debt...but this is smart, income producing debt.  My existing single family properties (7) are owned outright...so taking on mortgages and committing myself to years of debt, albeit cash flowing, feels...weird, constricting and dangerous.

This was long winded but I really would appreciate any feedback.  Thanks!

[jnc]

If you're really able to find such properties, the return is looking pretty good and passes the various rules of thumb (1% rule, 50% rule etc...)

I don't own any multi-unit properties (only SFH) but my understanding is that maintenance costs tend to be a bit higher (common areas, etc...) but overall, the picture you painted looks pretty solid.

As far as the debt part, I own 7 properties and they're all leveraged except for one... Does not bother me in the least. Last one I bought was all cash because it was a smaller purchase and the mortgage costs and associated fees were not worth it. Heard of Arabelspy doing the same.

[zephyr911]

It sounds like a good plan. You have plenty of resources to deal with surprises. Just make sure you have reliable boots-on-ground help to manage those surprises with your resources.

[Another Reader]

Not sure an FHA lender is going to overlook your job being offshore in qualifying you for an owner occupied loan.  Have you looked into that?

Wouldn't you be competing in a relatively small market with Brandon Turner from Bigger Pockets and a few of his friends?

[Poorman]

You can only have one FHA mortgage at a time so the first 4-plex would need to appreciate enough for you to refi to a conventional at 70% LTV before you could proceed with using FHA for the second 4-plex.  If you are applying the cash flow to the principal that will help pay it down enough for you to accomplish this, but you would still be at the mercy of the appraiser when you go to refinance.  It sounds like a good plan, but you might not be able to pull off a new purchase every 12 months. 

And like Another Reader said, it depends on whether they consider your Washington residency as proof that you will occupy the place or if they pay attention to the actual reality that you live overseas.  You should try to find a broker that is used to dealing with ex-pats to see what they say.  The average loan officer probably doesn't know the rules around this type of nuanced situation.

[sammybiker]

Thanks all for the feedback!

@JNC - thanks. 1% rule in Spokane seems common...doing better than that (and still staying within decent school districts/quality of neighborhood) isn't easy but doable.

@zephyr911 - boots on the ground are key.  To be honest, I don't like the vacancy factor when dealing with MFR...coming from SFH, I know it will be higher.  Turnover in between tenants with a property manager will be killer, I'm sure.  Something to factor into the numbers.

@AnotherReader - good call.  I had discussions with a mortgage broker in the area about this two years back and I don't recall what the outcome was.  I'm of the opinion that as I'm still a WA state resident and I'm not formally living anywhere else (and I have personal belongings in my unit), it's fine.  But I'm also of the opinion that flirting with mortgage fraud isn't ideal.

I recall asking him some pointed questions re: FHA and moving out and he was a bit uncomfortable answering, due to his licensing and the legal aspect of it, I'm sure.  Also, at the time, I didn't understand the seriousness of the owner-occupied aspect.  It may be worth a couple hundred bucks for me to screen this through an attorney and get squared away formally.

Re: Brandon Turner, he's on the other side of the state and exploiting his local niche.  As for his friends, perhaps...but I think the local Spokane market in general has a hard time finding qualified buyers that can follow through, at least for some MFR...it seems like a soft, buyers market IMO.

@poorman - Interesting, this I didn't know.  To recap, I understand that I can only have (1) FHA loan at a time.  So to qualify for a new FHA loan, I have to refi my existing FHA loan to...conventional, thus the requirement to have 30% equity?

Shit...that sort of puts a roadblock on picking-up several of these with minimal down payment...I don't think the local market will provide that sort of appreciation in 5+yrs, much less 12mo.

Let me know if I understood your point correctly?

Thanks all, very insightful.

[NoNonsenseLandlord]

A non-owner occupied unit will not be a FHA loan.  As you have stated, it might be mortgage fraud.  You will generally pay a .5% premium interest rate no for a non-owner occupied unit.  Plan on a 25-30% down payment.  Which is still not bad.

With risk, comes reward.  Be sure to understand what neighborhood classifications mean.  A class D neighborhood better get a much higher return, as your maintenance and management expenses will be higher.

The 1% rule is just a quick guideline.  I always assume ~45%  of rents for expenses.  Then add your mortgage.  With a ~$50K down payment, you need much more then $4K to make it worthwhile.  If all you have is $10K to put down, stay out of RE.  You are under-capitalized.

Turnover can be higher in a multifamily.  In a lower-income neighborhood, it may be less or more.  When you do have it, plan on a major expense.  Vacancy, repainting, lots of repairs.

I do a lot of turns, at least 6 so far this year.  Most are 1-day turns.  With a solid tenant, it is possible.  With low quality tenants, it is near impossible to make money.

Understand what type of tenant you will be attempting to attract (i.e. your 'market'), and understand how to screen tenants - BEFORE you become a RE investor.  That's standard stuff you should understand BEFORE you go into any business.

It is no ones god-given right to make money in RE.

[sammybiker]

Cheers NNL, you provided a couple of decent points but perhaps I didn't expand enough on what I was going after or my existing RE experience.  Under-capitalization isn't an issue and putting 30% down on a property isn't the goal.

Thanks all for your feedback, I'll take it from here.

[Poorman]

@poorman - Interesting, this I didn't know.  To recap, I understand that I can only have (1) FHA loan at a time.  So to qualify for a new FHA loan, I have to refi my existing FHA loan to...conventional, thus the requirement to have 30% equity?

Shit...that sort of puts a roadblock on picking-up several of these with minimal down payment...I don't think the local market will provide that sort of appreciation in 5+yrs, much less 12mo.

Let me know if I understood your point correctly?

That's correct.  If your lender isn't sure about the occupancy question, you can have them call the local HUD office for guidance.  As long as you are up-front about what your are trying to accomplish, there's nothing fraudulent about it.  They won't proceed with the loan if FHA won't insure it.  It sounds like you might be better off approaching existing owners and asking if they would be willing to carry the paper.  A lot of long-time landlords looking to retire might jump at the opportunity.  You could offer terms agreeable to the seller in exchange for a smaller down payment.

[sammybiker]

@poorman, alright, thank you.

Seller-fi is a good idea and something I'm always watching for.  Haven't had a whole lot of luck as a lot of the sellers are asking for large downs with large monthly payments...but I'll keep my eye out.

[arebelspy]

You can get the one FHA, and then move to conventional, as long as they are owner occupied, they'll likely want ~15% down (25-30% for investment, if you don't do OO).  How are you going to have an overseas job and have that be your primary residence?  Or are you planning on moving back to WA?

[sammybiker]

@AR:  My residency is still WA state.  I'm not sure why, just because I work overseas (rotational work, flying back to the States every few weeks for R&R), I wouldn't be allowed to purchase an OO property.

Again, maybe this is best rolling into a couple hundred bucks for me to screen this through an attorney and get squared away formally.