Okay, I’m actually really excited about this one. I got this idea from a former coworker who rents out property with her husband, and they’ve been building their real estate passive income for a while. If you’re trying to buy a house, I beg you don’t ignore this opportunity.
Let me hook you with this pitch: earn rental income on a million-dollar property by only putting down $35,000.
Want to know how?
First: Getting an FHA Loan to Buy a House
The Federal Housing Administration (FHA) is a government agency whose purpose to help Americans buy homes. It’s based on the belief of the classic American dream where everyone can own their own home (AKA borrow it from the bank).
Unlike a normal housing loan, where you put down 20% of the price of the house (or lower with some insurance) and take out a loan for the rest, the FHA is a special kind of loan where all you need down is 3.5% down if your credit score is above 580.
That means if a property is worth $1,000,000, you can merely put down $35,000 (and 10k of that can come as a penalty-free withdrawal from your Roth IRA). You’d have a decent mortgage to pay for as well, but you technically could still do this.
The catch? This has to be your primary residence. You can’t get a loan for somewhere you never plan to live. You have 60 days to title the property in your name and move into it as your primary residence. But you’re looking to buy a house anyway, this part shouldn’t matter to you.
“But if I’m living there, how do I make rental income? Am I renting out a room?”
Nope, even better. You’ll buy a house that’s multiunit.
Second: Picking the Right Property
The FHA loan restricts you from using it for investment property or anything NOT your primary residence. But that doesn’t mean you have to be living in all of the property.
You can buy a house that’s either a multifamily unit (e.g. a block of condos) or even a mixed-use residential and commercial space (e.g. a storefront with an apartment up above).
Buy a House? No, Buy a Multifamily Unit
You can get a property with up to four separate living units. As long as you’re living in one, you can rent out the other three. A property with more than four units counts as commercial property and would not qualify for an FHA loan.
The simplest route to find is a duplex. But get creative if you can and get a multi-unit. These tend to be older buildings since most newer multi-unit homes are horrendously monotonous corporate construction projects.
You can also use an FHA to build a new house, which is called a construction-to-permanent loan.
Mixed-Use Property
You can’t buy a commercially zoned property with an FHA loan. You can get mixed-use property as long as a majority of the square footage is residential.
E.g. you buy or build a property with a storefront at street level and apartments all above.
The next-level gangster move is to do both: get a mixed-use residential/commercial space with multiple residential units.
This is what I’m talking about. Look at this bad boy. A storefront at the bottom, three apartment units above. Get one of these, live on one floor, and rent out the others—all with a 3.5% cash down.
Why Everyone Doesn’t Just Buying Houses This Way?
To get a good property, there’s a chance it could be too expensive for an FHA loan. There are upper limits on the loans which depend on where you live.
I’m also not a lawyer, so some of this may be wrong. #notlegaladvice
Why doesn’t everyone do this? First, not everyone knows about FHA loans. Second, not everyone wants to be landlords. And third, finding a place worth living in and renting out and finding a commercial tenant (if you’re going for a gangster move) is pretty dang hard. And if you have kids, your fourth obstacle is school district limitations.
I’ve seen property out there that fits the bill, but you need a weird combination of commitment and flexibility. You need to mentally commit to being a landlord ahead of time, as well as the flexibility be willing to look in different neighborhoods or even cities to find the right balance of good property price with high rental demand. So it takes time. Most people trying to get a house don’t want to wait patiently for six months until the right one comes up. If you can afford to, you’re golden.
This idea is honestly so valuable. If you’re looking to buy or build a house, and you’re not super tied down to a timeline, please consider doing this. You could be paying off your mortgage at no cost to you while building equity in a deflationary asset class. There are some complications which is why not everyone does it. If you’re interested, start looking around on Crexi, Loopnet, and Zillow and see what you find.
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