How to Buy Rental Property With Only a 3.5% Down Payment

The FHA is very well known for its mortgage insurance programs. Homebuyers can buy homes with far more lenient terms than other banks would dare offer. But the FHA's programs don't stop there.

For starters, a savvy real estate investor can use the FHA's programs to buy rental property for as little as 3.5% down.

One for you, three for rent
All FHA loans are required to be used for the purchase of owner-occupied housing. There's a nuance to that requirement though -- the rules do not preclude a potential buyer from using an FHA loan to purchase a duplex, triplex, or fourplex. The buyer only needs to live in one of the units. The other units are fair game to be rented.

For the entrepreneuring real estate investor, this option is four birds with one stone. One loan nets a place to live and three rental units. The devil is, of course, in the details, and that's particularly true with a government-backed mortgage loan.

The details
As mentioned previously, one of the units must be owner occupied. Further, the borrower must qualify for the loan under the FHA's established criteria. That means the borrower must demonstrate adequate cash flow, credit history, and net worth to be approved. That said, the rental income from the proposed rental units counts toward the borrower's income.

The FHA doesn't limit the maximum sales price of the property, but there is a maximum loan amount. The FHA distinguishes between a "basic" mortgage limit and a "high-cost area"; this accounts for certain areas around the country with demonstrably higher housing costs than the nationwide average. These limits are outlined in the table below.

Property Type Basic Limit High Cost Area Limit
Duplex $347,000 $800,775
Triplex $419,425 $645,300
Fourplex $521,250 $1,202,925

To find the exact loan limit in your area, you can use the FHA's calculator here.

More resources to help
Buying rental real estate can be a very lucrative investment class if done correctly. Investment real estate is considerably different than simply purchasing your own home; owning and operating rental property is a business, plain and simple.

For example, when considering your monthly cash flow, a rental property must also consider vacancy, maintenance, and a whole host of other expenses. It is, for better or worse, a lot of work to actively manage a successful rental property.

For some help on learning just what it takes to start building your own rental property empire, check out these short reads:

But these top dividend stocks might be an easier way
Let's face it -- The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3080357, ~/Articles/ArticleHandler.aspx, 9/21/2014 8:15:20 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement