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

The FHA offers very attractive terms for loans to purchase two-, three-, or four-unit residential properties.

Sep 1, 2014 at 9:37AM
Fha Public Domain

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.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers