Struggling with high borrowing costs as a real estate investor? It’s no wonder, with mortgage rates as high as 6.8% in 2024!
FHA loans may look like an appealing option for investments. They have low down payment requirements and an easier qualification process. However, these loans come with certain restrictions.
You should carefully consider your options before you make an investment. But with home prices rising and huge migration projections, 2025 is an ideal time to begin your investment journey!
What Are FHA Loans?
These loans are government-backed loans that help buyers with low credit scores or limited savings. FHA loans allow down payments as low as 3.5%. This makes them a popular choice for first-time homebuyers.
However, FHA loans require mortgage insurance premium (MIP), which adds to the loan cost. They also come with the following conditions:
- The property must serve as your primary residence.
- It should meet FHA livability standards.
- You must move in within 60 days of closing.
What Is an Investment Property?
It is real estate bought primarily to generate income or profit. This can involve rental income or a future sale of the property at a higher price.
Investment properties include rental homes, commercial properties, or vacation rentals. The goal is to earn returns from the property, either through steady cash flow or appreciation in value over time.
How Can You Use an FHA Loan for Investment Property?
Although FHA loans are typically used for primary residences, here are some ways they can be utilized to:
- Buy a Multi-Unit Property (2-4 Units): Use an FHA loan to purchase a multi-unit property (such as a duplex or fourplex). You can live in one unit as your primary residence for at least one year, and rent out others for extra income.
- Rent Out Your Primary Residence: If you need to move for a job, the FHA may let you rent out your current home after one year. You can also take a new FHA loan to buy another primary residence.
- Refinance Your FHA Loan: After you have met the one-year residency requirement, you can refinance your FHA loan into a conventional loan. You can rent out your current property and use FHA eligibility to buy a new home.
Tax Considerations for FHA Loans on Investment Properties
- Rental Income: If you rent out your property, you’ll need to report the income on your taxes. But you can deduct expenses like repairs, property management fees, and mortgage interest.
- Depreciation: The depreciation of the property over time can reduce your taxable income. This deduction applies to the portion of the property used for rental purposes.
- Capital Gains: If you sell your home after living in it for at least two years, you may not have to pay taxes on the profit.
Alternatives to FHA Loans
You can use FHA loan for investments, but they may not be the most suitable option. Here are some alternatives:
- Conventional Loans: Private lenders offer these loans as they are the most straightforward option for investment properties. Conventional loans require a higher down payment and credit score, but don’t have the FHA residency rules.
- VA Loans: VA loans are designed for active-duty service members, veterans, and eligible surviving spouses. VA loans require no down payment and have low additional fees, which makes them a good option for investments.
- Seller Financing: This is when the property seller acts as the lender. Seller financing allows you to bypass lenders and negotiate terms directly with the seller. It can be a flexible option, particularly if you can’t secure financing from a bank.
- Portfolio Loans: Banks or credit unions issue these loans and keep them in their portfolio instead of selling them on the secondary market. Portfolio loans have more flexible requirements, which are suitable for real estate investors.
Should You Use FHA Loan for Investment Property?
FHA loans are for primary residences and generally not recommended for investment properties. However, certain circumstances may allow you to turn your property into an investment.
If you’re a real estate investor, consider conventional, VA, or portfolio loans for more flexibility and fewer occupancy rules. Start today and apply for pre-approval to explore your options!
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Frequently Asked Questions
Can you rent rooms out in FHA properties?
Yes, you can rent out rooms in a property purchased with an FHA loan. However, it must be your primary residence.
How to use an FHA loan for investment property?
You can use an FHA loan for investment property if you purchase a multi-unit home and rent out units. You can also refinance your FHA loan after one year to rent out your primary residence.
Can FHA be used for multifamily?
Yes, FHA loans can be used for multifamily properties (up to 4 units) as long as you live in one of the units as your primary residence.
