Is It Possible to Buy an Apartment Building (Duplex, Triplex, Fourplex) with an FHA Loan vs Conventional Financing?

Can you buy an apartment building with FHA financing? And what I’m saying is can you buy a duplex, triplex or fourplex using FHA financing? You’ve probably heard from real estate investing podcasts or books about being able to take advantage of an FHA Loan as a first-time home buyer for your first apartment building. That’s great advice, but can you actually pull it off?

What is an FHA Loan and why is it better than a conventional mortgage loan?

The Federal Housing Administration (or FHA in short) provides mortgage insurance on loans made by FHA-approved lenders nationwide, allowing an investor to buy a multifamily property with a 3.5% down payment versus a 20% down payment with a conventional mortgage loan. So in terms of being able to pay a lower down payment, it’s an easier option allowing you to borrow more money. It’s a great program, but can it work with apartment buildings? Does it work in the city of Long Beach, CA?

The short answer: If you buy a multifamily property and live in one of the units, you can use FHA financing. It does work for duplexes, but it’s a different story for triplexes and fourplexes.

To answer this question, we analyzed recent fourplex transactions during the last four years (2016-2020) in Long Beach, and the numbers were surprising:

  • Through 2016 and 2019, there were no fourplexes sold with FHA financing.
  • However, in 2020 a total of (4) fourplexes were successfully purchased with FHA financing.

The recent data tells us that it is rare but indeed possible to obtain an FHA loan to purchase a multifamily duplex or fourplex property. Then why is it so rare and difficult to be approved for an FHA loan when they’re so popular and every other podcast or book recommends it?

The FHA Self-Sufficiency Test

This is the reason why it’s so difficult to buy a triplex or a fourplex, is because these types of properties first need to pass the FHA Self-Sufficiency Test. In order to insure the mortgage loan, the FHA wants to know that the multifamily property is self-sufficient. This means, that the total rent that you receive for the units must be equal or greater than the mortgage payment and other expenses.

How does the FHA Self-Sufficiency Test work?

  1. The FHA sends an FHA-approved appraiser to the property.
  2. The appraiser then calculates the market income for all units based on a rent survey.
  3. Then the FHA looks into what is called the P.I.T.I. (principal payment, interest, taxes, insurance).
  4. If the mortgage amount is more than the net income you could bring in (income – P.I.T.I.), the property is not self-sufficient.

So no matter what mortgage lender you’re going through, it has to pass the FHA Self-Sufficiency Test. In the end, it is all really dependent on the FHA-approved appraiser’s decision regarding market rent, and it’s a difficult (and almost impossible) benchmark to pass.

It is also important to be aware of mortgage lenders who have done FHA loans for single-family properties and duplexes, and still think it’s possible to be approved for a triplex or fourplex.

Conclusion

The FHA’s loan and financing program is great, and we love it! However, if you’re looking to buy a multifamily property with 3 or 4 units, through them, it’s going to be a big hurdle to get across. In other cities around Southern California, it may or may not be easier, but in Long Beach we know for a fact that the probability of getting a loan is less than 1%. It’s a misconception that anyone could be approved.

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