Moses Kagan on Real Estate

The Magic Number for FHA Loans

with 3 comments


12.

That’s the magic number for FHA loans on 2-4 uni apartment buildings. It stands for 12x the annual rents.

Why is 12x grm the magic number for FHA loans? 12x a building’s total annual rent (including the fair market value rent of the unit you will occupy) is basically the maximum price you can pay using an FHA loan and putting down 5% and still have the amount you pay out of pocket each month be equal to the fair market rental value of the unit you occupy.

Why is this important? Well, imagine you move out of your building a year after buying it. If you pay 12x the rent or less for your building, when you move out and rent your old unit to a new tenant, your building is at least breaking even (and, hopefully, paying you each month).

If you paid more than 12x the rent for the building, when you move out, you’ll still have to pay a few hundred a month for the pleasure of owning the building. That is most emphatically NOT what an apartment building is for.┬áIf you want to just speculate on the real estate market, go buy a single family home (with a different broker).

If you want to be in the apartment game to generate passive income, you want to use FHA if you can (because when the government is offering you free money, your answer should be “yes”). And if you’re going to use FHA, you need to pay less than 12x.


Written by mjkagan

08/21/2012 at 4:54 am

Posted in Brokerage, Buying, Debt

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