Investing in real estate can be an extremely profitable alternative to stock markets. However, the barriers to entry in this market can be much higher.
But this is not always the case. Utilizing finance tools can help you purchase an investment property without a huge down payment or a high credit score. One financing option that is popular for many first-time investors is an Federal Housing Administration (FHA) loan.
What is an FHA loan?
An FHA loan is a loan that is backed by the Federal Housing Administration. Because of this, lenders are guaranteed to get paid back on their loan and can offer you, the borrower, financing on a home for as little as 3.5% down in 2019. You would pay the FHA through a mortgage insurance premium to insure your loan in addition to your monthly principal and interest payment.
The FHA loan technically only applies to those who plan to live in the home that they purchase. However, investors can leverage this loan by applying it to multi-family units. As long as you live in one of the units, you can rent out the other units of the property.
Pros of an FHA loan
- Less capital needed The biggest pro of an FHA loan is that you can start investing in real estate with a smaller amount of capital.
- Live and rent You can live in the investment property while you rent out other units. If you manage this well, you might be able to live rent free while building up equity on a home.
- Low risk Because of the FHA program, you have a greater chance to get loan relief if you experience financial hardship
Cons of an FHA loan
- Limits on loans FHA loans have strict ceilings on the amount that someone can borrow. Typically, this corelates directly with the median prices of homes in your area.
- You only get one FHA loans stipulate that you cannot takeout another FHA loan until you have paid off or refinanced your initial FHA loan.
- Lower equity While paying 3.5% down on a home is great, it also means that you will have less initial equity of the house. With interests on a larger principle loan, you may also find that you build equity very slowly with an FHA loan.
The bottom line
An FHA loan can be a great tool for investors with less capital. However, that does not mean that an FHA is the right loan for every situation. As with any investment, you should consider all your options before making a purchase.