What are the pros and cons of buying a house using an FHA loan?

Rental Property as First Home?

• OK so I have been thinking of buying a rental property because I move around too much with my job and decided that a personal home is not an option for a few years or so. I figure a rental property could offset some of my student loans once they become due... So I saw a nice 3 br down the street from my moms house which would make it easy to keep an eye on it. First I need to know where to begin. A lot of people are saying go FHA, but that means I have to say that I am occupying the place. I am not sure because I dont plan on living there and I am also thinking of doing section 8, which is all the same department so theres a good chance of getting busted. But how much down do I need for a conventional loan and what type of score am I looking at needing to qualify? Then the house is for sale by owner who doesnt know how if he wants to rent it or sell it- he says that he cant get tenants to stay, but the asking rent is $700/mo where the going rate in this area is $500 (im sure thats why). In addition he is selling it himself and doesnt sound like he knows much of what he's doing. I saw on zillow the recent sale price was in 2006 for $41,000 and hes asking $67,000 !!! So would that be MY agent that would get me through all that red tape? And lastly is section 8 a good idea/easy to do and what type of loan (ARM,interest only) works best for a rental property if I am thinking of keeping the house at least 5 years or more. And what other financial considerations are there (PMI etc...). I want this thing to pay of my student loans for the long term, is this realistic? Or should I stick with buying a duplex in a larger city and generating more income for rent x 2 and using a management company?

• Answer:

  When you buy a rental property (non-owner occupied), you have to come up with at least 25% as a down payment. So, VHA is out. You also pay a higher interest rate than an owner occupied property loan. But, you will avoid PMI. So, to buy this house, you'll have to come up with $16750 down, plus have a couple thousand in the bank for closing costs and spare cash in case it doesn't rent right away (or your tenant moves out and the place is vacant for awhile). Your mortgage payment on $50,250 at 7.5% would be about $350 a month, plus an additional $100 or so a month for taxes and insurance, for a total cost of about $450 a month. If this is a condo (I'll assume it's not), you'll also be paying HOA dues. As a long distance property owner, you'll have to hire a property management company, who usually charge 8% of the monthly rent as a management fee. So, if you do decide to rent this property out for $700 a month, you will actually be getting about $646 a month in rents for a positive cash flow of just under $200 a month (as long as the tenant is making his payment). Unless it's a condo, in which case the HOA dues will probably eliminate that profit. You will get a tax write-off for the mortgage interest, property taxes, HOA dues, and property management fees, as well as any repairs or maintenance the propery requires. But, that will be offset by the additional taxes you pay on the rental income (yes, you must claim that as income). Before doing anything else, you should contact a real estate agent. As a buyer, this doesn't cost you anything (the seller pays for the buyer's agent). He can then help you to determine if $67,000 is a fair price and help you find another place if this isn't a good deal.