Is it financially smart for my girlfriend and I to get our own FHA loans for separate properties before marrying?

Question

My girlfriend (22) is a nurse and I (22) am currently in my last year of undergrad for BS in Computer Science. I want to invest in real estate for the purpose of renting or using as an Airbnb to help establish future financial freedom. I'm trying to understand if it would be a wise financial decision if I were to get an FHA loan on an investment property while my girlfriend were to get a loan on another property where we would live.

To provide more context:

• both my girlfriend and I have a credit score above 770
• I have saved and can continue to save enough money to put a down payment on a 250k property assuming the FHA down payment would be roughly 5%
• we do not plan on purchasing a home together for at least a couple years so the investment property would be purchased much sooner (we may even marry before purchasing our own home and I'm not sure how that can affect this whole process)
• assuming we qualify for these FHA loans, the area and type of property my girlfriend wants for our future home would be roughly 600-700k (we live in California🥺)

I'm sure my question reveals some lack of understanding on how real-estate investing works; I'm trying to understand as much as I can, and I have many more questions. If you have links to some informative sites I'd be interested in reading through them.

Answer 1

"Wise" is very subjective. Some on this site (me included) would not call going into debt for $250K ($500k between the two of you) to buy an investment property "wise". Especially before you graduate and have a good job.

I would call it "very risky". You might be okay and end up with two great properties that make you a ton of money. Or you might not have renters for 6 months and lose both properties (and your good credit) in bankruptcy.

Some other things to consider when thinking about rental property:

• You are effectively buying a job as a landlord. Does the return (after your loan payment) give you enough to make it worth the work?
• Do you have enough saved up to pay the mortgage, insurance, and taxes if the house goes unrented for 6 months?
• Do you have enough saved up for large unexpected expenses (new A/C, water heater, new roof, etc.)?
• Buying an investment property with a mortgage is a form of leverage. Leverage is great when times are good. When times are bad, leverage multiplies losses as well. The more leverage you have, the riskier the investment. A 95% loan is effectively 20X leverage, which is extremely risky.

Also I have heard anecdotally that FHA are incredibly expensive (in terms of closing fees and perpetual costs) compared to conventional loans (because they are more risky). I would do more research on FHA loans to be sure that's something you want to lock yourselves into.

Answer 2

I want to invest in real estate for the purpose of renting or using as an Airbnb to help establish future financial freedom. I'm trying to understand if it would be a wise financial decision if I were to get an FHA loan on an investment property while my girlfriend were to get a loan on another property where we would live.

You will be required to live in the property for at least 12 months before turning it into a rental property. The paperwork you see during the application process will make this clear, you will also have to re-certify this at closing.

You will also run into the same problem if you get a non-fha loan.

I have saved and can continue to save enough money to put a down payment on a 250k property assuming the FHA down payment would be roughly 5%

Most lenders will want you to put down 20% on an investment property. Some lenders don't make loans for investment properties.

Answer 3

Yes, you can use FHA loan for an investment property, as long as you live there as your primary residence. This is called duplex investing or house-hacking:

https://www.millionacres.com/real-estate-financing/articles/how-i-used-fha-loan-buy-my-first-investment-property/

https://www.mrmoneymustache.com/2020/10/23/house-hacking/

Answer 4

As a Southern California Realtor, I can definitely say if you can buy a house on your own, do it. For no other reason than to keep your finances separate, but also because you lose the ability to use some programs if you have already purchased a home.

If you have a good credit score and can cover 5% closing, why not go conventional? The only reason would be debt to income ratio may allow more of a purchase on FHA, but you'll be stuck with MIP that you have to refi out of where conventional the PMI is dropped once you hit your 78% LTV. You also can get a better interest rate with conventional depending on your situation.

FHA is going to have much more strict limits on investment vs rental vs primary residence compared to conventional.

My advice would be to definitely buy a home now, live there and get used to what goes into a home. It's nothing like renting, you have years of no expense then all the sudden you need to spend 20k on a roof in a week, or the HOA makes you paint the exterior of your home that costs you 5k or you get hit with fines and a new lein on your home. Once you have been in the home, then start looking for rental units. Once you've built enough equity in the first home, you can use that for an investment property down payment. Use the equity to finance your next home purchase.

Last word of advice. If you can have just one person on the loan do it. You never know if times get tough, medical expenses etc., and you have to short sale your home. Your credit can be ruined for years. Hers will be just fine, and she can buy the next house with no impact.