Want to Rent Your FHA Property Short-Term? Here’s Why You Need to Plan for a Longer Timeline

FHA loans provide a fantastic opportunity for homebuyers due to their low down payment requirements and more lenient credit score standards. However, they are intended for owner-occupied properties, not for rental use. FHA guidelines require you to live in the home for at least one year before renting it out for income.

That said, there are certain ways to navigate these rules.

Can You Short-Term Rent Your FHA-Backed Primary Residence?

There’s a lot of debate on whether FHA-mortgaged properties can be used for short-term rentals of less than 30 days. Many in online forums, like BiggerPockets, suggest that it is possible to rent out rooms in an FHA-financed home.

However, according to FHA.com (a non-governmental site), you can only rent out your FHA property for a minimum of 30 days, as anything shorter is classified as “transient” use, which FHA rules prohibit.

Key Considerations for Mid-Term Renting Your FHA Home

Renting out part of your FHA-mortgaged home for the mid-term is similar to having a long-term roommate. Whether your tenant stays for a month or longer, unless you have a separate living area, you’ll need to be comfortable sharing common spaces like the kitchen and bathroom.

While some homeowners prefer privacy, the current affordability challenges may make mid-term renting a practical way to manage finances. It can also help you save for future investments.

After living in your FHA home for a year, you can legally rent it out and move to another primary residence, which you may be able to purchase using another FHA loan (assuming the original home is refinanced). This strategy allows investors to continue growing their portfolios.

If you need to relocate for work, you may be able to rent out your FHA home without refinancing, offering a path to building a portfolio of single-family homes with FHA’s low down payment options.

FHA Loans for Multifamily Properties

FHA loans are particularly beneficial for buying two-to-four unit buildings. As long as you live in one of the units, you can rent out the others. You’ll still enjoy FHA’s benefits, like low down payments and flexible credit criteria.

The bonus with multifamily properties is the potential rental income, which may cover your mortgage, plus the tax benefits that come with owning rental properties. Many investors use this strategy to quickly launch their real estate investing careers by refinancing and repeating the process.

Flipping a Home with an FHA Loan

If you’re willing to live in the property during renovations, FHA’s 203(k) loan can be a great way to finance a flip with a small down payment. The loan covers both the purchase and the renovation, and the contractor is paid in stages based on a consultant’s approval of the work.

As with other FHA loans, you must live in the home for a year before selling or renting it, unless it’s a multifamily property, which can be rented immediately. Additionally, if you live in the home for two years, you could avoid capital gains taxes on profits up to $250,000 (for single taxpayers) or $500,000 (for couples), a significant benefit if your property appreciates quickly.

Getting a Second FHA Loan

Generally, you can only have one FHA loan at a time, as they are meant for primary residences. However, in some circumstances, you can get a second FHA loan.

Relocation: If you must move due to a job that is too far to commute from your current home, you may be able to obtain a second FHA loan. This would be short-term, as you’d need to sell or refinance the first FHA-backed home.

Growing Family: If your current home no longer accommodates your family’s needs, you may qualify for a second FHA loan if you have at least 25% equity in your existing home or pay down the loan to 75%.

Co-signing Another FHA Loan: In some cases, you may be allowed to co-sign for a relative’s FHA loan while still holding one for your own residence, though you would be financially responsible if they fail to make payments.

Divorce: If you’ve separated from a co-borrower on an FHA loan, you may be eligible for another FHA loan if your ex-spouse remains in the home. You will need to show legal proof of the divorce to qualify.

HUD REO Investment: If you’re purchasing a property foreclosed on by the FHA (a HUD REO), you may be able to get a second FHA loan, as HUD is motivated to move these properties.

Conclusion

In today’s high-price and high-interest environment, real estate investors must think creatively. FHA loans, although not typically thought of as investment tools, can serve as a great starting point for building a portfolio.

Whether you’re using mid-term rentals to save for future investments or flipping a home with a low-interest FHA renovation loan, there are numerous ways to leverage government-backed programs for real estate success.

In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“