FHA and BRRRR ? Will this work?

Question

Hi, I’ve been thinking about how to get the real money in my pocket. So here’s the game plan (mindset) without looking into it to much:

1) Find a house using (ARV x .75 - Repairs = MAO). Hopefully a quad-plex.

2) Use a FHA loan with a construction loan packaged into one ;for repairs and financing on the property.

3) Hire the construction out and have a crew fix the place up to par, nothing fancy. Just the basics.

4) Have the property re-appraised. And do a cash out re-finance.

5) 15 months later use a 1031 exchange and put a down payment on another quad-plex. And fix it up for re-appraisal.

Question: Can / Will this work the way I’m thinking? Any advice is helpful.

Thanks!

Dave Foster · Answer

@Matthew McManus It could work.  But understand that like @Andrew Syrios said you will need to live in one of the units to qualify for the most advantageous lending.  If you hold for 24 months and then sell, the profit the sale of the unit you live in would be tax free.  And you can 1031 the rest of the units into.....your next investment property.   The small amount of extra cash flow when coupled with losing the tax free nature of the sale isn't worth committing mortgage fraud.

Andrew Syrios · Answer

So you're never planning on living there? I would avoid ever telling a lender/FHA that you are going to live in a place and plan not to do it. Even if you're refinancing out, you would be intentionally misleading them.

Otherwise, there are several issues.

1) You'd be incurring two sets of loan costs which are not inconsequential.

2) Few lenders will refinance at appraised value unless it's been at least six months and more like a year. They will also want the property performing, which means you would probably need to either live there or rent out that unit. (And renting out every unit would be fraud with an FHA loan.)

3) If you're getting an investor loan on the back end, you'll probably only be able to get 75% financed. Given an FHA loan is 96.5%, even with a great deal, there's not going to be much if any cash out.

4) 1031's are only for sales. You cannot take loan proceeds (nor is there a reason to since they're not taxed anyways) and 1031 them into another property.

Matthew McManus · Answer

Some of this conversation has been mix matched with some assumptions.

I’m talking about 2 separate questions.

ARV x .75 - repairs = MAO

Would be on an off market distressed property of some sort. Usually wholesalers go for these and sell to flippers.

That formula is usually .70 actually.

But for the 2nd question.

I’m wondering if this would work almost like a brrrr as far as the cash out refinance and the 2nd appraisal goes.

I found out you can get the purchase of the land, the build, fees, and all that packaged into one loan for an FHA. So I would build new. I’d build a quad. and then house hack by living in one of the units for 12 months. Reappraise and cash out everything beside 10%. To use for another loan on another quad and focus on debt equity.

I could be confused on this. I realize brrrr is used to force appreciation into a property. But I’m just wondering can the same work on a new build?

Thanks

Lucia Rushton · Answer

@Matthew McManus curious where you live that you can acquire a duplex- quad with an FHA 203-k for 75% ARV.

Jaron Walling · Answer

@Matthew McManus What you described is a perfect world situation. Step #1 is never going to happen. I'm sorry but that's the truth given the current market conditions. Any distress property priced that low with that much spread (opportunity) is going to be found by a cash buyer. Very few motivated sellers would take an FHA loan offer > CASH. I don't mean to discourage you but I experienced the same thing over and over again when I started out. I was using a conventional loan. At least you know you're looking at the right properties!!

I'd go into the rabbit hole on 203k loans. You'll find some pros and cons. "Hire the construction out and have a crew fix the place up to par, nothing fancy. Just the basics." - Big hurdle and source of frustration right here. Some lenders only work with approved contractors. Don't expect to save much $$$ on the materials or labor. I don't even think you can DIY projects. My wife and I will paint walls to save $6k... Cheers man.

Matthew McManus · Answer

Good info thank you.

I also just looked into FHA One-time close construction loan for multi family.

What is everyone’s input on this? Does everyone agree the multi-family quad is a good idea to start off in the business with low credit score and finances?

How would you go about it?

Andrew Syrios · Answer

It's exactly a year that they require from my understanding. As for construction loans and FHA, it's called a 203K loan that you should look into if the property needs work. Basically just an FHA loan with some more for rehab.

Matthew McManus · Answer

I plan on living in one of the units. But only for a limited time. Isn’t it about a year you need to live in the property before exchanging up to a more valuable property as far as tax reasons?  For the 2nd appraisal this would be after fixing up. I’d leave 10 % in the home and take the cash and put a down payment of 10% on the second quad plex and rent out the first 4 units and the 2nd homes 4 units. And not live in either after the first year.

I believe I can get a construction loan packaged into the fha loan for the 1st.

FHA and BRRRR ? Will this work?

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