Decisions... 203k Loan or something else?

Question

Hello everyone,

I just joined BP over a week ago, I really find it very very useful, there are tons of information here for everyone in the business of real estate. I have been considering becoming a real estate investor for a while now. I recently graduated from college and I have a job in my field as a software dev.

I have joined my local RE investors association. I have been meeting new people there little by little. I do tend to be a quiet person so it get a little challenging to meet new people. Though I know I have to change that to succeed in real estate.

I have been reading a lot about RE and the different methods to get involved in it. I have decided that what I want to do is buy and hold to generate passive cash flow to eventually in about 5 years become financially free to be able to become a full-time investor in real estate investing.

That being said, I found out about a FHA 203k loan that seem to be doable to start with given that I am not very experienced in RE and unfortunately I do not have the money to start investing yet. I am starting to read about how to buy houses with low or no money down. But I am still not decided where to begin and if it is a good idea to start with the 203k loan plan.

My plan was to get a multi-plex property where I could live in and rent the rest, which would allow me to save money to start investing elsewhere and gain knowledge about managing properties and potentially obtaining cash flow.

My question is, would it be a good idea to start the business with that plan 203k?

Any recommendations on how to start if it is not a very good idea to start with the 203k plan?

On the other hand, if it is a good idea, any suggestions or things I should be aware of?

Thank you so much for taking the time to read my post!

Edward Barnes · Answer

I'd say go for it. I don't think you could get better start than a 203K fourplex. You'll have to live it in a year and then you'll want to refinance to a conventional loan to get rid of the mortgage insurance premium (MIP), so just buy right so it'll appraise at 80% LTV when you try to refinance after a year. Other than that, I would make sure to find a realtor, contractor, and a bank that are familiar with the 203K process. It'll make everything go a lot smoother. My primary residence is a 203K and my first home. I can just point out my biggest mistakes. My realtor kept referring to the HUD consultant, who walks the property and comes up with the budget for all the repairs, as the "inspector". He was doing an "inspection". So when she asked it if I wanted a home inspection, I declined because I assumed it was the same thing. Seemed redundant to me. Really dumb. Get a home inspection, it's entirely different than the HUD consultant walking around and coming up with the budget. Feel like the realtor should've nudged me in that direction but I think she just wanted to expedite the process at that point. Also, pick a good contractor familiar with 203Ks and vet them through referrals, etc. I got a referral from my bank. Still turned out to be a dud, but it's always hard to get a good contractor. Might be a good idea to have him on hand when your HUD consultant is going around and making the budget. You might clear it with the HUD consultant beforehand, not sure if it's taboo or not and he might not want the contractor on hand. I wouldn't think he'd have a problem with and you don't want some low ball budget where your contractor's gonna cut corners. I'd also make sure they've both seen the home inspection paperwork beforehand. If you have any questions, I can expand on any of this if you'd like or you have any general questions about the 203K, let me know.

Patrick Britton · Answer

203k has to be under your "human" name, since it must be owner occupied.  but as a former loan officer i will tell you that 203k loans are not easy.  they are incredibly restrictive and although in theory are a very good way to start, almost no one uses them for their first property.

Have a look at Fannie Mae's HomeStyle program.  it's a similar program but with a little more flexibility.  and be careful when using private lenders...

start monday by calling a few mortgage brokers and bankers in your area and tell them exactly what you want to do.  i'm certain after speaking with a handful you'll find someone legit.

Simon Aristizabal · Answer

I see, that makes sense. Thank you for your help @Ryan Murphy I will definitely go looking around to see what is my best choice.

Ryan Murphy · Answer

Yes, I've checked into that as well.  My understanding is that if you are going to get traditional financing (meaning any loan that is conventional (FNMA, FDMC), FHA or VA), ALWAYS attaches to you as an individual, regardless of if you have an LLC or say it's an investment, etc.  The only way to get a loan where it's attached to the property and on your LLC without any guaranteed signer is to do a non-traditional lending like a commercial loan or hard money lender.  The problem is you can't take advantage of the rates you can get when it's tied to you as an individual, and your down payment would be higher.

Your best bet is to do it in your name as owner occupied and get the benefit of the best rates and low down payment.  Later on, you can decide to move out when you don't want to live there anymore, and you can also try quit claiming title to an LLC you own, but technically it will still be tied to you as an individual.  Otherwise it would be considered a sale to a new entity, and the bank could call the loan due ("due on sale" clause).

Simon Aristizabal · Answer

Thank you @Ryan Murphy and @Edward Barnes for your input! I will definitely get some more info from local mortgage brokers and bankers to see my options.

The thing is, with that program (Homestyle loan) it sounds like it all has to be under my name and not my entity's name which is my plan. Do you happen to know?

Edward Barnes · Answer

Ryan's correct. You can finance the cost of the first few payments while the property's being rehabbed.

Ryan Murphy · Answer

I second looking at the Homestyle renovation loan instead.  I don't like FHA, I think it's main use is for people with lower credit scores to be able to qualify for a bigger loan (I think the DTI ... Debt to Income ... threshold is lower).  But it costs more than Homestyle in the long run.  I also agree that you can refinance, although you are betting on what the future loan rate will be.

Also, you may need to check on the minimum down payment ... for multi-plexes, the down payment is higher for a Homestyle loan, not sure about FHA.  If FHA allows 3.5% down on a multiplex, then that's actually a bonus.

I agree with @Upen Patel, although in my experience, you can "roll" your first payment or few payments into the loan while construction is getting finished.

One other thing you may want to look into is if your state (or any other local organization) has a downpayment assistance program.  In WA State, there's a program like this that allows you to basically get a second mortgage to cover up to 100% of the property value (i.e. if you had to put 5% down, the second mortgage could cover that 5%).  Sometimes even a little more, to help cover closing costs, or something like that ... there are restrictions on what you can use excess money for.

My advice is get a bunch of quotes from a bunch of lenders and study up on your loan options, and you should be able to figure out how to pull the trigger and make something happen.

Simon Aristizabal · Answer

Thank you so much for that valuable information @Upen Patel! Don't worry you did not burst my bubble at all, on the contrary I learned something new which can definitely lead me to other options I can look into.

It does seem like the 203k is quite a hassle to start with considering where I stand right now. Plus it does not seem like the most viable option for me either given that unfortunately I do not hold the capital to go with it.

I do appreciate your time to explain a little bit about 203k's.

I will keep looking!

Simon Aristizabal · Answer

Thank you for your response @Patrick Britton! Good thing I asked before actually going in to search for a 203k loan. I will definitely look into the Fannie Mae's program and contact a few mortgage brokers in my area! Thank you for your help again!

Decisions... 203k Loan or something else?

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