Live-in BRRRR Strategy?

Question

Hello BP, I am a new investor in the Tucson area and this is actually my first BP post! I'm looking for some opinions about my beginning investing strategy. My apartment lease is up in about 6 months and I plan on buying a single family home to essentially do a live-in BRRRR. Here is my step-by-step process: 1. Buy a single family house with a FHA loan. 2. Live in the property and perform renovations during the seasoning period (I believe it's 12 months?). 3. Refinance the property to a conventional loan after the seasoning period. My goal of this is to have at least enough equity built from forced appreciation to cover the 20% down payment. 4. Move out, and find a tenant to live in the house. 5. Repeat Would like to hear some of your feedback on this. Thanks everyone!

Justin Rogers · Answer

@Bobby Foster curious to know how this turned out as I’m looking into a similar situation now.

Account Closed · Answer

@Bobby Foster I think this is a great plan. One thing you may have difficulty with is finding a property in the sweet spot. You need something that is beat up enough that you can add value through renovations, but also still livable. Banks won’t give you an FHA loan on something that needs extensive rehab. Unfortunately the value add deals with the most meat on the bone tend to be the properties that are very distressed. @Alexander Felice talks about this issue in his BP podcast interview. It’s a great interview you should check it out.

Alexander Felice · Answer

The problem you're going to run into is finding a distressed property that FHA will allow you to move into.FHA owner occupy requires the house to be in fairly high living condition. So finding a place that's distressed enough to add value, AND that you can move in is HARD. Not impossible, but difficult. Plan is fine on paper, in real life you're going to find it infuriating to execute. Also, you're at the top of the market: rates are rising, there is more competition, and you're less likely to be able to bank on appreciation.

Bobby Foster · Answer

@Alexander Felice thank you for your input. You bring up a good point, and the fact that we are at the top of the market, I will consider cash flow a little more than appreciation. Possibly choosing a conventional loan with 5% down (mentioned in a previous comment) and skipping the refinance step since the house may not appreciate enough or at all. I am also reading a book called "the sale of a lifetime" to become more familiar with housing market cycles. Could not recommend this book enough!

Peter M. · Answer

Yep, sounds like a good plan. You don't need to rush to refinance either but the seasoning is usually 6 months. If you make sure your FHA payment is less than market rent you will usually be good after the refi. Also consider a conventional loan up front (5% down minimum) in case it takes longer, at least MIP will stop once you get to 20%.

Bobby Foster · Answer

@Sydney Tiffany I believe the seasoning period for a fha loan is 6-12 months, so after that point I believe you can refinance out of it, but I'm not completely sure. As for the 203k loan, I have considered it and will definitely explore that option with my lender when the time comes. I would imagine that since it's a type of fha loan, there would be a fha appraisal to deem the house is livable.

Sydney Tiffany · Answer

Just adding another question to this post for other knowledgable investors. Would @Bobby Foster be able to get a 203k loan that would allow him to get a home that is more run down or does the same standard apply to a traditional FHA loan? Also in an above comment Bobby mentioned refinancing and then moving out after the refi, I was under the impression that you must live in the property for 2 years with an FHA loan. Is this true?

Bobby Foster · Answer

@Jonathan Hulen I'll get right on that podcast, thank you for your help!

Bobby Foster · Answer

Thanks @Peter M. I was planning to quickly refi so I could move out, purchase a new property with a fha loan, and rent out the property to start the cash flow. But if I used a conventional loan with 5% upfront, I could probably get a lower monthly payment and save on refinance closing costs. Definitely something to consider.

Bobby Foster · Answer

Thanks for your response @Ed Emmons, I have updated my profile. I chose this strategy because I don't have the extra capital to spend on a down payment and repairs on a rental property, nor do I have my own personal residence (currently renting an apartment). I figured this would be the best of both worlds, where I can start my investment career and end my life of paying somebody else to live somewhere.