Will BRRRR Works With FHA Loan? If yes, How Does It Work?

Question

Hi everyone, I’m trying to buy my first rental and this will be my first home as well. I have no idea what I’m doing. I got pre-approved with FHA loan for 250k. I’m looking at a quadplex consists of 4 /2 beds 1.5 bath that seems to need a little bit of cosmetic work on the outside and it’s newly renovated inside listed for tip top price for the area - in my opinion- at 249k. Current gross income is 2390/ month- average rent in the area is 850 for a 2 Bed room. I wonder if is this a good deal? Will BRRRR work with FHA loans? If yes, how and how long do I have to wait until I can refinance? If not, is there any other creative way to maximize the deal? Thank you in advance

Jake Tovey · Answer

@Apinya Patterson Look into FHA 203K loan. Allows you to wrap rehab costs into one loan and still only put 3.5% down. Too use BRRRR with this, use the 70% rule (Purchase Price + rehabs < 70% of the ARV). This is what I’m hoping to do right now, house hack a small multi-family with 203K and refi into conventional after 6-9 months of possible. You have to look at your Debt-Coverage ratio though, most bank want a 1.2-1.25 Debt-coverage ratio to finance which is tough for a house hack. It’s tough to do and you may have to move out after the year to get the debt-coverage ratio up, but it should work. I recommend finding a good investor friendly agent with experience to help you out. Network. I’ve learned a ton from my agent, books and reading the forums here at BP.

Frank Wong · Answer

Hi Apinya,Haha, I love the honesty. So let's go to your first part of the question. Will BRRRR work here? No, it won't. BRRRR will require you to find a property that is currently under market price because the condition of it is not that great and will require rehabbing. You stated the 4plex is newly renovated so it takes out your upside on rehabbing. This doesn't mean its a bad deal for you. Since you are FHA you won't be able to buy properties that fall into the BRRRR anyways. Why? FHA has special requirements for the condition of the home and if the quality doesn't meet the standards of FHA then it will not lend on it. No way around this. Honestly, you will have a hard time finding BRRRR properties with FHA nearly impossible to find and qualify and to win the offer over better cash offers. Your best bet is to find a 4unit like the one you have in front of you buy with FHA, hold and rent out and over time build equity by natural appreciation then refinance into a conventional loan. I know it's not what you wanted to hear but its the truth and you just gotta play the hand that you are working with. Like I said its not a bad thing you got an opportunity right in front of you.

Jake Tovey · Answer

No problem. Debt-Coverage ratio is just the Net Income / Total Debt Service. A 1.2 ratio means your net income is 20% higher than what you owe every month. Banks like to see at least that much coverage to refinance. That’s tough when house hacking because you can’t count potential income from the unit that you’re living in (From what I’ve been told). The goal of house hacking is to break even essentially, which means a debt-coverage ratio of 1 or so. Doesn’t mean it can’t be done of course but you need to keep that in mind. And you can only have one FHA loan at a time. So if you want to ‘Repeat’ you have to refi into conventional first to be eligible for another FHA loan or find a different way to finance your next deal.

Apinya Patterson · Answer

@Jake Tovey Thank you, Jake. That sounds like a good plan. I don’t understand the debt coverage radio part. Can you explain a little more about “1.2-1.25”?

Apinya Patterson · Answer

@Frank Wong Ok, I’ll keep looking. Thank you.

Frank Wong · Answer

What you are looking for is something simple that you can buy and get in the door with little work. Oh wow, fake pictures. That's not good. Start with something easy. You don't want to bite off more than you can chew.

Apinya Patterson · Answer

Thank you for taking your time to answer, Frank. I thought no one would answer my question. I kind of figured but your answer has clarified it. I went to look at the quadplex last week. There is nothing like what they got on pictures on MLS. It needs a lot or renovation and potentially has structure damage. At this point I’m not sure if I will be able to take on that big of renovations. I talked to the bank about this property and 203k loan he said he has no problem lending but he only seen fake pictures from the MLS. Again thank you for the answer. I’m sorry It took me long time to reply because I don’t know how to navigate website and I didn’t even notice someone answered my question until just now.