My strategy. Thoughts? Advice?

Question

Okay, here's my situation:

I'm 25 years old, Bought a house about 2 years ago for $105,000, FHA 203k loan, did some rehab to it. Living in it for the last 2 years, renting the extra rooms out to friends, making positive cash flow on it. In the current market, after I put about $15,000 more into it, it should sell for $190,000 based on comps right now.

I'm ready to buy my next one, move (tennants with me), and sell the first one. I'm pretty sure, I'm going to have to refinance this one with a conventional mortgage, so that I can do another FHA 203k on my next house.

I can't get conventional financing on a lot of the houses I'm interested in, because they need repairs, and of course I can only have one FHA loan at a time.

So, after I buy the next one and move, put 15k into the first one, sell it at hopefully $190 and then put that tax free profit into either a cheaper all cash flip property, or buy another house to rent with a mortgage.

My current liquid assets is at about $40,000.. so putting 20% down on a 120-150k house will make money tight until I sell the first house.

What do you guys think?

Ray Orellano · Answer

Yes, once you bring up the appreciation on the second property all you need is an appraisal (Not a REFI) to get out of the PMI...

Asher Anthes · Answer

Yeah, if the purchase price ends up being around $170,000 I'm probably going to have to only put 10% down. But with a PMI rate of .65% that's essentially the same thing as paying about 5.8% per year interest on that additional $17,000 (the other 10% I would have put down to get it to 20%)... which isn't that bad. So... most likely when I sell my first house I will pay off higher rate student loans (6.5%), and probably re invest the other profits back into real estate that will make me higher ROI than that PMI is charging me. Also... if I fix up the second property, and also get market appriciation so that my loan is less that 80% LTV, can't I get an appraisal and then get out of PMI that was as well?

Ray Orellano · Answer

@Asher...your off to a Great start only being 25yrs old. Last I checked....With 5% down conventional and a credit score of 720 or higher a PMI factor of .65% x loan amount divided by 12 would give you a good estimate of the monthly PMI fee. Once you reach 20% equity on a Conventional loan you will be able to get rid of PMI, usually its a 1 year min on Conv loans and 5 years minimum for FHA loans. So even if you put less down initially, once you sold your first house you will be able to take some of your funds and add enough to your new house and get RID of PMI.....just a thought. Good luck!

Asher Anthes · Answer

Yeah, I'm pretty much positive that I'm going to buy the new one before I sell this one. My first choice would be if I can get conventional financing on the next one. I'm not sure if I'm going to be able to put 20% down though. Any idea what PMI rates are now? I feel like that's going to eat up alot of my monthly cash flow... which is why I really wanted to put 20% down. Thanks

Mark Ferguson · Answer

Asher Anthes, HUD has a program called FHA 203B, it is only available on HUD homes. Basically HUD does an appraisal before hand and the appraiser determines the cost for the property to meet FHA guidelines. As long as the repairs are less than $5k, the home qualifies for FHA 203B with repair escrow. If the repairs are $3k, then $3k is added to the buyers loan at closing, the repairs are completed by a licensed contractor after closing and the lender pays the contractor directly from the escrow amount. It's similar to a 203k, but you don't need 2 appraisals or new bids for the repairs and they can close in the same time as regular FHA loan. You can put very little down with either the 203k or 203B, 3.5% is very common. You have to be owner occupied buyer and live in the house at least a year. Like you said, you can only have one FHA loan in your name at a time so you would have to sell or refi before you did this. The best option may be to sell without refinancing and get a new FHA loan after your house sells, but I am guessing you don't want to rent for a couple months. You may also lose your current tenants if they have to move twice.

Steven Hamilton II · Answer

Asher Anthes, The tax free cash can be greatly utilized. Remember with a refi you will only be able to go to 80% LTV And they will probably beat the appraisal up. -Steven

Asher Anthes · Answer

Yeah, I want to get as much cash out as I can with the refi to either put towards more property or pay off student loans. What is the 203b escrow? I haven't heard of that? Can I do a 203k or 203b with less than 20% down? And, yes it seems kind of conterproductive to refi and then sell immediatly, but I feel like the tax free profit from the sale will give be a better jump start into buying more properties as opposed to waiting years and years to get that same profit from rent cash flow. Maybe, I'm impatient, but that's just my thinking right now!

Mark Ferguson · Answer

Sounds like you are in a good position. You could refinance your current house with 75% conventional loan. Then buy another with FHA 203k or a HUD with 203b escrow. If you are cash flowing now with you living there I am guessing it will keep cash flowing after the refi. You could keep it as long term rental. You buy the FHA house with little money down and have even more cash from your refi to purchase another rental if you want. You could also sell yours, but it seems like a waste to refi and then sell right away.