Combining 203k loan, house hacking, and brrrr

[Adam Hermsen]

Hello everyone, I am curious if anyone has experience using the FHA 203k loan? I am interested in learning more about that process.

Ultimately, I am wondering how feasible it would be to find a 2-4 unit property that needs some work & updating.  I would plan on using a 203k loan to for the mortgage and repairs then live in one unit and rent out the others.  My goal would then be to refinance to a conventional mortgage after 9-12 months, and then find a new 2-4 unit property I could move to using another 203k loan.  

I wouldn't need to receive any cash out from the refinance but hoping with the refinance, I would end up with 20%+ of equity in the property while only investing my original 3.5%-5%.

I am new to REI and this would be my first property (looking to purchase in 6-12 months) and would be happy to hear any input or feedback on advice, challenges, or concerns from this group!

Thank you,

Adam

[Matthew Porcaro]

Hey Adam - 

This is exactly what I did on my first deal. 

I purchased a really distressed duplex with a 203k loan. Picked it up for $270k, and the renovation was $80k. All in for $350k. 

I ran my numbers and had an idea that it would be worth in the neighborhood of $450k when I was done with it, and also that since it was a two family, one of the units covered just about all of my mortgage payment for that first year of occupancy. 

Renovation was hefty, and took 8 months roughly but once it was done I refinanced out into conventional, getting rid of the ~$225 PMI from the FHA loan, and a few months later moved in with my now wife, and I now rent out both units for cash flow.

A few months later I took out a HELOC on the remaining equity (it actually re-appraised a year later for $500K) and used that money to finance two flix and flip deals I did a year later.

Essentially, I did the househack + BRRRR method in one shot with the 203k. The difference is I just did a fix and flip, not a hold on my next deal, but that's up to you!

The best advice I can give you is that your team is the most important part of a successful 203k. 

Many will try to steer you away from it, simply because they don't understand it. 

But the reality is there are plenty of 203k experienced lenders, contractors, realtors, and consultants out there that will be able to help you. 

The most important one in the bunch is your lender. Make sure to find a loan officer that specializes in these, and they'll help drive the ship for you with vetting out some of the other members. 

A good way to find 203k brokerages in your market is by looking up the "203k endorsement summary". 

It's a list on the HUD website that is updated each month with who is doing the 203k's in every major metro area of the country.

Just search through the list and find the market closest to you, look at which brokerages have done the most in that market, and call them up and ask which loan officers do the most renovation loans at their branch. 

It's real estate's best kept secret because it takes some legwork, but I'm telling you it's worth it.

Good luck!
MP