203k vs Hard Money vs Construction Loan

[Cory Cox]

I got under contract on a duplex here in Conway, Arkansas this morning at a real good price of 85k from the MLS (if that matters). It is a 2/1 on each side and is close to a big college here in town. I have my inspector coming in on Thurs to give me exacts on repairs, but I'm thinking it will need somewhere around 20k of repairs to it to bring it up to a good standard. ARV I'm thinking will be around 140 - 150k or maybe more considering small multi's are hard to find and outrageous right now it seems in Conway.

I'm looking for a low down payment considering that's why I don't just pay for the repairs myself and could live in the rental once it get done with repairs or obviously just rent both sides out and take the cash flow (ultimate plan).

Is the 203k going to sadly be my best option considering I don't have a ton to start with upfront?  I was really hoping a great deal like this would be able to help me out on the back end of it of even if I strike out then they will get the property.

Talked to one lender this morning and he said he would prefer 20% but have seen where 15% down is done.  I could maybe stretch that with friends/family but I would like to get them their money back as soon as possible of course.  Thing is, If I was able to come up with the 20% (17k) then I could just use that to make the repairs!

I'm so torn on what to do.  My main objective is for good cash flow and eventually in a few years be able to live off my passive income, but something like this, should I just find a way to make the repairs, take the profit and then I'll have money to play with on my next after paying my family/friends back? I plan on making a decision here in the next couple days as I have contacted a few banks/hard money lenders to see what exactly my options are.

Thanks for the help!!

[Perry Farella]

There are pros and cons to 203k for sure. I have experience with them on large and small projects. If you can live in one unit for 12 months ( requirement before turning it into all rentals) then a 3.50% down 203k is a great option to get you in and get the reno dollars needed to bring it to livable standards. 203K FHA may require you to spend more than planned to fix any broken concrete, peeling paint, missing handrails on staircases, etc. So all that has to be in the General Contractors bid or you can use 3 separate contractors if you want. There is also an automatic 10% to 20% emergency reserve added to base budget to protect you and the lender from cost overruns or unforeseen issues that later occur during construction that are required to be fixed or local building codes you may not know about require more than you planned. Always check with the local building dept. before buying to be sure you know all that will be required to be updated.

I like 203k for a newbie investor because you get the protection of the 10% to 20% emergency reserve on the loan and if never used you just don't borrow it so loan amount reduces at completion. I'm a big fan of the 203k Full or Standard because it adds the eyes and experience of the HUD Consultant to walk and inspect the property to give you added experience you may not have. Costs a little more but protects you from making a mistake on a property that is too expensive for your numbers to work perhaps. 203K Streamline or Limited does not offer that protection so I rarely use it as a lender doing these for many clients, even small jobs under 35k, its just wiser and better for everyone.

Plus as a 203K owner occupied loan you can borrow up to 6 months mortgage payment money in the loan if you have to love somewhere else during rehab and have a second housing cost to pay elsewhere.

All this versus Hard Money lenders - my view would be they are very useful in the right situation but fees can be 3 points (percent) and rates 7% to 12%. So rather expensive.

Another loan I use is called EZ C Rehab for investors of 2 to 4 units buildings. But it requires 25% down so may not be of help to you.