Can I still BRRR w/ low interest rates, high housing cost & FHA?

Question

Hello BP community, thank you in advance for the advice :)

I'm concerned about my "master plan" for real-estate investing. In Connecticut I plan to purchase multi-families & steadily BRRR my way to eventual financial freedom.  My 300k FHA financed offer with 10% down was accepted today on a 3 family which I'll be occupying, this will be my 1st time purchasing. Last year this house was worth 167k & today it was listed at 289k.

Interest rates are at a record low & house prices are a record high in CT. Housing prices will drop eventually & homes purchased for double their value will depreciate.

Am I putting the carriage before the horse purchasing this property? Is it even possible to BRRR if this home value plummets & the interest rates rise. I don't want to pursue this despite it being cash flow positive if it will screw me up in the future.

Details on the house:

Built in 1900 but in fantastic shape. New roof, updated electric, thermopane windows, extra insulation in all units. Off street parking with an additional 2 car garage & separate access to basement with 4 storage units (will rent out all separately or to tenants). Dirt basement with stone foundation.

Landon Bleau · Answer

Jill, though it is possible prices will drop (also possible they could just keep climbing!), as long as your property is still cash flowing, you'll be able to navigate through a recession.  Just curious, what value were you looking to add to the property in order to BRRRR it?  Based on your description, it sounds like it's in pretty good shape and could be a little difficult to BRRRR as there's not much left to add value to.

Mat O'Grady · Answer

@Jill Jay Welcome to BP and to real estate. In order for BRRRR to work, there needs to be a way to bring the value up in the property. It sounds like you think the property is in great condition and that it is at the highest value. This will make it difficult to BRRRR. If it cash flows, that is good. If this is your first investment and you are going to be using it to get into real estate, you don't have to be hitting a home room or doing a BRRRR.

I think you should post more information such as rents, taxes, insurance, mortgage costs, vacancy, cap ex and repairs.

This will give us all a better idea of what you are looking at.

Jaysen Medhurst · Answer

@Stephanie Medrano, you'll have to shop around to different lenders. They will have different underwriting standards. Try and stick with portfolio lenders, if possible, since they don't have to conform to Fannie/Freddie guidelines. Focus on other CUs, local and regional banks.

When my wife and I bought our coop in Greenwich 4 years ago, we only put down ~11%. We used a national bank, for what it's worth.

Stephanie Medrano · Answer

@Jaysen Medhurst Hi!

For your point 3, I was under the impression ( according to my pre-approval letter from a credit union), that I need 15% down payment for a conventional loan. We (my partner and I) have really good credit and our only debt is the car. We are looking in Westchester County by the river towns such as Peekskill, Ossining, and Yonkers. They also said we needed 6 months mortgage plus interest cash reserve.

Where can I find more information on a conventional loan with 10% downpayment? Thank you for your insights!

Joe Norman · Answer

I'm not sold on this sentiment, in most cases housing costs are rising because of limited inventory which isn't going to get better anytime soon. However if this is your outlook then why are you buying right now?

That aside, and as others have said, this could be a good turn-key rental deal if it cashflows, but it does not sound like it is distressed enough for the BRRRR strategy.

Good luck!

Tim Delaney · Answer

@Jill Jay there is already some great advice here, but I would echo that this sounds less like a BRRRR and more like a house hack. The first R stands for rehab, but if the house is in such good condition that it doubled in value over a year then It sounds like there is not much rehab to do.

As for renting out the storage units, personally I’d be hesitant to rent them out to non- tenants. Just charge a little more for the units and include storage.

Property values can always go up and down - just make sure that you are cash flow positive (total rents - including a fair market rent that the unit you live in would bring in - are larger than mortgage, insurance, taxes, repairs, and savings for big ticket items such as roof, furnace, etc) and the value of the property will not matter in the short term. Was the value of $167k a year ago before the new roof and other items you mentioned were put in? That could account for such rapid appreciation.

Jaysen Medhurst · Answer

@Jill Jay, already some good advice in this thread. A couple of things to think about:

• If you've offered $300k on a MFR "worth" $289k, you may not appraise. Be prepared for that. It means another $11k you'll have to bring to the table.
• In order to BRRRR, the value needs to hit ~$340k before you can pull out your capital for another deal. It's unlikely you can add much value, so you're dependent on appreciation, which is risky.
• If you have 10% to put down, why are you using a FHA mortgage? This is the "loan of last resort" and should be avoided if at all possible. Assuming your credit and DTI are okay, you should be able to qualify for a low-down payment conventional mortgage. This will avoid up-front PMI and monthly PMI will drop when you hit LTC of ~80%. Unlike a FHA, which will have monthly PMI for 11 years (never drops if <10% down). It's not too late to shop around.

What do the numbers look like?

Caleb Brown · Answer

I think this is a good rental probably not a BRRR. To do BRRR's with an FHA is hard since they have appraisal requirements regarding condition. You could look into the FHA 203K loans. Just keep house hacking and moving out. As long as you buy well and it cash flows you'll be set as time goes

Can I still BRRR w/ low interest rates, high housing cost & FHA?

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