New to Real Estate · Pawtucket, RI · Member since 2018 · 10 posts · 0 votes
The 203k seems like it fits, but i can only have 1 FHA loan at a time (i think), which means i have to refinance and convert this 203k FHA to a conventional loan. I think this strategy will allow me to build my multifamily business, does that make sense?
The only thing is that when i refinance into conventional loans means i have to put 20% down, correct and have PMI? Isn't 20% to much to put down on a deal? this would allow me to work alone and not need any private money, for now.
Hi, @Joe Prew. If you're house-hacking / BRRRRing the property, you should have 20% equity by the time you do a conventional refi. You're not "putting it down," you're creating equity through the BRRRR process. Remember, with an FHA you have to live in the property for at least a year.
With 20% equity you won't need PMI. With an FHA loan you'll have PMI for the life of the loan, even after you reach 20% equity. That's another great reason to refi out of the FHA.
Hi, @Joe Prew. If you're house-hacking / BRRRRing the property, you should have 20% equity by the time you do a conventional refi. You're not "putting it down," you're creating equity through the BRRRR process. Remember, with an FHA you have to live in the property for at least a year.
With 20% equity you won't need PMI. With an FHA loan you'll have PMI for the life of the loan, even after you reach 20% equity. That's another great reason to refi out of the FHA.
technically i am not house hacking (or am i), because the 203k is like getting 2 loans (1 mortgage and 1 rehab). This FHA loan will require 3.5 % down with PMI. i would not move into my 1st multifamily house until the rehab is done, but i am going to live in the property once its completed. once the rehab is done, i will get it rented out, wait 6 months to 1 year and refinance my 1st house, (pull that money out and put it right back in), put 20% down on the house i am living in and that would seal the deal for my first multifamily deal. Next i find the next deal and get a 203k Loan for the 2nd multifamily house and repeat the process. Does that sound like i understand the process correctly?
i always though i would pull out the money and put that $ on my next house, but this way is a bit different. i pull out the money and put in on that same property. Technically, i would be taking out money i never really put into the deal. All i will have in the deal is my 3.5%, since i am getting my rehab lumped into the loan.
I'm not sure that I'm following your strategy, @Joe Prew. Might just be confusion about how you're using a the terms. A few points:
I believe a FHA 203K is 1 loan, it just has the rehab money wrapped in.
When you write, "...refinance my 1st house, (pull that money out and put it right back in)." This is the refi part of BRRRR in your example, right? Then what do you mean my "...put 20% down on the house I am living in..."? You're not putting anything down on the house you're already in. You're refinancing 80% LTV, so you have 20% equity.
If you buy a place for $50k with 3.5% down ($1750), do a $30k reno for a total cost of $80k, then refi with an ARV of $100k, you'll have 20% equity and get back the $1750 down payment.
FYI that's far from the "only" thing. The biggest hurdle is getting the seller to accept your 203k offer after the listing agent has told the seller to throw it in the trash after they present it (which they only do because they are legally required to).
Well over 2/3 of successful 203k purchase deals that cross my desk, the buyer is a realtor, a general contractor, or in sales/marketing in some other capacity. You've got to be able to really sell the offer.
By all means bark up this tree, but this shouldn't be your primary/only strategy, unless of course you are that seasoned salesperson or marketing expert and can/will put those skills to work.
(I am in the Bay Area and my perceptions are subject to being skewed by that)
i did not know that a 203K is a hard loan to pitch the seller. you would agree that it takes a while to get the loan approved based on all the approvals, and extra paperwork required and that "extra time" is why the agent and seller may just disregard the deal. is that correct?
I assume that no one is "legally bound" to disregard a completely legitimate offer. i think i hear a little sarcasm, which is fine. I think your saying it may just be in the agent/sellers best interest to wait for quicker money.
i did not know that a 203K is a hard loan to pitch the seller. you would agree that it takes a while to get the loan approved based on all the approvals, and extra paperwork required and that "extra time" is why the agent and seller may just disregard the deal. is that correct?
I assume that no one is "legally bound" to disregard a completely legitimate offer. i think i hear a little sarcasm, which is fine. I think your saying it may just be in the agent/sellers best interest to wait for quicker money.
thanks for the reply
Yeah, there's a little bit of snark/sarcasm on my part. It's one of those things I end up talking about several times a week, but only doing a few times a year. Yes it's in theory possible, but odds are the people who pull it off invariably have full time sales/marketing experience on their resumes.
By all means go for it and make a "ha! I told you so!" thread if you pull it off. :)
Time is one of the reasons. Supply/demand for general contractors is another. The last time I had a non-marketing/sales person get one under contract with 203k, no GC would show up to bid it until it was under contract, even if you offered to pay them $500 for a quick 30m down and dirty non-binding verbal estimate. Knowing what I know, I bumped the buyer's agent / buyer's stated estimate for rehab budget by 60% before sending out the property-specific preapproval. But that wasn't enough. Once in escrow, multiple GCs bid, and the LOWEST bid was 2.5x their estimate, instantly killing the deal. I buffered it 60%, it turns out that I needed to buffer it 250%!
...& that's after me and the buyer's agent spending HOURS pitching/convincing/etc the listing agent to even entertain the offer...
That listing agent is going to go back to her office, and tell all the other agents that story. Realtors gossip like middle school students. "Yup, another 203k bit the dust. Don't waste your time with these." And they might even be throwing my name around as a time-waster too in their gossiping, which sucks for my local reputation among Realtors.
An FHA loan is for those people that will owner occupy. You should definitely check with your mortgage broker to make sure you are not running afoul of the feds. Also check to see if there are any restrictions on length of time of occupancy, refinancing, etc.
My understanding is that the 203K side of the mortgage is not an issue with anyone but you and your lender. The seller gets their money at closing, you get your rehab money in draws as your work progresses.
@Joe Prew I have been working on Brrrring my first property with this exact method. Didn’t seem to have any issues getting it under contract. It was a lot of extra paper work and the buyer was a crotchety old grump-but all went as planned, even had the buyer cover most of the closing costs. Granted, the property was on the market for quite a while, marked down every so often so maybe they were just sick of it, but I closed for 7.5k under their final asking price with them paying the maximum allowable in closing costs.
I even changed lenders two weeks before closing to save .5% interest and 1k closing costs. My realtor did say if I didn’t have such a good credit score it would have fallen apart.
As far as the GC goes I nailed that down prior to getting under contract and it was a friend of a friend sort of thing. He’s also interested in rentals in the future so I think he is using it for his own knowledge as well. I also aided in sourcing subs and any permits, paperwork, project management, etc. I think this is the biggest hurdle for contractors because they just want to work and manage their guys not deal with a bunch of bureaucratic bs. If you have any questions about the process let me know.
@Chris Mason maybe 203k loans are just more popular in my area but my neighbors also bougt their historic row house with a 203k loan: 80k purchase price and 190k reno.
If you plan on pursuing a 203k loan and the BRRRR strategy, you will need to add a ton of value to the deal in order to refinance without having to put additional capital down.
For example, you 203k a $150k property with $50k in rehabs and the ARV is $250k. You will have to put 3.5% down on $200k, which is $6k, and the loan is $194k, If the ARV is $250k, you have $56k in equity, which is ~22%. But if the ARV is $225k, you have $31k in equity, which is only 14%. So in order to refi in this situation, you'll need to bring the remaining 6% to the table. And that is assuming you can get a 80% LTV loan, whereas 75% LTV is more realistic.