Fastest way to a BRRRR-203k, FHA or irrelevant ?

Question

Hi everyone,

I feel like the closer I am to pulling the trigger with my first home purchase the more unanswered questions I have about making this go right or faster. I will make this as short as I can but will try to put all the inquiries I have out there.

My main goal: BRRRR as many 3 unit properties as I can next year (hit the ground running)

In order to accomplish this, I feel I have to make a good first deal, or is it irrelevant ?

I know I want a 3 family to live in one unit and rent the other two here in providence RI

Scenario 1, get a loan through RI housing which is basically a FHA loan with down payment assistance and renovate out of pocket to create some equity, I know I have to live in it for a year.

- go this route without the down payment assistance and put some money into rehab to create equity in order to refinance?

Scenario 2, get a 203k loan for a distressed property, but I don’t think this will create enough equity to refinance not even in a year down the line due to the small DP and large loan. It will have to be SUPER cheap in order for a BRRRR to work.

OR, am I just over thinking this and should just go ahead with a RI housing loan (either one) and just “forget” I bought this first property and continue the next one with hard money as soon as I can without counting on the first property’s equity? I mean, one deal under the belt and I think It will open doors with hard money lenders right? And I will have cash available to put in the next deal.

Is probably confusing but that's how my head is right now lol. One more thing, can someone recommend a rockstar real estate agent ? I am ready to get the ball rolling right away. Thank to everyone to takes their time to respond :)

Anthony Thompson · Answer

@Eladio P. just based on what you've posted I think scenario #1 is the simpler and easier one, that is more likely to get you actually into a property, and over the hurdle of your first property, soonest.

As long as the #s work as far as your purchase price vs. the rents you'll be getting, owner-occupied financing typically has the best loan terms. Though depending on which program of RI Housing's you choose, you may need to stay in the property for a year or two before you can move out and buy a second property to house hack.

My concern with scenario #2 is that you'd likely be targeting properties that need rehab, which means you'll probably be competing with more buyers since those are typically priced cheaper and tend to pop on more people's radar. And also, if you don't have rehab experience, it is a bigger risk for you. And you might be more apprehensive about pulling the trigger, which you've already mentioned has been an issue.

I'm not sure what you mean about "forgetting" about the first property. If you mean moving out before the owner occupied term is up under the terms of a RI housing first home buyer program, I don't think I'd recommend that.

But if you mean moving on to a second property and leaving any equity in the first without touching it, yes I think that's a good idea. I'm not generally a huge fan of leveraging each property as much as possibly to buy as many properties as quickly as possible. Someone one described that as a "house of cards" and I think there's some truth to that - particularly in this phase of the market cycle.

So if you mean that you'd consider the second property independently from the first, and see if it can stand on its own, then yes I think that's a good idea - though I'm not sure why you'd necessarily need to get a hard money loan for the second property. There are plenty of institutional mortgages that serve non-owner-occupants (investors). The terms might not be as good as owner-occupant loans (higher rates, more down payment required, etc.) but I can tell you the terms will be a lot better than any hard money loan terms.

And as far as real estate agents, yes I can recommend a couple of excellent, investor-friendly ones if you still need that. I'd recommend meeting with a few and seeing who you have the best connection with, who seems the most active/knowledgeable, etc.

Christian Allen · Answer

@Eladio P. I've done basically both of the scenarios you described. Granted it was a few years ago (2016, 2017) and some would make the argument that the market is different now but I would disagree. In today's market as everyone continues to say, off market deals are likely you best option but I still see some stuff hit the MLS that could have some potential if you are creative.

The first property I did a FHA loan and did the renovation on the cheap by doing all the work myself and after a year it refi'd for 75% LTV. The key to doing this is finding a property that is cosmetically in the worst condition. You can't have any major issues or it won't qualify for FHA but the cosmetic updates can really sway the appraisal in the end. Even in the end if you have to front some cash to push it past the 75% LTV, it would be worth it to be able to get another FHA loan.

For the 203k to work you really need to find the worst of the worst properties in a good area. I was able to pick up one on the East Side for real cheap and put a ton of work into it to get it past the LTV requirement for a refi. If you are not familiar with big rehabs I would caution you some because you are going to have to deal with properties that have many different issues and some can become bigger issues.

The 203k process can be pretty long and drawn out because the contractor usually knows he has 6 months to get the job done and there's little incentive to get it done quicker.  On the front end you really have to have your ducks in a row and expect it will take more than the typical 45 days to close. This may be an issue for some sellers who are looking to get the property sold quickly so be prepared to deal with that.

My advice would be to find a solid first deal and focus on that 100% initially. It's good to have the long term goal in mind but if this is your first rehab project you are going to be plenty busy trying to figure out the first to be focusing on how to get the second. Hard money is an option but that comes with lots of added risk.

Feel free to PM me if you have any specific questions.

Michael Noto · Answer

@Eladio P.

Scenario 1: If your goal is to BRRRR then a property that will qualify for FHA financing will likely not leave enough meat on the bone for a refinance to make sense. Typcially the BRRRR strategy is best executed on properties that are either not financable or very close to it.

Scenario 2: There is a better chance that the BRRRR can work on a 203k deal as opposed to straight FHA but keep in mind that you will pay full retail prices on the rehab for the 203k and a lot of times that eats into the equity on the back end. With that said, you now have a property with little or no major capex for years to come if you do it right and you only put 3.5% down. That sounds like a good deal to me but not really a BRRRR type deal.

Eladio P. · Answer

Thanks @Anthony Thompson! Yes I agree with option # 1 going with the fha loan and put a down payment, maybe some rehab with my own cash in order to create some equity, the most important thing I want out of the first home will be to cash flow positively.

Yes that what I meant by “forgetting” the first property, moving forward to the second property without touching the equity in the first home which I will look at like a home instead of an investment. I wont have a problem staying more than a year and refinance when it makes sense $$. My intentions exactly about avoiding a “house of cards” since I am starting out I don’t want to risk everything and become a story of someone who lost before he started.

I’m thinking about hard money for the 2nd property going forward since I will be targeting distressed properties mainly here and in NJ where I have really good friends (lenders and contractors) and I would like to use as little cash as possible. But if these institutional mortgages work for this I will take a look at them.

Of course let me know of good real estate agents that you know of, ill be more than glad to meet with them. Thank you for your time and knowledge as always, I appreciate it so much !

Eladio P. · Answer

thank you @Christian Allen! yes im leaning towards buying one with fha and just make sure it cash flows positive and keep that more as a "home" than an investment. Then move forward with the second property which will be an investment 100%, without really counting on the equity of the first one.

i was thinking something similar to your first FHA loan, make some repairs myself that way i wont have to include it in a 203k loan and just give it time to build some equity, since it will be a 96.5% loan starting out. thank you so much, i'll definitely PM if anything

Fastest way to a BRRRR-203k, FHA or irrelevant ?

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