Can you BRRRR your Primary after an FHA Loan?

Question

Hi everyone!

I am looking to buy a new primary home next year (currently my primary is a condo and going to convert that into a rental in 2021) and was wondering if you could use the tools of an FHA loan to buy it and a BRRR later on to convert it to an investment?  Lower money down to purchase, throw some money into it to make it look nice, and then place renters in there after a year?  That is doable correct?

Thanks!

K-Man

Lumi Ispas · Answer

@Kuriakos Mellos, you got it. Your scenario will work. Remember two things, you can have only one FHA loan at a time with the exception if you move markets ( different state, at least 100 miles away) and you have to occupy each property for at least one year.

I've had several clients this year that did exactly that. I found them some great 3 and 4 unit buildings that they did FHA 203K renovation loans and increased the value of the buildings by 25%. So in our market, Chicago, I've had a few of them refinance in a conventional 25% equity owner-occupants and they'll wait another year to buy another building with another FHA and a few have refinanced after they've occupied the property for a year to satisfy the FHA "owner-occupant" requirement and now they can buy another building with an FHA loan!

With the low-interest rates, it's easy to make the numbers work and by taking a 203K renovation loan you win on multiple levels: you get completely remodeled buildings that are easy to self-manage, gain a lot of equity and gain a very high rent!

Good luck to you!

Joe Splitrock · Answer

You can keep the FHA financing on the property after you move out, but you would be doing a conventional loan on the next property. You can still do low down payment with conventional financing. Where I was confused was how BRRRR figures into the equation. The way BRRRR works, you get a property, rehab the property, rent the property and refinance. You could theoretically refinance before you move out, but the general goal of refinancing is to pull cash out. I don't think refinancing the FHA into a conventional on a rental property will put you in a better situation. Of course it depends on the extent of your rehab, but loans on non-owner occupied properties require 20-25% equity. As I mentioned you can leave the FHA loan in place after you move out and then just get a conventional on your next property. That is probably best.

Joe Splitrock · Answer

The main advantage of FHA is low down payment. If you convert to rental and refinance, you are going to need 20-25% into the property. You are probably better to leave it as an FHA from a cash into the deal perspective. BRRRR isn't technically an owner occupied strategy. Bottom line if you take away the fancy acronym, all the strategy optimizes is having little to no cash into the deal.

David M. · Answer

@Kuriakos Mellos

Just to add along..  I believe the brrr method is about using the same capital to keep generating rental properties.  Assuming the same price points, you can using x amount of dollars for a down payment and reno.  By doing the reno, you are able to cash out refi at a ~75% ltv and still get that x amount of dollars back out.  Now you do the "rinse" part of the brrrr.  I believe the "original" method was to purchase in cash to both strengthen your offer and reduce the cost of getting an extra loan.

So, any attempts to use a loan as part of the purchase will put a "wrinkle" in the method as discussed above.  The main issue that conforming residential loans require owner occupation except the 'investment' conventional loan.

One more thing to point out is calling the FHA loan as the "first time buyer" loan is a misnomer.  Also, its not always your best choice.  A conventional loan goes down as far as 5%, sometimes 3% in some situations, and is sometimes cheaper than a FHA depending on your financial situation.  Now you eliminate the issue of "one FHA loan" at a time and can also remove the PMI without refi'ing (remember, any Gov't backed loan can't have the mortgage insurance removed without basically refi'ing into another loan).

Good luck.

Kuriakos Mellos · Answer

Thanks @Joe Splitrock I guess I was trying to get creative.   So two separate strategies - FHA loan to help get a low downpayment to grab a property and then rent it out after a year. Future properties would just have to be conventional loans. (Or other financing) BRRRR - just gotta get a good deal so that when I refinance I could take the money out and repeat ;-)

Jacques Ikolo · Answer

What's up Kuriakos, if you do a FHA 203k loan (rehab loan that's apart of your mortgage), then you can get a property that needs a little work. You can fix it up, you gain the equity. After a year you can then refinance and pull that cash out to get another property. SO basically BRORRR (Buy, Rehab, Occupy, Refinance, Rent, Repeat) Where you Refinance first before you can Rent it completely out. I hope that made sense.

Paul Welden · Answer

@Lien Vuong The borrower can refi after 6 months but must intend to reside in the property as their primary residence for 1 year.

@Kuriakos Mellos Your plan can definitely work. Welcome to the BRRRR strategy. I recommend the borrower keep the property as their primary residence for 2 years so that if they decide to sell within 5 years, they may qualify for tax free profits (IRS Topic 701).

Lien Vuong · Answer

Technically yes but you'd get a FHA 203k loan and would need to be there for a min of 1 year before refi. However, the issue you'll run into is the deal flow and achieving that in the primary market of Boston. What you have a better shot with is expanding your market further in the outskirts and start building relationships with a GC to assure you have the right crew to execute.

David M. · Answer

@Kuriakos Mellos

The mortgage insurance on a gov't backed loan, such as a FHA, stays on for the life of the loan.  Once you refinance, well, then you follow the terms of your new loan.  The original FHA loan is extinguished, so its "life" is over.

Now, thats not to say that mortgage insurance is "bad."  Just consider it the cost of money.

Yes, if you can get a conventional loan, the Private Mortgage Insurance payments will auto stop when you reach 20% down acording to the payment schedule or you get an appraisal showing the effective 20% down (basically, you had some good appreciation).

Again, it depends on your financial situation as to whether the FHA or conventional loan is cheaper for you.  Generally, your credit score governs strongly.  Don't forget that if you buy another condo, it has to be on fHA's approved list...

Good luck.

Kuriakos Mellos · Answer

Hey everyone - thanks for the feedback! I had NO idea that a FHA loan a had a permanent PMI tied to it - even if you refinanced with another lender?    I think my take away is this : find  a primary with a conventional amount at like 5% - and if I ever move I can rent it out without being worried about being tied down to an FHA.    As for a BRRRRR, just gotta find that deal.

Can you BRRRR your Primary after an FHA Loan?

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