Combining BRRRR and FHA??

Question

Hi everyone!I'm a newbie in the OKC area looking to buy my first property and have a financing question. I'm fairly familiar with the BRRRR method, but I have a question on the "Buy" portion of that and how to get that cash. I understand there are conventional loans, private/hard money, etc. but want to explore all options before I jump in. I'm curious if I could use an FHA loan so that I can acquire the property with 3.5% down. Here's what I'm thinking with hypothetical numbers: Buy a $100K duplex/4-plex/etc. using an FHA loan. Make the necessary repairs, say $15K, and the ARV is then $150K. I do a cash out refi and get 75% of the ARV ($112,500). At that point I will have rented the units for good cash flow, no longer have to deal with PMI, and will have some cash for the the next property!1. Is this possible? 2. Am I understanding the BRRRR here?Thanks!!

Patsy Waldron · Answer

@Dallas Schwab"At that point I will have rented the units for good cash flow..."If you take out a 3.5% down FHA loan you can't rent out all the units- those terms are for owner-occupied properties, so you will need to be living in one of them for at least a year so that you are not violating the terms of the loan.

Keishee Hill · Answer

Dallas Schwab looking at the numbers you provided in this thread, there would not be enough equity for you to do a refi cash out regardless if you use a 203k or not. If the purchase is $100k and repairs are $15k, you are already at $115k and you said 75% of the ARV is $112.5k. So, if you put 3% down, the loan will be $112k...the only thing you could cash out is $500 (the difference between the 75% of the ARV and the loan amount. If you can find a bank that will refinance at 80% of the ARV because you live there, at least you could cash out $8k, but you would have to continue to live there. But yes you can do a refi cash out with a 203k loan. You can even use the same lender if you wanted to.

Brandt Smith · Answer

@Dallas SchwabFHA won't loan you the money for rehab. The reason people use hard money is that they don't want to fund the renovation out of their own pocket. Also, you can immediately shift to a conventional loan after rehab where if you pay cash, home equity, private money, etc...you need to season the property before you can refi and pull the money.

Patsy Waldron · Answer

@Dallas SchwabOnce you reach 20% equity in the property, the lender has to drop the PMI. The question for you, I guess, is whether the rehab will get you to (at least) 20% of ARV. If it does, and you refinance with a non-FHA loan, then I am pretty sure you are good to go to rent out all the units (though you may not be able to refinance until 6 months after the rehab is completed). I am not familiar with the 203k loan, so can't comment definitively on cashing out at refinance, but I can't see why it would work any differently than other types of loans.

Rogelio Rosales · Answer

If you utilize a FHA 203k loan it will pay for the rehab and purchase of the property. You will have to use certified and approved contractors by them.

Trenton Jackson · Answer

Patsy Waldron tie junking of the old rules. The PMI drop off for the loan is no longer the case at 20% of loan to value. FHA rules changed within the last year or 2. I wish I could direct your to the specific HUD mortgagee letter. But I do know at this point in time, Anything greater than 90% LTV is for the whole term of the mortgage and less than 90% LTV is for 11 years. Check this HUD link for more info http://portal.hud.gov/hudportal/documents/huddoc?id=15-01mlatch.pdf You are allowed to refinance from an FHA to a conventional loan product but as others have pointed out max LTV is generally 75% for a cash out. I hope this info helps you in your endeavors

Dallas Schwab · Answer

@Keishee Hill Maybe I should've put a little more thought into the numbers; I see what you mean. Good thing they are only hypothetical! Your input was still helpful and is appreciated! Hopefully something like this will work out. It would definitely help me get started in investments.

Dallas Schwab · Answer

Thank you all for your input! @Rogelio Rosales I go back and forth on whether or not I want to do the 203k for some reason. I would almost rather fork up the cash to rehab and not pay for the rehab over the life of the loan to pocket the difference in cash flow. I'm undecided on that. @Patsy Waldron I didn't mention it, but I do plan to occupy one of the units for at least one year, so that's no problem. But, do you know how I could occupy for 1 year and refinance to remove PMI and rent out the remaining unit(s)? Also, if I do a 203k loan there's no way for me to get cash out of that refinance, right?

Adam Irvin · Answer

Rogelio hit it on the head. The 203K is designed to do exactly what you're asking for. Plus, you can bid during the early period on hud homes since you'll be occupying it too.

Taylor Weaver · Answer

But when you say he would only cash out at $500....yes technically he’s only netted $500 but he has the $112.5 in hand to make another investment correct? He can now BRRRR another property to creat more cash flow, and be able to make a larger (20%) down Payment now that he won’t be able to use an FHA, is this correct?