Single Family Conversion to Duplex with FHA 203k Loan
New to Real Estate · Rome, GA · Member since 2017 · 107 posts · 34 votes
In my local market I have found that good small multifamily homes are difficult to come by. Naturally, I began to ask myself, can I use a FHA 203k to convert a single family home with a basement (unfinished/finished) into a multifamily property? I have read a few post discussing the FHA 203k that I have found very helpful. One that deserves recognition is Steven Gesis's post "Secrets Everyone needs to know about using a 203k loan". It seems that this type of home conversion could be possible under a standard FHA 203k loan but I am not 100% about it.
Has anyone done this type of home conversion under a Standard 203k?
Does anyone know if this is possible?
In my local market I have found that good small multifamily homes are difficult to come by. Naturally, I began to ask myself, can I use a FHA 203k to convert a single family home with a basement (unfinished/finished) into a multifamily property? I have read a few post discussing the FHA 203k that I have found very helpful. One that deserves recognition is Steven Gesis's post "Secrets Everyone needs to know about using a 203k loan". It seems that this type of home conversion could be possible under a standard FHA 203k loan but I am not 100% about it.
Has anyone done this type of home conversion under a Standard 203k?
Does anyone know if this is possible?
Yes you could do this as long as zoning allows for it or you have a conditional use permit as a duplex/triplex/fourplex.
This is the ultimate strategy which stacks BRRR method, with house hacking, with value add semi development-ish conversion of 1 unit to multi. By stacking multiple strategies your returns could be exponentially higher than prior.
Its one of the creative ways to make an area that doesnt cash flow so well to an area that ends up being a cash cow or from a house that was costing you each month to a house that now allows you to live for free or pays you to live there.
In my local market I have found that good small multifamily homes are difficult to come by. Naturally, I began to ask myself, can I use a FHA 203k to convert a single family home with a basement (unfinished/finished) into a multifamily property? I have read a few post discussing the FHA 203k that I have found very helpful. One that deserves recognition is Steven Gesis's post "Secrets Everyone needs to know about using a 203k loan". It seems that this type of home conversion could be possible under a standard FHA 203k loan but I am not 100% about it.
Has anyone done this type of home conversion under a Standard 203k?
Does anyone know if this is possible?
Yes you could do this as long as zoning allows for it or you have a conditional use permit as a duplex/triplex/fourplex.
This is the ultimate strategy which stacks BRRR method, with house hacking, with value add semi development-ish conversion of 1 unit to multi. By stacking multiple strategies your returns could be exponentially higher than prior.
Its one of the creative ways to make an area that doesnt cash flow so well to an area that ends up being a cash cow or from a house that was costing you each month to a house that now allows you to live for free or pays you to live there.
I will need to look into that.
It is refreshing to hear that, I also thought this could be the best strategy for making my current area cash flow.
I saw in another post you mentioned a caveat with the refinancing aspect of the FHA 203k...
"The nuance when refinancing with FHA 203k is that you need that 2.25% equity before the project starts or "in as is condition." So 203k refinance is not for those who are currently under water with regards to LTV ratio unless if the borrower has a huge sum of cash to buy down their LTV to 97.75%. This is not the same with Homestyle renovation loan where the borrower could technically be underwater and do a non owner renovation loan as long as their total loan outstanding is still within guidelines (75-80% LTV) with regards to the ARV."
I am having some difficulty understanding this concept, could you explain this to me?
Hi Nathan
The 203k when doing a refinance can be a little tricky if you do not have enough equity in the home in its current condition. The 203k refinance in some cases requires two appraisals, one is the value of the home in its current condition and one that will reflect the value once the home is renovated. The first appraisal is called an "as-is" appraisal. If that appraisal is completed and there is not enough equity to cover your payoff and closing costs based on a 97.75% loan to value ratio then you would need to make up that difference with cash to closing table.
The HomeStyle renovation loan doesn't have an as is appraisal requirement so we would only need the after completed value and with the HomeStyle you can go up to 95% of the after completed value on a single family home. I hope that helps a little.
I will need to look into that.
It is refreshing to hear that, I also thought this could be the best strategy for making my current area cash flow.
I saw in another post you mentioned a caveat with the refinancing aspect of the FHA 203k...
"The nuance when refinancing with FHA 203k is that you need that 2.25% equity before the project starts or "in as is condition." So 203k refinance is not for those who are currently under water with regards to LTV ratio unless if the borrower has a huge sum of cash to buy down their LTV to 97.75%. This is not the same with Homestyle renovation loan where the borrower could technically be underwater and do a non owner renovation loan as long as their total loan outstanding is still within guidelines (75-80% LTV) with regards to the ARV."
I am having some difficulty understanding this concept, could you explain this to me?
Simply put if you’re current home before improvement is worth 100k then your current loan(s) on that property can not exceed 97,750 or 97.75% on the “as is Appraisal,” since fha requires an as is Appraisal and an after repair Appraisal. This is one nuance to fha 203k that you must have 2.25% equity, aka what we explained above, prior to starting the 203k rehab loan.
Like I also mentioned the equity could be there or you could bring in cash to pay down the current loan to 97.75% or 97,750 in this example as well to artificially create the equity position.
The reason you may want to go with 203k is because you can still borrow up to 96.5% of the after repair value on a fourplex while on home style renovation financing your LTV or max loan amount is a lot lower 85 duplex down to 75% with a fourplex as an owner occupant.
However having a lower LTV could be seen as forced discipline to make sure you don't over leverage yourself as well.