TEAR THIS IDEA APART

[Albert L.]

I just finished the 1st chapter of No/Low Money Down and learned about FHA + 203k Loans which gave breath to some ideas.

Tell me why this won't work! 

For example...

Say we found a foreclosed house in Oakland. Let's use this one for example. 

https://www.trulia.com/p/ca/oakland/925-e-11th-st-...

Let's say I was able to negotiate it down to a purchase price of $650,000 and added another $50,000 in renovations (cosmetic upgrades, new hardwood floor, kitchen cabinet, paint, bathroom vanity/shower, etc etc). 

I wrap up the purchase price and rehab in a FHA 203k loan for a total of $700,000 with a 3.5% down payment at 4.9% interest rate.

Assuming I'm able to rent out the (2) 2BR/1BA for $2700 each and the (1) studio for $1900 and my wife and I living in the 1BR/BA, the income would be around $7300. 

Factoring in PITI, repairs, vacancy, capex, maintenance, sales expense, and MIP fees, I would be cash flowing around $1,100 and see a CoC return of 45%.

Calculations here. 

Furthermore, let's say we didn't have the upfront downpayment needed ($24,500) and used a HML to help us out who charges us a 9% APR which would bring my total to around $27,000 that I owe there.

Let's say we live there for 6 months or so, (I think that's the required seasoning period of FHA 203k loan?), we have it appraised for $875,000 which I think is somewhat reasonable with the upgrades and the appreciation that are is seeing.

We can then do a cash out refinance with the $199,500 equity that's been built up and pay back our HML.

Lastly, let's say in 2-4 years my wife and I decide to move out and we rent out our 1BR/1BA which would add to the total cash flow. 

But...if it was 'this easy' I'm sure everyone would be doing it. 

SO, here's what I think I'm missing and I invite you to critique away as well as I'm sure I'm missing a million obvious things! 

Why this won't work: 

1. This is California, let alone the Bay Area. Cash rules! Ain't nobody will want to deal with your FHA 203k loans!

2. 50k for rehab...cmon now. It's going to be closer to 100k

3. Do you really think it'll appraise for that much? Those repairs ain't going to do nothing!

4. Those rental prices are astronomical. Yes craigslist gave some suggestions but that's a bit outlandish given it's still all in the same property! 

5. The timing doesn't work out. There's a ton of paperwork with foreclosed houses AND securing a FHA 203k loan. This won't be rentable for quite a while..

Your turn, how else can this go wrong? 

Thanks BP! 

[Wayne Brooks]

You won't be able to borrow the down payment...as per fha plus no HML would make this 2nd mtg loan.

You’ll have substantial closing costs/prepaid taxes and insurance also, more than $15k likely.

 No way your insurance is $840/yr