FHA loan for flipping

[Michael H.]

At the end of this year, I would like to purchase a personal residence with a FHA loan. Is it possible to use a FHA loan for wholesale properties? I would live in the property and do renovations (kitchen and cosmetic) and sell it in a year. I like this idea because I will not be wasting money on rent and also I will not have the time pressure related to the holding cost. Do you foresee any issues with this and has anyone done this before?

Currently I'm paying 1,900 a month for rent for my 1 bedroom apartment, I figured that it might be the time to start looking for a home. A multi family home will not work in my area for cash flow.

[Albert Bui]

Hi Mike,

Fannie & Freddie (std conventional) financing will do 5% down for primary. There are a lot of ways to finance the primary. If you have minor rehabs like all cosmetic items then you could probably use conventional financing and in some cases FHA but with FHA during the appraisal process they check everything and it can be a hassle for some investors who feel like they have to fix every tiny little thing like loose stairrails, cap the exposed wires, tighten the leaky faucets, recaulk the bathrooms, etc. Conventional financing will not require these minor issues fixed only major items that if left untended could substantially lower the value of the collateral (property in this case).

Since your hold time is minimal I would recommend 5% down primary utilizing a single premium mortgage insurance (SPMI) to get rid of that payment. This assumes you raise your rate to a point in which you can absorb the cost of the mortgage insurance. If your fico is 720+ the SPMI will be about 2 points or about 2% of your loan amount. What this means is as opposed to paying monthly mortgage insurance you can have no mortgage insurance because the rebate or money within the rate has paid for the mortgage insurance (a third party mortgage insurance company) upfront in one payment. So you'll end up with just the mortgage payment, taxes, insurance, and perhaps a HOA fee if its a condo or common development for your monthly carry cost.

In truth mortgage insurance can be paid in many ways: Single premium, monthly premium (stereotype), or even split premium which is like a hybrid combination of the first two.

Or if you can negotiate it have the seller carry 15%, you put 5% and then you won't even need a mortgage insurance policy.

There are many ways to skin the cat.

As for the 203k concern and rehab loan:

These can be some hoops to jump through however as with all answers in finance, tax, or real estate investing it ... really "depends." Thats why its hard to given specific advice unless you become a client or we know intimate deals about your scenario.

Here are some basics on 203k's (This is a FHA loan with a rehab component not conventional financing)

- depends if you're doing a full 203k (not capped can go above 35k in rehab)

- Streamline 203k which is capped at 35k non structural repairs/non major repairs (no luxury items, but can do kitchen rehab, paint, cosmetic minors)

- you'll need to have a contractor who is used to creating and devising blue prints for the work to be done. The work blueprint has to be approved by the FHA appraisal for accept compliance with the 203k program

- once the plans are approved the loan closes like any other FHA loan however if you don't have a licensed contractor who has experience in doing 203k work it can be a hectic experience. It pays for quality advice in all areas really.

As for the tax concern:

If you're buying it as primary I would recommend you use Robert Leonard's strategy for hold for 2 of the last 5 years to get up to 250k capital gain tax free or 500k if you're married, but the problem with that strategy is you may not want your profits and exposed to the market for 2+ years. If that be the case I would recommend a min 1 year hold so you can at least pay long term capital gains tax as opposed to short term capital gains tax which is taxed at your current income tax bracket (could be 25-35% depending on what you make). Your long term capital gains tax rate could be 0% if you make minimal income, up to 15% for most people generally, or up to 20% for those at 400k or over (single)/450k+ (married). Also gotta be aware of the additional 3.8% obummer tax too for investment income if you make over 200k (single) and 250k (filing as married). This is not to be misconstrued as tax advice, I am not an accountant and this is my personal experience working with accountants/CPA's day in and day out.