Is having my first flip be my home a good idea? and how to finance?

Question

Hello BPA quick intro as this is my first post! I'm a new investor from Anaheim, CA. I have been trying to educate myself on REI and have learned a lot thanks to BP. Podcasts, forum and books have been incredible, i would have never felt as ready as i am if i haven't found you guys! I had a brief real estate experience in my early 20s (2005-2006) and the rest is history given that it was family and the 2008 crash.

I have setup a website, ordered business cards, registered to the next REIAs in my are (irvine, Inland empire) , read a lot on direct mail and still reading. Plan to launch a campaign in the next 2-3 weeks.

Sorry if the intro was long. Now to my question:

My wife and i have been wanting to buy a house for about a year now. We can easily get approved for FHA. I've looked briefly into 203k loan but i don't like all the stipulations especially if we want to do some of the work given that they require licensed contractors.

Would it be a good idea to find a fixer and learn from it since either way we are needing to buy a house? and it would be nice if we can rehab it to our taste and earn an experience that if proven costly our exit strategy is in place (living in it)

Also what are our financing options? We have about $30k to spend on a new house(not including credit cards) but i don't think that is enough to get a HML to finance for example. Fixers in our area would be at least $300k+ . Ideally we would fix and then get an FHA or hopefully a conventional if there was enough equity.

Any input is greatly appreciated.

Kyle Gregg · Answer

I am a strong believer in the 203k. I am currently in the rehab phase of one right now. I work a full-time job outside of real estate and i found that the 203k was the perfect introduction to real estate for me.

Considering that you want this house to be your primary residence, i personally think the 203k is perfect. You only have 30k to work with so that doesn't leave you many options to purchase a house for $300k THEN do a rehab...

Do you work a full time job? do you have a lot of experience in rehabs? do you have experience with managing subcontractors? do you have experience with estimating work?do you have the man hours required to rehab a house in a timely manner?

Rehabbing a house nights and weekends will take you FOREVER and will leave you with NO free time. If you have no experience with subs or estimating work, you will be left spending WAY too much money and possibly digging yourself a deep hole. Using the 203k and having an experienced contractor running your rehab will allow you to enjoy the rehab process. You will be able to do small things here and there, if the contractor allows. You will be able to do all the designing, picking of finishes, and watching the complete process with little responsibility on your shoulders. Its perfect for any beginner.

Also, considering your $30k budget and using a 203k:

Purchase price: $300,000

Rehab: $50,000

Total financed: $350,000

3.5% minimum down payment: $12,250

~6% closing costs: $21,000

Total required at closing: $33,250

Let that figure be an eye opener with what you can afford. $50,000 rehab might not leave you with much of a rehab.

Feel free to ask me a ton of questions.

Wes Shive · Answer

Abraham,

You're quite right--I honestly forgot about that aspect of FHA (and conventional) loans. However, you can still pick up property that is extremely dated (think grandma living there for 50 years) but otherwise functional. This is the key, particularly kitchen and bathrooms still in place and in working order.

Not being able to go after homes that are more "gutted" than that gives you fewer options but is still doable. Frankly the hardest part is getting a good deal. In fact, if it wasn't a PITA to get the deal or if you didn't go after a dozen or more good deals to get one, it's probably not a real deal (or you got very lucky). The fact that you are not a cash buyer is also to your disadvantage in locking up deala, relatively speaking. This has been my eperience anyway.

You may also try to get more creative. Perhaps you can work with an experienced flipper to find them a good deal then get involved with the rehab process as part of the deal.

Wes Shive · Answer

@Abraham Hodroj, fix and flipping (or living in then eventually flipping or renting out) a house while you occupy it is definitely a way to go. I have not done so myself, but I have done a few flips before (and a lot of rehab and long-term holds.) Keep in mind that, generally speaking, the more work that needs to get done the more profit or equity capture there is.

From my understanding you can get FHA loans for as little as 3% down. I'm not sure what you personally qualify for, but if you can qualify for such a loan, it's often a great first-timer option. You need to pay careful attention to you costs however, both in terms of whether you can cover the cost of the mortgage and also whatever rehab, maintenance, property taxes, insurance costs you will have as well. You should still pencil everything as if it is strictly a for-profit flip. That's the only way you'll truly know if what you did actually made worthwhile money or if it was just a way to acquire a house that was fixed to your tastes but for only a minor discount.

Off the top of my head, things to include that often aren't considered by some newbies:

-carrying costs (if the goal is a long-term hold then flip as opposed to immediate flip, you can buffer some or all of this with some rental income)

-selling/closing costs (I like to use 8%, which may be slightly high)

-self-employment tax on your gains

-contingency or slush fund (for when your expenses are higher than you expected--this can happen often)

Hope this helps.

Abraham Hodroj · Answer

Wes thanks for your great input. FHA should be fine with 3 percent down. My concern however is that FHA won't approve a non move in ready house if i'm correct or at least thats what my RE agent once said. She either wasn't interested in helping me find a fixer or its true. So prior to getting an FHA on a property i have to figure out how to acquire the property(finance), fix it and prep it so that i can get an FHA? That is my question if you or others can chime in.

Is having my first flip be my home a good idea? and how to finance?

Most Popular Reply