Can you BRRRR with an FHA Loan?

Question

Can you cast-out refinance when using an FHA loan? And do you need to convert to a conventional loan?

Paul Beets · Answer

FHA does have a cash-out option.   But the requirements are strict and so are the terms (LTV).    Typically ... it is not an ideal mechanism for the BRRRR strategy.

FHA loans are great for purchasing a pretty much turnkey property because if you qualify ... it is only 3.5% down.

Paul

Jake Tovey · Answer

Yes, you can, but a little tougher to do. I am hoping to do this right now with my first property. The way I understand the process is as follows:

1) Buy property with FHA and move into the property within 60 days

2) Complete any renovations, fill tenants in all other units (or bedrooms if SFH) throughout first few months while living there.

3) Wait 6-9 months (Seasoning period). You may be able to work around this but from my understanding you need to wait about this long.

4) Refinance into a conventional loan, if you've built up 20% equity through the renovations and, hopefully, increase in income from the other tenants. Key is getting the property to appraise high enough that you have 20% equity after the increase in property value.

5) Once refinanced into a conventional loan, you are eligible for another FHA loan and can repeat process (Including physically moving into the next property). You could also cash-out refinance, keep the FHA loan, and use that money to buy your next property, but you would have to find another form of financing.

Example of an FHA House hack with BRRRR strategy) Buy property with an FHA loan for $300,000. You spend $20,000 in renovations, focusing on value-add renovations, which results in an increase in income from tenants and property value (Bringing all-in cost to $320,000). Then in 9 months, the property appraises for $425,000. You then refi into conventional with 20% down, or $85,000, which is covered in the equity you built through the renovations and increase in income. You then pay off the existing FHA loan of $300,000 without any money down and could cash out the extra $40,000 ($425K (New value) - $300K (Existing loan) - $85K (20% downpayment for new loan)). The $40,000 can be put towards the refinancing costs, $20,000 in renovations you spend and then money towards your next deal. Since you refinanced out of the FHA loan, you can use an FHA loan for your next property as well.

It is tough to do and many people will probably tell you that you can't. It will take a lot of work on your end to pull it off. My best advice is to buy a property that is outdated with below-market rents, move in and complete as many of the renovations yourself, and increase the rents to market value in the first year. This will be what separates you from others since you can renovate the property for much less than others by doing as much yourself as possible. You'd be surprised by how much you can learn through youtube! As long as you are willing to physically move into each of the properties you purchase with an FHA loan, you can repeat using FHA loans as well once you refinance out of them. Hope this helps and best of luck!

Andrew Postell · Answer

@Mike Dusenka

The BRRRR method is generally meant for investment properties....mainly because our out of pocket costs are so large on them. Refinancing is also part of the strategy since we have to buy off market properties in many cases, which causes us to buy with Hard Money or some other loan type that can close quickly....but is a short term loan that we MUST refinance out of.

Since FHA loans are only for your primary home, have SUPER low downpayment requirements, and are 30 year fixed rate loans....it's likely that you won't need to refinance after you are in one. I hope this makes sense how I am describing this. Feel free to ask anything else that you may need. Thanks!

Jaron Walling · Answer

<Purchases house with an FHA 3.5% down payment> "Trying to BRRRR the property! Can I cash-out REFI on this??"

Can you BRRRR with an FHA Loan?

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