House Hacking a BRRR

[JP Crowe]

Hey All,

I have a live-in BRRR and would be interested to hear what you think of my plan.

Background

My wife and I bought a fixer-upper in Portland OR at the beginning of 2016. Our reason for buying this particular house is because it has an unfinished basement. Once finished this basement will take the house from 660 sqft to 1320 sqft, and from, essentially, a 1 bed 1 bath to a 3 bed 2 bath. We also plan to refurb the upstairs bathroom and kitchen, as well as replace the siding and improve the landscaping of the 3100 sqft lot.

Questions

I am now looking for a way to finance the refurb. The main questions I have are: 1) should we refinance with a FHA 203(k) loan, and 2) should we rather attempt to get a hard money loan?

• The refurb will include structural so I’m assuming I would have to use the Standard 203(k), which has no price cap but limits you to a single contractor, six month deadline and requires inspections of all the work
• I’m guessing this would mean a much higher price tag for the refurb, and less flexibility around scheduling and execution of the work
• I am unsure whether a hard money lender would favor such a deal, but I would imagine that if we could secure a loan we would not be limited to using a single contractor and could get the job done for less.

Exit Strategy

Ideally, we would like to do a cash out refi after the refurb and roll the profits into the purchase of a multi-family. We would then rent (or sell) the SFH (depending on the market at that time) and house hack the multi.

Considering our exit strategy the 203(k) seems financially inefficient, as we will have to refi via the banks twice (once for the 203(k) and again for the cash out refi). It is for this reason that I want to really push to see whether hard money is an option.

Here are the numbers:

• SFH purchase price: $235 000 (5% down payment conventional loan)
• Refurb est: $60 000 (this is conservative, and with some sweat equity we should be able to keep it lower)
• ARV: $351 000 (avg of 5x recently sold SFR comps in my local neighborhood)
• Difference: $56 000
• Assuming LTV of 80% on the refi that's $44 800 cash out

Of course there are closing costs and loan payments to consider, but bearing these added expenses in mind this still seems like a feasible plan.

If someone on BiggerPockets has executed a similar strategy I’m all ears and eager to learn. Lastly, if there is something about this plan that isn’t lender friendly, how should we restructure the plan to improve the deal from the perspective of the lender?

Any feedback would be a great help!

[Account Closed]

HML won't lend on owner occupied. It has to do with legal SEC stuff.

If I were you, I'd find some other way to finance--personal loan or low interest/promo rate credit cards or private lender or Home Depot credit line etc, get the work done before any variable/promo interest rates rise, live in home for 2 years, then sell, taking my [up to] $500k capital gains exemption and using profits on a 3.5% FHA DP for a 2-4 plex that I live in. With the leftovers, I'd maybe purchase a second investment property, unless the first one needed work or I could force appreciation.

If I didn't want to wait 2 years because of an uncertain market or rising interest rates, I might use a HELOC as a 25% DP on a small plex. All this assumes conventional financing and a robust market.

Or I'd just establish a HELOC and wait for a market correction.