Buying a Mixed use building using FHA 203k

[Kieran Dowling]

Hello,

There is this mixed use building in my area and it has a Bar on the first floor and an open 2500sqft space on the second floor. I was wondering can i use the FHA 203(K) loan to renovate the second floor into two apartments and house hack it?

[Vitaliy Volpov]

Hey @Kieran Dowling

You are correct. The guidelines permit both FHA and FHA 203k loans to be used to finance mixed use properteis as long as they are at least 51 percent residential (determined by the appraiser and calculated based on floor space). FHA 203k guidelines allow you to use the loan funds to renovate the residential portions, but not the commercial portions, of the mixed use property. Additionally, if the commercial portion of the mixed use property is in disrepair, that may disqualify the purchase from being FHA eligible, similar to how any property may be disqualified for a regular FHA loan if it is in disrepair.

As I understand it, your specific question/situation involves converting the commercial portion of the mixed use building into residential apartment(s) to make the space 100% residential. You should definitely consult with a qualified lender to answre that question, but my hunch based on the above is that this type of use of the funds will not be allowed. Additionally, you will also have the hurdle of getting the municipality to approve this type of conversion. 

My business partner and I have attempted to buy some mixed use deals (not house hacking scenarios but still applicable here) where we wanted to convert the restaurant/shop space on the first floor to an apartment and we got significant push back from the building and planning departments. The main issue typically is that the municipalities believe that it is more beneficial to the neighborhood to keep the commercial space commercial as they are hoping that the owner/commercial tenant that occupies that space will bring jobs into the area. They often see it as on overarching conern, especially where the area doesn't really have a residential housing shortage.   

This of course varies case-by-case, as many different factors will affect how building and planning departments will look at your project in the area where the property is located. But, I'm just mentioning it here as someone who has actually tried it and did not get the most welcome reception.  

Also, if this is going to be your first house hack and first investment property, it may be a bit much to handle as you are adding many layers of complexity to the situation. Not only are you trying to use an FHA 203k loan (which has many aspects to manage and compliance requirements to meet), but you are also intending to change the existing use of the building too. Managing a rehab and a mixed use to a residential conversion while adhering to the "red tape" involved with a 203k loan and the local planning/building department is an advanced investor level project.

I'm not saying that it can't be done or that after you finish it might not be more profitable than a run of the mill house hack of an existing multi-family. But, it will likely be a lot more difficult and therefore also a lot more risky than you think. As long as you are going into it with that understanding in mind, go for it! 

Vitaliy