All Forum Posts by: James H.

As of this moment, yes. 5.75%. Ouch. Refinancing is in underwriting right now though. The cost of the carry was by far the most expensive part of this job. One benefit I guess is that it put me well above the standard deduction, so a bit of tax relief there.

Excellent replies, thank you!

I wanted to circle back and post on where this is ultimately landing several years later for the benefit of members. There is definitely a treasure trove of lessons to learn. 

I haven't run the full numbers yet, but I think I might end up making some money on the project. I will live in the property and rent out my fiance's house, so that's a win. I think the weak link in this project was that this was not a beginner job to take on and I did not surround myself with any non-biased advocates, or put another way, anyone knowledgeable who didn't stand to gain financially from the deal. Lender, realtor, 203k inspector, contractor, etc. 

There was a dollop of being green, a dash of people standing to make money on the deal motivated to ensure it happened, and a heaping scoop of the house being in much worse condition than I could have possibly imagined. What would have been helpful would be an inspection that said here are the things that are condition issues and here is what they will cost to fix. What I had was such a report which only covered like 40% of the known issues and was about 10% financially accurate (painting the entire house was apparently going to cost $300 for instance). And none of this included fun bonus items like foundation cracks behind finished basement walls.

In the end, the house is gorgeous, I paid a ton of interest, and its only now nearly complete. The strategy that worked, really my only one, was to learn how to do almost all of the work. I built a team consisting of an engineer, contractor (for anything I couldn't do myself), and other subs. I essentially became the project manager. Since I couldn't get paid directly, this required clever personal debt leveraging (401k loans, personal loans, family loans, etc.). I was able to extract some of the money from the 203k to pay for major work done by the contractor. 

The simple fact, however, is that hiring a new contractor to do all of the work for the whole property after I fired the old one was completely out of the question financially and exceeded the budget by about 300-400%. And it took me months of looking for new ones, vetting them, getting bids, etc. to realize this.

My key pieces of advice for anyone considering a 203k would be to:

1. Take along an independent, prepaid inspector not party to the deal or other trusted person to actually price out the renovation and to do the work correctly, professionally, and without cutting corners or being sub par. With this kind of loan, you need to be able to do the work cheaply enough with the allotted funds from the lender based on the ARV. If the repair cost ends up being multiples of the buy price OR the ARV, you're in trouble (my case), so walk away from that deal.

2. Have an extremely strong relationship with the contractor. If they walk off the job, file for BK, can't finish because they're incompetent (my case), or otherwise won't do the job you aren't left with much recourse and will have to find someone else to do the job who may come in and say it will actually cost Y, not X (my case).

3. Being handy with repairs will save you money. No, you are not supposed to do work on a 203k as the homeowner but in practice the lender may turn a blind eye if you aren't requesting payment for it and its a smaller job.

4. You are turning over ownership of the whole project to other people. The financing, the contract work, the inspector, and you don't have much control and if things don't go smoothly, there isn't much guidance or help on how to proceed (see my earlier posts). 

5. Labor is expensive, materials are cheap, engineers charge like lawyers.

I can follow up with anyone if you find yourself considering 203k's or need help with anything. I'm sure most people have successful projects but sometimes a massive failure is a great way to learn massive amounts.

Hello. My fiance has a house in her name that she would like to rent out in the near future. I've read about transferring to an LLC but most of the conversations deal with liability and not tax, which is my primary concern in asking this question. If she keeps the house in her name and doesn't have a business entity owning the property, are any tax deductions or business benefits not available therefore? For instance, improving your live-in home, if I understand correctly, ads to the cost basis of the property but isn't a deduction. However, it would be a deduction for a rental property owned by a business. But since the house is still in her name, is there any issue with declaring that the improvements are business related? We've made improvements to the house since we lived here as private residents, so would any of those count as business deductions retroactively? In general, are any tax benefits lost if a property is in her name personally?

Separately, does rental income count as a type of income that can be used for SEP IRA or Individual 401K retirement plan contributions?

And final question, since I am also a contractor on the side, if I do any improvements to the property should I not be paid or should I take a reported income. Just thinking through the best approach from a tax perspective for both her and I.

Thanks

A french drain would be my first step and it isn't a big deal to DIY if done safely. This will mitigate ingress of water. Then you can resolve the foundation itself. 

Not sure what the sewer will cost yet but people have thrown out 40-60k. The new contractor has the ability to do the work himself vs using a dedicated excavator so should be some savings. We also can take a different route than before which should be an additional savings. 

The house is a mansard style (think McDonald’s roof) and as such, the two bathrooms upstairs have one wall that is sloped. I don’t like it one bit but I don’t know what I could do about it either. Best bet would be some dormer windows that could flatten those walls out. This increases costs though and probably is getting scoped out. The kitchen however, will be very nice and I took a wall out to make it bigger. Because of the limited size in the area, it’s going to be a galley style. But the foundation needs to be done before this can begin. All I can do is work on the second floor and continue demoing and fixing water damage in the meantime. 

The township is making me connect to the sewer because the septic failed, it’s also a law in pa apparently. I’m trying to descope as much as possible or do those items myself. The bathrooms are actually not terrible so rather than refinish them (they’re ugly) I want to maybe just bandaid them until after the loan is finished. I can remodel whenever i want. 

Problem is that to move in the house needs to be in sellable condition, which is pretty near to perfect. 

I don't see wood siding mentioned very often. Seems like everyone wants to go with JH Fiber Cement. I would like to do board and batten since I have a rustic French countryside type of house (it was formerly stucco and cedar shingles). Stucco, in labor, I have been told is probably out of my price range. Vinyl would throw this way off. What about cedar board and batten? I do have bees and some evidence termites are in the area, can these risks be mitigated? Costs seems agreeable on the B&B in cedar from what I can gather. Appreciate any input.

Is there a cheaper, but just as good, wood option? 

I plan to be in the home for about 1.5 years at least if not longer.

I wanted to provide some updates. The old contractor has been fired, which went like this. "Lender, I'm committed to firing this contractor, I have another guy in mind." They sent the new guy papers to sign. For the old GC, I told him he was finished and also sent him a letter the lender sent to me formally stating such. As for the 10% hold back and some of the old contractor's expenses, we shall see. I will push to absolutely not give him the 10% holdback based on some of his work being sub-par and might press for more down the line. But all in all, not as complex as I thought to fire. NOTE: if he refused, it could have gone a different direction since he technically has 10 days to challenge, etc. I think he gracefully took his leave, which I appreciate.

I know some others have had better experiences with 203K loans. For me, too early to tell how this will work out financially but I don't like the way you lose control of the project because you can't pay yourself from the money to make repairs, you can't really do anything to move the job along unless the contractor is doing that, you're paying on a loan that is including funds you may never spend since it is buy price+projected renovation cost. Not a major deal if the contractor is doing their job and doing it quickly but for me, this has been nearly devastating. The rate is high, the payment is very high for the mortgage (as if I bought a fully renovated 2000 SqFt house on 1+ acres in a posh neighborhood), and I have had to spend basically any cash I manage to accrue to grease the wheels (fees to engineers that no one wants to pay up front, dumpster costs, township fees, inspection feeds, etc. and just other small things that fall between the cracks. Had this been a simpler project with a better capitalized and competent contractor, who was coming in to do basic contractor work, a 203k might have worked fine.

I am in a race now to get this job finished and get it refinanced. I am hoping to be living there by this fall, can get my girlfriend in there to help with rent, and then take a breather. 

The lender confirmed only one draw came out so far. No materials disbursement. Imo, he’s had a tremendous incentive to do this job. There’s money to be made by everyone participating. But I think the scope was too large for him or he didn’t have money for putting the funds up front. He also made a few mistakes in communicating with me, like asking if I got the draw check. If he was an experienced 203k contractor he would have known that he gets it. So maybe this is why he didn’t request materials expenses, he didn’t know to.

I’m a project manager at my day job, which is the only reason why this project hasn’t died. Had I been just someone who was hands off and wanted this to get done.....I don’t know how what would have happened.