All Forum Posts by: Matthew Porcaro

Hey Clayton - 

First off, congrats on using the 203k successfully on your first BRRRR/househack! That's awesome. I got started very similarly!

To answer your questions. 

1. Your underwriter on your next loan is going to see what you're doing. Now, technically, you're moving out of your first, refinanced out, and no longer have the FHA. Lenders will definitely challenge you on this. This loan isn't meant to be a flipping loan you do over and over again, but if you have good reason and are playing by the rules, it can be done. Would it kill you to wait the year before your next one?

2. Again, you can use another 203k to go into another property. But, your underwriter will challenge you on this. Why are you moving so soon? Why would you go from one 3 unit, into another 3 unit for your own home you want to occupy? Does that follow conventional wisdom?

3. Yes, there are a few. The Fannie Mae HomeStyle, Freddie Mac Choice Renovation, and some other oddballs here and there. But those are the most popular products. Those loans generally are similar to the 203k. I'd say the main points that might concern you would be that the HomeStyle down payment requirements rise with the amount of units you want to buy. Unlike the 203k which is 3.5% flat across the units, HomeStyle ranges from 3% down for single family, up to 20-25% down required for 3-4 units. 

I love your enthusiasm to roll right into the next one, but in my experience, just let time do it's thing. Many doors will continue to open for you if you make good deals. 

You won't have to keep leveraging owner occupant loans to the point of flagging lenders from wanting to work with you. 

You have some equity now. Look into combining that equity with some more conventional loan products, or hard money lenders, etc. 

I absolutely love the 203k and the power it has, but ultimately, it is a logistically intensive process compared to other methods. 

Best of luck either way, man. And congrats again!

@Ariel Drilon

On a conventional I’m pretty sure you can do the same thing. Just ask your lender!

I did the 203k and did a refi into conventional immediately after the rehab was completed. It dropped my PMI but also got me a slightly better rate, which is common since reno loans of all kinds have slightly higher interest rates than conventional.

@Ariel Drilon

Hi Ariel -

To start, it seems like your lender isn’t that experienced with this loan. I’d start shopping around more to find lenders that do these day in day out. There’s a number of ways to find these guys. I have a tip where you can find lenders doing the most 203k’s in your market but looking up the “203k endorsement summary”, going to the most recent month, and searching through the document for your market and finding who has done the most in the last month/fiscal year.

To answer your question about occupancy during construction, there is an option in the 203k loan to wrap up to the first 6 months payments into your loan to prevent you paying out of pocket during the rehab. (my lender did NOT know this and I was stuck paying for a house I couldn’t live in - which was fine, but would have been nice to know!)

Regarding running the project on your own, yes, you are in charge of the project at the end of the day. If you use a 203k (or even conventional reno loans like the homestyle) the bank will assign you a HUD consultant or rehab consultant.

They’re beneficial in the sense that they’re basically a referee between you, the contractor, and the bank.

They also help you create a scope of work, that you can then give out to contractors as a baseline for their RFP (bid/estimate)

They come and inspect the contractors work periodically through the project at your discretion, check what progress they made, and then release the funds pro rata based on how much they’ve completed.

You get an objective third party to check progress.

However, you’re still in charge of making sure that your contractor stays on schedule.

@Gerrett Houston

Ideally the process should look like this.

You have some contractors vetted from your personal network, online resources, professional network, to call on once you find a property.

Once you get into contract, first person to step into that property should be a HUD consultant. (Homestyle they're not required, but some banks will require it anyway - I'd argue that you should hire one regardless)

They will create a feasibility study, and an SOR or schedule of repairs.

This document will let you know what needs to be done to the property for it to be up to code + HUD quality standards, and will also list out by line item whatever work YOU would like done.

The consultant will then give you this line item list, which they often accompany by rough estimates of labor + material cost per line item.

THEN bring in as many contractors as you can to walk the property, using the SOR as a bid sheet. Have them basically fill in the SOR with their labor and material numbers for each line item.

This will make sure that the bids are leveled, and things don’t get lost in translation which is very common with people that don’t understand construction.

Then from there, you negotiate and pick which contractor works best for you.

Get the best contractor you can afford. Don’t go for the cheapest price. Cost and price are two different things. Lowest price often costs you more in the long run.

Also, make sure to have a soft start date agreed upon with the contractor. You don’t want to close on the loan then find out the contractor is backed up for 6 weeks.

@Sarah Esposito

I bought a duplex in Farmingdale (Long Island, NY) in 2016.

There’s not a ton of 2-4 units outside of NYC, but they’re definitely out there, and absolutely worth the wait.

I think now more than ever it’s important to only focus on distressed properties and buy with a renovation loan like a 203k.

A lot of stuff on Long Island is getting overbought, and you don’t want to be caught up in the emotional buying.

I’ve been seeing foreclosures on Long Island trickle back online, from all the backup they had last year.

Just set alerts on all of the online platforms for distressed deals and analyze everything that comes into your inbox!

Hey Adam - 

This is exactly what I did on my first deal. 

I purchased a really distressed duplex with a 203k loan. Picked it up for $270k, and the renovation was $80k. All in for $350k. 

I ran my numbers and had an idea that it would be worth in the neighborhood of $450k when I was done with it, and also that since it was a two family, one of the units covered just about all of my mortgage payment for that first year of occupancy. 

Renovation was hefty, and took 8 months roughly but once it was done I refinanced out into conventional, getting rid of the ~$225 PMI from the FHA loan, and a few months later moved in with my now wife, and I now rent out both units for cash flow.

A few months later I took out a HELOC on the remaining equity (it actually re-appraised a year later for $500K) and used that money to finance two flix and flip deals I did a year later.

Essentially, I did the househack + BRRRR method in one shot with the 203k. The difference is I just did a fix and flip, not a hold on my next deal, but that's up to you!

The best advice I can give you is that your team is the most important part of a successful 203k. 

Many will try to steer you away from it, simply because they don't understand it. 

But the reality is there are plenty of 203k experienced lenders, contractors, realtors, and consultants out there that will be able to help you. 

The most important one in the bunch is your lender. Make sure to find a loan officer that specializes in these, and they'll help drive the ship for you with vetting out some of the other members. 

A good way to find 203k brokerages in your market is by looking up the "203k endorsement summary". 

It's a list on the HUD website that is updated each month with who is doing the 203k's in every major metro area of the country.

Just search through the list and find the market closest to you, look at which brokerages have done the most in that market, and call them up and ask which loan officers do the most renovation loans at their branch. 

It's real estate's best kept secret because it takes some legwork, but I'm telling you it's worth it.

Good luck!
MP

@Bob Ross

You can use an FHA loan as long as you move in and intend to make that new property your new home.

If you have other properties, and they pay for themselves and/or your debt to income ratio still qualifies for another purchase with those other mortgages under your name, you can take advantage of the 3.5% minimum down payment that FHA requires.

Hiring a 203k consultant is an important step.

Finding a very experienced renovation loan lender, will help you find a 203k HUD consultant for your project.

The FHA rules are owner occupancy, not first time home buyer. You can use an FHA loan, so long as you move into the property and make it your primary residence, AND you don't have any other active FHA loans (unless in special cases when you do a relocation due to work or a life altering event).

On the topic of converting a single family to a two-family, this is something that is possible with the 203k, but in general it's very hard from a permitting and variance standpoint to get single family conversions approved. 

Single family areas usually are zoned in such a way that does not allow commercial (or multifamily) in the areas. 

If you want to leverage the strategy of turning your owner occupied home into more of an investment/asset by having multiple units and tenants paying your mortgage, I'd focus directly on distressed 2-4 unit properties. 

In general there are way fewer of them on the market, but with patience you'll be able to find something you can build equity into, as well as get cash flowing or paying for itself!

For single family, I'd say that the HomeStyle is probably your best bet. It requires a bit less paperwork, and you don't need to pay PMI upfront like the 203k does (1.5% of loan amount at closing).

A loan officer that specializes in renovation loans should direct you to which renovation loan product works best for your specific situation and financial profile. 

I think your next step should be finding experienced renovation lenders in your market, and starting the conversation with them to get a pre-approval for the program(s) that work best for your goals. 

Hi Israa - 

I can appreciate you taking time off to travel! As a travel lover myself, I'm jealous you got to get some time away and explore, especially right before the pandemic started! 

To answer your questions:

1. Most banks are really going to need to see consistent income for the last two years, FHA or not. Some banks have more leniency than others, but generally speaking they need to see stable income in order to give you a mortgage.

Now, there are things you can do to navigate this. You can entertain bringing on a cosigner or a partner to buy and live in the property with, but these are things that you should discuss with loan officers and see what your next best move is. If you just have to wait, it might not be the end of the world, all though I know what it's like to want to start right away!

2. The underwriters for the loans are going to be looking at your Debt-to-income ratio, that will be affected by that first conventional loan. Unless, you're buying that first conventional property using a conventional rental loan, and are renting that property out for cash flow, and can prove it. But even if you were renting it out and it was paying itself off, banks still want to see a year of rent roll to prove if it's paying itself off or not. 

3. The pandemic has brought many challenges in real estate, but overall, deals are still being done. I know of many lenders, contractors, and consultants in the 203k world and I know for a fact that deals are still happening in every market regardless! As foreclosures start to trickle back into the market later this year, you're going to see many more opportunities to buy distressed deals with 203k's directly from banks. 

If I could make a suggestion, I'd say why not just focus on one deal at a time? If there isn't a huge rush, I'd methodically pick one at a time and keep your focus centered on each deal, to make sure you maximize each one!

I know you mentioned the 203k, maybe focus on the 203k first, find a deal that needs a lot of work and you can build some forced equity into on the renovation portion, then when you're complete with that, use a HELOC or do a cash-out refinance if you're able to with the new equity, and use that money to buy your next deal with a conventional loan, or combined with hard money/private money. (That way you don't need to deal too much with the banks requirements)

Hope this is helpful, either way, good luck!