FHA Loan and flipping first house
So please correct me if I'm wrong. But, I have to reside in the house for a year if it is a FHA loan? What if I was to find a house and use the FHA plus 203k loan, then once I'm ready to sell convert to a conventional loan within 6 months of living there. Or would I only be allowed to convert to a conventional loan after living there for a year?
Hello,
If you want an accurate answer then I would ask a mortage broker. If you are flipping did you look into a portfolio loan or a transaction loan. If you have a list of buyers who want turn key properties, then a transaction loan would be best. You would not need to use any of your money.
Hope that helps.
Melissa
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@Rita Templeundefined
@Melissa W.undefined
If you decide to keep an FHA loan I would highly recommend living there for one year. Even if it's a 203K Loan as that is still an FHA loan.
Now you can refinance out of an FHA loan after 6 payments have been made. Just make sure that you have enough equity or some cash to put down especially if you put down 3.5% initially.
I hope this helps and have a great night ladies.
Hi Rita,
If you can qualify for a low interest FHA loan, I would not waste it on trying to flip a property. With a FHA loan you can buy up to a 4 unit property in most states as it qualifies as a residential loan. In a fourplex, you could live in one unit for a year and rent the other 3 and once your year is up rent the fourth unit and probably live there for free and bank the savings to put toward flipping going forward. FHA loans are ideal for cash flow properties if you can qualify for one as your first property. You could even turn this into a medium term flip and sell it after a few years by increasing rents and fixing them up over time. If you are set on flipping properties, it is very cash intensive as you have to pay cash to get a great deal. In these cases, you have to use personal funds/loans or hard money loans to close fast and you have to have the infrastructure in place to flip fast to keep the holding costs down. That means having a reliable contractor and marketing/good Realtor in place to turn the property.
I have used hard money in the past and you have to be confident in your market that you can fix and sell it within a couple of months or the hard money interest will eat all your profits away the longer you hold. Make sure you research areas you want to flip in to make sure there is adequate demand/sellers in the price point you are going to buy and market in.
I hope this helps.
I was hoping to use the FHA for the low down in order to get into a house and then put some some sweat equity into it and sell it within 6 months. Use that to do it again and eventually while doing flips also start purchasing rental properties.
I was thinking that if possible to convert the FHA loan to Conventional in order for me to use the FHA loan for the 2nd house. Is that even a possibility? Am I just wishing? I have lofty goals and really like to have 20 rental properties within 5 years.
Traditional financing is extremely hard to use to flip properties, especially if you want have 20 rental properties in 5 years. The rules get more and more extreme as to how long you have to hold properties and it is hard to buy cheap enough using the slow and cumbersome traditional financing. The nice thing about buying a house you live in, is you can generally change/sell houses every two years and not have to recognize the gains for tax purposes and you can roll it into the next one. People have different ideas as to how flipping is defined and for how long you have to hold the property. If you have to use FHA and live in a property for a year before you can sell it, then 20 properties in 5 years does not seem like an achievable goal. What do I know, I am only a CPA by trade ;-)
I do know of investors that continue to get FHA loans on properties they buy as rentals and they tell the lender they will live there for the year and never do. They are gambling that FHA will never check in that first year or they have the ability to refi out of it if they do. From talking to these investors, they have yet to hear anything from anyone on any of these properties as they are performing notes. Similar gamble to buying properties "Subject To" the first mortgage staying in place. Lenders have the right to execute the Due on Sale Clause, but rarely do on a performing note in stable interest rate climates.
As a conservative CPA investor I have not considered this approach, but real estate is risky and some investors like to push the risk and see what if anything happens. I guess that is a personal and integrity choice as long as they can live with any downside effects.
There's nothing that says you have to keep an FHA loan for a year. You can refinance in to a conventional loan at any. Just be careful that you have a real good fix on your ARV to make your numbers work when you flip since you will have only 3% skin in the game.
I'm sure that once I feel more secure in my knowledge in real estate investing I will probably use other methods in order to obtain those rentals. But, I was just thinking of using the FHA as a jumping off and getting going.
I would think you need to use FHA with a low down as you don't have a lot of funds for a down payment? If this is the case, how would you qualify for a conventional loan to refi out of the FHA since most conventional lenders require more skin in the game and will require more reserves to secure the loan? All of my loans are conventional on my properties and they scrutinize everything from my cash reserves, my income level and needless to say debt to income ratios. They also generally required me to have 25% to 30% equity in the properties. If you are buying using traditional financing, you will most likely be buying at fair market value using the MLS and Realtors, which adds to costs. To flip, you need to buy at discount prices fast for cash.
Using the FHA to buy is great, but it is my opinion it is better utilized for longer hold times as it will take longer to get the value up enough to make a profit. If you can cash flow positive on a rental property with a low down, low interest, FHA loan, you will make more money in the long run. You get positive passive income, depreciation deduction for tax purposes, and hopefully some appreciation going forward. If it appreciates, then take out a HELOC against it and purchase another property while continuing to cash flow the first property. If the HELOC is more than your initial down payment, you just got all your cash out of the property and then some, so you now have a property that is cash flowing with none of your money in it! Rinse and repeat.
Just my two cents.
You may also want to become a licensed Realtor if you plan to flip as this will save you 3% on the sale side and put more money in your pocket. You will also have direct access to the MLS in your area to find properties and put offers in fast on good buys. In Arizona I just had to take 90 hours of classes and the cost was very cheap for entry at a few hundred dollars. I learned so much about real estate taking these classes, especially the legal issues in my state. The alternative is to find a realtor in your area that is willing to add you as an assistant and give you access to the MLS. My hard money lender is also a licensed Realtor and was willing to do this for me when I started, but this was after I built the relationship with him and borrowed from him several times. NETWORKING is the key to this business and you are wise to have started here on bigger pockets ;-)
Best of luck however you choose to proceed.
@Ed Caldwell maybe you know the answer...
I recently purchased a SFH to live in and took title in my LLC. Will this be eligible for tax free treatment as a primary residence after 2 years?
Thanks in advance.