Questions about 203(k)

[Jaron Klopstein]

Hey BP Community: 

I am looking to begin my real estate investing journey through house hacking utilizing an FHA 203(k) loan. I have two questions about this:

1. 1. I am aware that the FHA 203(k) loan will require me to live in the property for 12 months, which is no problem. However, I see many investors discussing the strategy of purchasing with a 203(k) only to refinance as quickly as possible into a traditional mortgage. If someone were to use this strategy, would they still be required to live in the property for 12 months after securing the traditional mortgage? If not, what is to stop someone from purchasing on a 203(k), refinancing into a traditional, using their new positive equity to secure a HELOC, rinse and repeat without ever living in the property?
2. 2. Does utilizing a 203(k) and building the renovation costs into the loan limit the potential upside equity with the ARV in any way as opposed to funding the renovation with cash or another method?

Thanks so much! 

[Chris Mason]

1. Owner occupied refinances technically require another 12 months of occupancy. Investment property refinances do not. Guess which one has the lower interest rate.

2. Yes, naturally, financing a renovation will lower your equity, simply because the mortgage balance is higher, relative to paying cash for those same renovations. 

Keep in mind I talk about 203k to someone once or twice a week, but only do a couple a year. As a "plan A," these have a very LOW success rate. But not at all crazy to keep the knowledge in your back pocket as a "plan B," in case you stumble into a scenario where it's a model match. Very critically, listing agents HATE 203k and will steer their seller client towards the investor putting 20% down with a hard money loan that can close in 10 days, even if that isn't the highest offer. Most 203k that cross my desk have some combination of being a) refinances of an inherited property or b) off market, where the buyer put some combination of personal work / personal time / personal money into finding it ("hey realtor can you find me a 203k deal? thanks!" isn't going to cut it; not b/c they don't talk to those sellers of beat up properties, but because they become the listing agent when they find those sellers, and see above for how listing agents feel about 203k) and/or c) the buyer has 10+ years of marketing and/or sales experience.