Real estate investing in San Diego.
San Diego, CA · Member since 2020 · 17 posts · 10 votes
Real estate investing in San Diego.
Most Popular Reply
Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votesThe FHA typically will not finance the best BRRRR candidates.
@Mark Frattini is correct that RE has poor to negative initial cash flow. This is more so with the extreme high LTV of FHA loans. Eventually the rent increases will create good cash flow until value is extracted and then the cash flow situation resets (back to poor).
If you have confidence of your BRRRR skills, you could use conventional OO loan and have more opportunity to purchase the more thrashed properties (conventional still has limits as it must have a kitchen, furnace, etc.). Note with the refinance, a moderate successful BRRRR traps 10% of ARV. An outstanding BRRRR (probably should not expect outstanding on the first try) would extract all of the investment. In this case you end up with even less invested than the high LTV FHA loan. In addition, you have added a lot of sweat equity which helps with the initial return. This immediate boost to initial return gets you over the period where the cash flow is terrible.
I would recommend someone starting out combine multiple concepts. I would purchase a detached duplex (duplex does not have same sustainment rules as a triplex) that is in need of a rehab to house hack. I would live in the unit in more need of rehab and rehab in place. When the rehab is complete, I would rent at top of market (it has just been rehabbed) and move into the other unit. I would repeat the process on that unit. When both units were rehabbed, I would refinance to lower my investment amount to ideally less than 10% of the new increased value (the ARV). Definitely refi before moving out due to better terms for owner occupied.
Good luck
6 Replies
- Real Estate Agent · San Diego, CA · Member since 2014 · 338 posts · 176 votes5y
Cash flow opportunities are tough but not impossible here. House hacking works really well for some investors. Buy a single family or a duplex and live in one of the bedrooms or in one side of the duplex and rent out the rest. Reach out and we can discuss further.
- 5yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
The FHA typically will not finance the best BRRRR candidates.
@Mark Frattini is correct that RE has poor to negative initial cash flow. This is more so with the extreme high LTV of FHA loans. Eventually the rent increases will create good cash flow until value is extracted and then the cash flow situation resets (back to poor).
If you have confidence of your BRRRR skills, you could use conventional OO loan and have more opportunity to purchase the more thrashed properties (conventional still has limits as it must have a kitchen, furnace, etc.). Note with the refinance, a moderate successful BRRRR traps 10% of ARV. An outstanding BRRRR (probably should not expect outstanding on the first try) would extract all of the investment. In this case you end up with even less invested than the high LTV FHA loan. In addition, you have added a lot of sweat equity which helps with the initial return. This immediate boost to initial return gets you over the period where the cash flow is terrible.
I would recommend someone starting out combine multiple concepts. I would purchase a detached duplex (duplex does not have same sustainment rules as a triplex) that is in need of a rehab to house hack. I would live in the unit in more need of rehab and rehab in place. When the rehab is complete, I would rent at top of market (it has just been rehabbed) and move into the other unit. I would repeat the process on that unit. When both units were rehabbed, I would refinance to lower my investment amount to ideally less than 10% of the new increased value (the ARV). Definitely refi before moving out due to better terms for owner occupied.
Good luck
- 5yTwana RasoulBusiness MemberReal Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
@Alejandro Romero Best bang for your buck is that fha loan to house hack a duplex. You won't have initial cashflow as Dan mentioned but you'll raise rent each year until you get to breakeven and eventually positive cashflow. But in the meantime you will still have great overall returns even with negative cashflow if you purchase the right duplex and account for appreciation and Principal paydown.
Compass5122 Reviews - Real Estate Broker · San Diego, CA · Member since 2016 · 355 posts · 195 votes5y
@Alejandro Romero, to answer your question. "Where do I start?"
One is mindset, know you have are ready started, you are here. Next, get clear on your goals, and what is realistic within your budget and your desired location.
Is your goal cash-flow? Or is it to reduce your monthly housing expenses, while you capture appreciation and equity?
Many people reach out to me from BP, and are stuck on the idea of cash-flow. Yet it's not really their true goal and motivation. What is yours?
- 5yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Twana Rasoul:
@Alejandro Romero Best bang for your buck is that fha loan to house hack a duplex. You won't have initial cashflow as Dan mentioned but you'll raise rent each year until you get to breakeven and eventually positive cashflow. But in the meantime you will still have great overall returns even with negative cashflow if you purchase the right duplex and account for appreciation and Principal paydown.
I have never used an FHA loan, but I have heard that they are more discerning than Fannie/Freddy (F/F) on what they will lend on. Therefore, I have read that they are not as good an option for BRRRR as conventional financing. To word it differently, F/F will lend on certain thrashed properties that cannot get FHA financing. Have you found this not to be the case? In addition, if the loan is to be refinanced with the BRRRR, the high LTV gets reset by the refinance. So the ultra high LTV of the FHA is leveraged for only the length of time it takes to do the BRRRR process. For a duplex house hacker doing some of the work themselves, this should still be less than a year.
It is my belief that FHA is not as good for BRRRR as F/F, but this is based only on what I have read because I have never used an FHA loan. What do you think? Not the case????
- 5yTwana RasoulBusiness MemberReal Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
The last duplex I purchased I tried to do with fha but the appraiser came back with costly appraisal conditions that would also take more time than we had available in escrow, such as completely repainting exterior stucco and Fascia. I ended up switching to a conventional loan to close the deal. I ended up gutting and completely renovating everything including all major systems.
It really depends on the appraiser but generally for older homes that need quite a bit of work, listing agents who know what they are doing won't accept fha over a conventional do to items that will get called out on appraisal inspection.
Compass5122 Reviews
Join the conversationCreate a free account to reply, vote on answers and follow this thread.