Potential Strategy Advise

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Potential Strategy Advise

Gregory Mizzi
Member since 2020 · 12 posts · 1 vote

TL;DR: I want to buy a fixer-upper with an FHA/VA loan for 0%-3.5% down, force appreciation through renovations, then sell after a year and use the profit as the 20% downpayment on a conventional loan then BRRRR. Is this a good idea?

Hello everyone,

I recently introduced myself the intro group and mentioned a strategy I was considering. Long story short, I live in NYC but plan to move. I want to BRRRR but I do not have 20% saved (not including my investment portfolio, which I do not want to blow on one investment). I did some practice analyses and determined that an FHA or VA loan would not work for a BRRRR. There is not enough money left to cash out. I was thinking of doing a "long-term" flip, whereby my first home would be a fixer-upper purchased with an FHA or VA loan (my wife is a veteran), live there for a year or so as I look for other properties. And instead of a refi, I would sell, hopefully realizing all the profits of the appreciation (minus closing and agents fees, etc.) instead of the refi's 70-80% LTV. The thought being that I can use the profit as the 20% down on another fixer-upper and BRRRR from there. I consider this over a typical flip since I have no experience and hard money loans are more risky. So far, I have not been able to think of any downsides that are within my control. I do not think I would be violating any loan terms, and provided there is not a significant decrease in home values, I think this could work. The only downside would be the mortgage payment vs. an interest-only loan, but I would be living there for at least a year so it makes little difference to me.

Does anyone see any potential issues with the initial strategy?

Thanks!

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Brandon RushPro Member
Real Estate Agent · Portland, CT · Member since 2019 · 761 posts · 849 votes
5y

Hey Gregory,

It's great you are trying to determine your strategy now. From what you wrote, it looks like you would be betting on appreciation to build enough in one year to get you enough money to sell the property and use the funds to get 20% down on the purchase of the next property. To be blunt, this is not going to work. While homes have appreciated rapidly over the last year, this was a fluke caused by COVID. Hoping for appreciation is what you are doing here and that is not a good strategy.

Instead of buying a property and hoping for appreciation, here are a few options you have:

* Use your VA loan to purchase a multi-family home. While it may or may not appreciate over a year, you have a much higher chance of building funds via cashflow or cost of living savings. Example, if you currently pay $1,200 in rent now per month, by occupying a 3 or 4 family you could now save up that $1,200 a month for a total of $14,400 a year. In two years you have saved up $28,800 and there is your down payment on the next property

* Purchase a single family home with a FannieMae homestyle loan. This loan will allow you to purchase a single family home and build the rehab cost into the loan. You will have to occupy it for a year (I recommend two years to avoid capital gains tax) and then you can sell and put those profits into something bigger and better.

* Purchase a multifamily that needs rehab with a FHA 203k loan. Similar to the homestyle loan, this loan allows you to purchase the property and roll the rehab cost into the loan. The difference is this loan can be used for multifamily properties up to 4 units.

* Lastly, an additional option on top of purchasing a multifamily home with the VA loan in your wife's name is purchasing another multifamily property in your name using a first time homebuyer program (assuming you do not own any properties). This will allow you to purchase a multifamily with as little as 5% down.

I hope this helps. Feel free to reach out if you need any help or clarification.

Good Luck!

Podcast Guest on Show #221
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  • Brandon RushPro Member
    Real Estate Agent · Portland, CT · Member since 2019 · 761 posts · 849 votes
    5y

    Hey Gregory,

    It's great you are trying to determine your strategy now. From what you wrote, it looks like you would be betting on appreciation to build enough in one year to get you enough money to sell the property and use the funds to get 20% down on the purchase of the next property. To be blunt, this is not going to work. While homes have appreciated rapidly over the last year, this was a fluke caused by COVID. Hoping for appreciation is what you are doing here and that is not a good strategy.

    Instead of buying a property and hoping for appreciation, here are a few options you have:

    * Use your VA loan to purchase a multi-family home. While it may or may not appreciate over a year, you have a much higher chance of building funds via cashflow or cost of living savings. Example, if you currently pay $1,200 in rent now per month, by occupying a 3 or 4 family you could now save up that $1,200 a month for a total of $14,400 a year. In two years you have saved up $28,800 and there is your down payment on the next property

    * Purchase a single family home with a FannieMae homestyle loan. This loan will allow you to purchase a single family home and build the rehab cost into the loan. You will have to occupy it for a year (I recommend two years to avoid capital gains tax) and then you can sell and put those profits into something bigger and better.

    * Purchase a multifamily that needs rehab with a FHA 203k loan. Similar to the homestyle loan, this loan allows you to purchase the property and roll the rehab cost into the loan. The difference is this loan can be used for multifamily properties up to 4 units.

    * Lastly, an additional option on top of purchasing a multifamily home with the VA loan in your wife's name is purchasing another multifamily property in your name using a first time homebuyer program (assuming you do not own any properties). This will allow you to purchase a multifamily with as little as 5% down.

    I hope this helps. Feel free to reach out if you need any help or clarification.

    Good Luck!

    Podcast Guest on Show #221
    3Reply
  • Paul Welden
    Real Estate Agent · Tempe, AZ · Member since 2011 · 1k+ posts · 543 votes
    5y

    If you live in it as your primary residence for at least 2 years during the previous 5 year period, you can get all your profits tax free up to $500k, but if you sell it before 2 years, you will pay tax on your profits.

    IRS Topic 701

    VA Loan - difficult to buy a fixer-upper since VA suspended their rehab loan option back in April 2020

    FHA Loan - doing the 203k with only 3.5% down is a great way to go with minimal out of pocket cost.

    1Reply
  • Gregory Mizzi
    OP
    Member since 2020 · 12 posts · 1 vote
    5y

    @Brandon Rush I see what you are saying. Thanks for the detailed response. I should clarify, what I mean by appreciation is forced appreciation. I aim to take an undervalued property and raise to market value (maybe even just over it) similar to the BRRRR strategy, only I would sell it rather than refinance to extract my money. I am certainly not counting on appreciation over time.

    I am open to a multifamily if it is within my budget, especially if it in need of some work and is under market value. The rental income would certainly help to build a downpayment over time. My only concern is that it would be too slow for certain markets, depending on where I move to. Currently, I am looking at Denver, CO as my current job is opening a new office there. With that said, I think the single family home route might be the most readily available option at a more favorable price since this would be my first property. But I will cross that bridge when I get there.

    @Paul Welden The tax benefits of waiting an additional year sound great considering I cannot use the 1031 Exchange for a primary residence under normal conditions. If I combine that with a multifamily with rental income + forced appreciation that could work. Something to think about. I also do not plan on buying anything soon, so the VA rehab loans may be reinstated by the time I would be looking to buy, however I am not counting on it.

    Also, I am under the impression that the 203b are a nightmare to work with and that contractors, by and large, do not like working with buyers who use them since it takes (in my understanding) forever for them to get paid. Would taking out a hard money loan to cover the rehab costs be okay, whereby I would use the 203b money to pay the hard money lender (and paying the interest difference if necessary)? I presume that the 203b money goes to me then I pay the contractor. However, if it goes to the contractor directly that could pose some logistical issues. Though, I work with contractors at my job so it would be something to discuss.

    0Reply
  • Paul Welden
    Real Estate Agent · Tempe, AZ · Member since 2011 · 1k+ posts · 543 votes
    5y

    @Gregory Mizzi The contractors that can cause the 203k to be a nightmare are usually the ones who don't know how the 203k works. That's why I always use and recommend contractors with the designation as a . Difficult to go wrong with someone who's been educated and prepared for the 203k and most likely has more experience with the 203k than others. 

    The 203k does not take a long time to pay the contractor. That's a HUGE misunderstanding. Also, the money to pay the contractors does NOTgo to you and then you pay the contractor. The money is usually paid via a 2-party check mailed to the subject property and then you sign it over to the contractor. Although there are other ways to get the money more efficiently and pay the contractor faster. 

    You'll also need a 203k-experienced lender. HUD has 2 databases of lenders where you can search for the ones with the most experience with 203k's.

    And hire a good Buyer's Agent Realtor who is NOT afraid of the 203k. They don't have to know a lot about rehab loans .... just not be a afraid of them. 

    1Reply
  • Gregory Mizzi
    OP
    Member since 2020 · 12 posts · 1 vote
    5y

    @Paul Welden I just looked up the difference between the 203b and 203k. Good thing you mentioned it because I only ever heard of the 203b, which I now know is a bit different. So yes, 203k is what I would look into using. And good to know that there are contractors and other professionals who know their way around the loan. I have read posts on here about how difficult it can be. I just need the right professional

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