203K , sell or keep after rehab ?

Question

Say you can get a 203K loan and a good deal , do the rehab ..... Now would it would make more sense to sell for higher value or keep and take advantage of that low interest rate ( assuming there is not cash shortage for next projects) ?

I know FHA 203K has mainly two advantages, low down payment and low fixed interest rate over time.  Selling after rehab sounds tempting for a quick cash return but I am thinking maybe you will be losing the second advantage which is that low interest rate.

Want to hear from the expert, what are pros and cons of each ?

Jaysen Medhurst · Answer

@Arsalan Augend, it won't be quick. You're required to live in a FHA property for at least 1 year. As with most questions in REI, the answer is "It Depends."

• It only makes sense to hold if it will make a good rental property. Many, many, many residential properties do not.
• You also have to consider the additional expenses of a FHA mortgage: 1.75% up-front mortgage insurance and on-going PMI.
• I don't think rates are really that much better than other residential products, especially not now.
• Lastly, don't forget about your selling costs. You really have get a great deal and build in a lot of margin if you want to sell after your occupancy requirement has been fulfilled.

Paul Welden · Answer

You may want to become more informed about the IRS Section 121 exclusion.

https://www.irs.gov/taxtopics/tc701

If you sell your primary residence within 6 months after owning it, you may be subject to short term capital gains tax.

However, if you qualify for IRS Section 121, you can get up to $500k equity TAX FREE! But this requires you to own the property for a minimum of 2 years. As with anything tax related, check with your CPA for proper guidance. Not to mention that FHA requires the borrower to occupy the property as their primary residence for a min of 12 months. If you get an FHA loan with the intent to sell the property within the first 12 months, you may be committing mortgage fraud.