Re-finance from 203k to Conventional?

Question

I'm considering buy a 3 family as my first investment property. Thought is to owner occupy 1 unit and rent out the other 2.

(Hypothetical Situation)

149k asking price

130k purchase price

50k rehab

ARV value - need to confirm with my agent, but let's say 220k

I'm just beginning discussions with banks so don't have a ton of knowledge, but figured I'd reach out to see if anyone has any advice/thoughts.

1. 203k loan typically requires 3.5% down, PMI and for you to owner occupy for 12 months - is that correct? Also, is the PMI tacked onto the monthly payments?

2. After 12 months, can I re-finance into a conventional mortgage at maybe 75% LTV, pull out the equity since I've forced appreciation up, get out of the 203k loan and then rent all 3 units?

Really love the BRRRR strategy, so trying to consider my options to kick start my investment career.

Thanks in advance for anyone's insights.

-Joe

John Leavelle · Answer

Howdy @Joe Morelli

You are going to find combining the two strategies (House Hack and BRRRR) is extremely difficult to accomplish.  The primary reason is the low down payment (3.5% initial equity)   compared to the Refinance equity requirements (20% - 30%).  It is almost impossible to push your equity appreciation that much in one year.  Unless you purchase a property that is in very distressed condition.  If you can meet the numbers you have presented then you have a good chance of making it work.

The PMI amount is in addition to PITI (Principal, Interest, Tax, Insurance) payment.  Not sure how it is actually billed.

Joe Morelli · Answer

@Andrew Postell thanks for the info/tips!

Andrew Postell · Answer

@Joe Morelli you have some elements here correct but lets review the numbers a little:

• The FHA 203k loan will lend 96.5% (or 3.5% down) of the purchase price + renovations.
• So if you buy for $130,000 and your renovation is $50,000, then your total price is $180,000.  Which means your "INITIAL" (more on this in a minute) loan amount is $173,700.
• Now the FHA has what is called a "Funding Fee"...which is essentially a tax that you pay...and that funding fee is not brought to closing, but rather rolled into the loan itself.  The funding fee as of this date (it does change from time to time) is 1.75% of the loan amount...which is another $3000 on top of your loan.  So you are really borrowing $176,000.
• All that said because if the After Repair Value is $220,000, then 75% would be $165,000.  So you would need to stay in the FHA loan for a while to refinance.

If you find a deal like this I would still pull the trigger on it but just know that refinancing may not be possible for a while.

Feel free to ask more questions if you need.  Thanks!