203k type loan for a shabby duplex?

Question

Hey all,

Looking at a set of duplexes that are currently rented but they're in rough shape. Each one needs about 30k in renovations, but they're "liveable" if you're into the slumlord thing. We have the cash to purchase, but not to renovate immediately. We'd rather use the cash as a downpayment on a creatively financed construction loan. Most banks won't loan on the condition that they're in, and my understanding of a 203k loan is that it can only be used for single family. Any advice?

Andrew Postell · Answer

@Dane Michael Lannon sorry I didn't catch this post earlier but if you are not occupying the property there is not FHA/Fannie/VA renovation loan option that you can use on a duplex.  A 203K loan is an FHA loan product.  You can certainly use it on a 1-4 unit property but you cannot use it if you are not occupying it.  In order to purchase and renovate these properties you would need a different loan type entirely.  A portfolio, commercial, or hard money loan.  You could then refinance into a Fannie/Freddie loan after you complete your rehab - or the BRRRR strategy to be specific.

My recommendation is to post in the state forum that these properties are located in to see if any locals can help you find a lender that does those types of loans.  Good luck!

Dane Michael Lannon · Answer

Thanks for the reply!

These properties are similar--very distressed but likely easy to fully renovate for less than 30k each. My biggest hurdle for the 203k loan is that I'm not intending to live in the property, since I'm in the military and I'm due to leave the area soon. I suppose I might have enough time to file the paperwork, close the loan and then refinance to a conventional loan as soon as possible. Is there a limitation on how long you need to carry the 203k before you can refinance?

Matthew Porcaro · Answer

This is how I did my first deal, I bought an extremely distressed duplex with a 203k loan. I put down the least amount possible (3.5%) since my tenant would be paying the mortgage, not me. I rehabbed the property, replacing all the major aspects (electrical, plumbing, roof, etc) and built in a fair amount of equity ($130,000 all in all). Because the flip gave me enough, I was able to refinance out of the 203k within the first year, and now I moved out and rent both units for $2000/mo cash flow.