203k Loan for multi-family first-time homebuyer

Rental Property Investor · Chicago, IL · Member since 2018 · 22 posts · 12 votes

I plan on using a 203k to purchase and renovate a 2 flat that I plan to live in for a year or so. I'd like to BRRR it and use the funds to purchase the next, investment property.

Is a cash out refi or HELOC a better option?

Thanks everyone!

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John Warren

Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes

@Kristina Lugo I prefer the cash out refinance in your situation because this allows you to delete the PMI forever which raises your cash flow substantially. Which part of Chicago are you looking to do this in? Make sure that you have an excellent GC lined up who understands the process and is comfortable working with the 203k loan. Your team will be very important to help you pull this off as your agent will help you find a great deal, your GC will help you stay on budget, and your lender needs to be able to pull off the cash out refinance on the back end. It is doable, but there are a lot of moving parts for sure!

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John Warren
Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
7y
@Kristina Lugo I prefer the cash out refinance in your situation because this allows you to delete the PMI forever which raises your cash flow substantially. Which part of Chicago are you looking to do this in? Make sure that you have an excellent GC lined up who understands the process and is comfortable working with the 203k loan. Your team will be very important to help you pull this off as your agent will help you find a great deal, your GC will help you stay on budget, and your lender needs to be able to pull off the cash out refinance on the back end. It is doable, but there are a lot of moving parts for sure!
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Michael Noto
Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
7y
i agree. I would go with a cash out refi. Get rid of that PMI.
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Tara JenkinsPro Member
Real Estate Agent · Chicago, IL · Member since 2017 · 17 posts · 16 votes
7y
@John Warren Hi! Sorry to piggyback on this question, but I also have a similar question. My Husband and I bought our 2 flat which we house hack about 6 years ago. Between appreciation and work we put into it we definitely have equity in it. We were discussing rehabbing our first level and decided to get a line of credit in order to pay for the rehab. Now, we decided holding off on the rehab and putting the money towards a multiplex. Should I call the bank and switch from a line of credit to a cash out refinance? I don't believe it is too late to do that since we only had our yesterday. Thoughts? We don't have PMI on our current loan.
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Jonathan KlemmBusiness Member
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Contractor · Chicago, IL · Member since 2016 · 4k+ posts · 2k+ votes
7y
@Tara Jenkins - If you Cash out refi you are likely going to increase your monthly payments and will be paying on that right away. If you are ready to deploy the REFI right away that is probably the way to go. However, if you keep the HELOC usually there is no cost and you can deploy it whenever you need it. HELOCs are typically are variable rate loan so if you do not plan on BRRRR ing your multi unit the Refi may be a better move so your rate is locked in.
Both options are great but the answer probably lies in how fast you are planning to move on your next deal. Good Luck!
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Tara JenkinsPro Member
Real Estate Agent · Chicago, IL · Member since 2017 · 17 posts · 16 votes
7y
This helps me a lot. I think I may stick with the HELOC because I'm still learning about investing and analyzing properties. I wouldn't consider myself 100% ready to jump in just yet. I need more knowledge on the financial aspects and analyzing deals. We would like to BRRRR the next multiplex we buy. I would like to close on a deal by the end of 2019, but will need a few more months of learning under my belt.
773-387-9304
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Zack KarpPro Member
Lender · Schaumburg, IL · Member since 2015 · 833 posts · 774 votes
7y
@Kristina Lugo
The answer lies in looking ahead to your next step(s). If for the next property after that you need a low down payment option, then you will need to utilize FHA again. Which means you will have to cash out refi into a Conventional loan to get out of FHA. And you will need 25% equity to do this. So you need to know your numbers on the BRRRRRRRR before you even start.
Strategy, planning, and looking a few moves ahead is very important for house hackers so that you don't just take random people's advice and then get stuck. Make sure you are working with an A-team of professionals that cater to investors and house hackers.
Hope that helps. Best of luck!
847-387-5513
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Kristina Lugo
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Rental Property Investor · Chicago, IL · Member since 2018 · 22 posts · 12 votes
7y
@John Warren thank you John! I didn't think about the benefits of PMI.
I’m working on building a team. I’ve given my agent criteria for the west and south sides of the city. We’ll be meeting for the first time this weekend!
I’ve spoken with 2 lenders who specialize in 203k loan products. One of which has said they don’t do cash out refi. I have a phone call meeting this afternoon to clarify. I’m looking for a lender who cares about my long term goals not just the deal right in front of them.
As for a GC, that’s a work in progress! I’m going to focus on researching how to properly vet a GC as this will be my first time working with one!
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Tim Johnson
Lender · Grand Rapids, MI · Member since 2018 · 703 posts · 446 votes
7y
Make sure you tell the contractor you are doing a 203k loan, they have to be approved or have the ability to get approved. Tons of guys run away from the 203k loan deal because it can be a paperwork nightmare if you don't know what your doing.
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Kristina Lugo
OP
Rental Property Investor · Chicago, IL · Member since 2018 · 22 posts · 12 votes
7y
@Zack Karp
Ok, so here’s a few numbers to illustrate:
- 203k to purchase a home for $50k
- another $50k for the renovations for a total of $100k
- $3.5k downpayment.
- ARV is $200k
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Bob Okenwa
Real Estate Agent/Investor · Peoria, AZ · Member since 2016 · 2k+ posts · 2k+ votes
7y
@Kristina Lugo
Per homebridge.com:
"With a 203(k) renovation loan, you are taking out a loan to finance both the cost of buying the home and the renovation costs.. The total amount of the 203K loan is determined before the repairs or renovations are made. Lenders need a professional estimate of what the fair market value of the home will be after repairs are completed. They request what is called an “as-repaired appraisal.”
To give a general picture of how the as-repaired appraisal fits into the process here’s a very basic look at the steps involved in a standard 203K loan, sometimes called a Consultant K* loan:
The borrower selects a property, a lender, a 203(k) consultant and a general contractor.
The lender pre-qualifies or pre-approves the borrower, and determines that the property is eligible for a 203K loan.
Working with the consultant and the contractor, the borrower submits a document that specifies all repairs.
The lender requests an appraisal. The appraiser reviews the all of the documents, as well as the actual property, and provides an “as-repaired appraisal” – an estimate of the fair market value of the home after it has been repaired.
The lender then calculates the loan amount, including the maximum renovation amount and the maximum mortgage amount, and proceeds to underwrite the loan."
Long story short, the loan you get will be for the ARV of the property based on the repairs you make, so there might not be enough room to BRRRR such a property.
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Zack KarpPro Member
Lender · Schaumburg, IL · Member since 2015 · 833 posts · 774 votes
7y
@Kristina Lugo
Respectfully, those sound like fairy tale numbers. If those are true, you just hit a grand slam. If that were the case, you would be in a great position to refi to a Conventional loan afterwards, with plenty of room to pull cash out as well.
Now let me give you a different perspective. Let's say:
PP = $50K (same property)
Rehab = $75K (you went over budget)
ARV = $150K (didn't appraise as high as you hoped)
In this scenario, you don't have 25% equity at the end. Are you looking to house hack another property? Do you have $10K to bring to the table in order to refi, PLUS have money for the next down payment? And what about the property after that?
These are the tough critical questions that you need to know the answers to BEFORE you even go under contract for that first property.
If your loan officer and realtor aren't working through that same thought process with you, then you're working with the wrong people.
847-387-5513
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Kristina Lugo
OP
Rental Property Investor · Chicago, IL · Member since 2018 · 22 posts · 12 votes
7y
@Zack Karp
I really appreciate this! My loan guy is aware of my strategy for the next deal so we’re working through the options that will get me there.
As for the property, my Reno estimates are definitely low, so I’m going to do my diligence and get a few quotes.
I’m also aware of the emotional side of dealmaking, how badly I want it all to work, but being mindful of forcing a situation I should walk away from.
Luckily, I’m in no rush and eager to do what I need to get this right!
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Kristina Lugo
OP
Rental Property Investor · Chicago, IL · Member since 2018 · 22 posts · 12 votes
7y
@Bob Okenwa
Thanks, Bob. My goal is to find a property that doesn’t require a complete gut. In my price range I’ve found that moderate renovations will get the job done, bring a decent return and the units can rent at market value.
The initial analysis is optimistic, but I get a sense that once I go through the actual 203k process with consultants that the numbers will change, which I'm prepared to accept and not move forward if the numbers don't support my BRRR goals.
Cause gettin the first deal is great but working it line up the next one is even better!
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John Warren
Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
7y
@Kristina Lugo just be very cautious. As @Zack Karp mentioned, it can be very challenging to pull of the perfect "BRRR" on a 203k loan. There are too many moving parts, and the loan itself can make good deals fall apart. I had three clients who made offers on good deals in 2018 using 203k loan products, and only one of the three deals closed... It was sad honestly, as one of my buyers should have closed literally the best deal on the MLS in Berwyn but he overdid his reno budget and then the thing failed the self sufficiency guidelines.
Every day that goes on makes me fall more and more in love with the 5% down conventional loan. It is so much easier to work with, and you don't "strike out" as often.
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Account Closed
Allentown, PA · Member since 2018 · 35 posts · 20 votes
7y
Originally posted by @John Warren:

@Kristina Lugo I prefer the cash out refinance in your situation because this allows you to delete the PMI forever which raises your cash flow substantially. Which part of Chicago are you looking to do this in? Make sure that you have an excellent GC lined up who understands the process and is comfortable working with the 203k loan. Your team will be very important to help you pull this off as your agent will help you find a great deal, your GC will help you stay on budget, and your lender needs to be able to pull off the cash out refinance on the back end. It is doable, but there are a lot of moving parts for sure!
John, can you explain what you mean? So , I’ve heard about cash out refinances, but I am a bit stuck on how it applies with this. A 203k loan allows 3.5 down on the house+ estimated rehab costs, correct? How would one profit on a cash out re finance If the estimated repairs are already built in the original loan? Thanks in advance.
1 Reply
John Warren
Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
7y
@Account Closed you would have to create more value through the construction than the original loan and construction combo. For example, if you buy a property for 200k and put in 50k worth of work, but it is now worth 350k. This would allow you to do a cash out refinance at 75% LTV which would pay of the 250k and also put 16,250 in your pocket.
This is by no means easy... as you can imagine this type of deal is not something you find every day, but I have represented a client who had this type of opportunity. In essence, all of these strategies revolve around creating equity which you can then access through re-financing. This allows you to use the capital to do another deal... and another one, and another one, etc.
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Account Closed
Allentown, PA · Member since 2018 · 35 posts · 20 votes
7y
Originally posted by @John Warren:

@Account Closed you would have to create more value through the construction than the original loan and construction combo. For example, if you buy a property for 200k and put in 50k worth of work, but it is now worth 350k. This would allow you to do a cash out refinance at 75% LTV which would pay of the 250k and also put 16,250 in your pocket.
This is by no means easy... as you can imagine this type of deal is not something you find every day, but I have represented a client who had this type of opportunity. In essence, all of these strategies revolve around creating equity which you can then access through re-financing. This allows you to use the capital to do another deal... and another one, and another one, etc.
Thanks John. Yes, I read more into and realize now that it requires more value than projected. I believe we are starting the downturn of the market cycle. Probably hard to pull off. In your estimation, as someone who is looking to by a property within a year, what’s the best strategy when the market cycles are turning down? (I study economies, etc. just trying to apply to real estate).
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John Warren
Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
7y
@Account Closed there are many folks on here who I feel have more wisdom than me and who have been through this before. I have been buying only properties that cash flow well, and my plan is not to sell any of them when the market corrects in the future. I think this question is more salient for those who will need to sell due to age, life timing. For thus of us with cash flow, a market correction should be a fairly insignificant event for our current portfolio, and it will allow us to purchase new properties at a lower cost!
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