FHA Residence > Rental Inquiry

[Joe Kern]

Hey All !

Planning to move into my first residence utilizing a variation of FHA or FHA 203k ! My question is, after meeting the primary residence requirement (1 year for example), what is the best process for transitioning to rental investment property? i.e contact real estate agent to list for rent? just looking for some advice, best practice after the minimum residence stay is over with, thanks !

[Matthew Porcaro]

Originally posted by @Joe Kern:

Hey @Matthew Porcaro- thanks for the feedback, great summary thus far ! Couple questions if I may:

1. when you say you refinanced out, did you start off purchasing the home +rehab with a 203K loan? If so, did you refinance cash-out option at 70% ARV? Did the loan require a specific % down payment i.e 3.5%?

2. What was the rehab process like? You mentioned it took 8 months, was that all financed through the loan ? How did you identify a good contractor? 8 months seems like a lengthy rehab but I could be mistaken, were you expected to pay monthly expenses during the 8months? 

Again, thanks for the response and congrats to you and your wife !

Cheers,

JK

Hi Joe - glad it shed some light! To answer your other questions. 

1. I purchased the house for $270,000 with a 203k loan, that allowed me to wrap an additional $80,000 of rehab costs into the mortgage. My all in cost was ~$350,000. After I finished the rehab, the property was reappraised for $480,000, which meant I was in for 73% of ARV, and had 27% equity in the property.

From there, I refinanced into conventional, to get rid of the PMI and the FHA loan off my name. I also got a slightly better interest rate (4.45). I didn't use a cash out refinance for the equity, instead, I use a HELOC that I opened up about a year later after I initially refinanced.

2. The rehab process was probably the easiest part of the entire process for me to be honest. My family has a background in construction, and I had a good contractor that really knew their stuff, so I was confident that everyone was doing the right thing. It just took a while because of a few random hiccups. We had a deep freeze in the winter that meant I couldn't do a lot of work on the house because it wasn't insulated yet, and my plumber mid-job had a heart attack (no joke). That said it probably took a 5 month job to an 8 month job. 

Now, regarding payment during the rehab: my lender had no idea that you can wrap up to the first 6 months of mortgage payments into the mortgage, so you're not stuck paying a mortgage on a house you can't live in due to construction. If you read some of my other posts and blogs, my lender wasn't at all experienced with this loan (biggest mistake I made which I teach others to learn from) so they didn't even let me know this option was available. That said, I was lucky enough to be living with my parents during the rehab, so I was just stuck paying a pretty heft mortgage, but that was really my only real payment each month. It was tight, but I was able to swing it. 

Regardless, I have no regrets, because I've made 100x that amount in equity and cash flow since then. 

Hope this helps!