Is it possible to combine the FHA 203k and the BRRRR strategy? I understand you can use this loan to make household repairs but to what extent?
Hey @Mike Sola ,
203K loans are great if its your first property. The good far out ways the potential negatives. There are 2 203 loans which is the 203B which is mostly cosmetic renovations not allowed to move any walls is really how they define it. Then the 203K which is much more in depth and larger rehabs like additions or rebuilding parts of the property. The contractor does in fact need to be approved but its based on the cost of the rehab. Its a very good product to use if you want to get your foot in the door. Remember you don't need to hit a home run on your first deal. If you eliminate your cost of living (rental expense) you are still essentially making that money every month anyway.
They aren't a BRRRR tool because the purchase price and rehab is calculated together in the appraisal.
Hopefully that helped out a bit. Reach out if you have any questions.
@Maxwell Fontaine Lets say I have a house that needs rehab for 70k and I agree on a purchase price of 50k. The house needs 20k in repair. The loan I would get would be 70k + any admin cost correct? And I would only require a down payment of about 5%? Let us say I get this deal, and a year later I get an appraisal for 110k. Could I then not do a cash out refinance as I would from the BRRRR strategy and come out with extra cash?
Yes, you could technically BRRR if you increased the value of the property. If you refinanced as a primary residence and the LTV was at least 80% you would now eliminate mortgage insurance as well. FHA mortgage insurance is on for the life of the loan, so refinancing conventional at 80% or greater will allow you to eliminate this. Your LTV will depend on if it is a cash out refinance or a refinance and, if it is a SFR or a MFR as well as if you are still residing in the property or not. If there is enough value there you could pull out cash.
@Mike Sola it's my understanding that the renovation loans work slightly different than it seems you think they do. Typically an appraisal is done before the loan is approved/finalized and that appraisal includes the value of what the property would be worth after the fact. So they would say "right now the house is worth X but after proposed repairs the property would be worth 110K." Based off of that they will give you a loan for the amount that the repairs cost to get it to that point = ARV-home purchase price. So in this case if you bought it for 50K and the ARV is 110K then you can get a renovation loan for the difference of 60K. If you use your numbers in your example then you would have 70K in loan value, but the 5% down, or the down payment expectation, is based off of the total loan amount, not just the purchase price of the property. So it would be 5% of 70K instead of 5% of 50K.
Those are just slgiht changes to the way you were thinking about it but they are good to know. With a 75% or 80% loan to value ratio you would be able to pull out $110,000*80%=$88,000 - ($70,000-5%down payment) = $21,500. Typically the more serious renovation loans have a higher interest rate so it would likely be a good idea to refinance =).
Those numbers seem like a dream scenario so just make sure you do the numbers a few times and get a few opinions for the ARV, the cost of repairs, etc before committing.
@Andrew Webber Thanks for the help! I understand it a little bit better now
@Andrew Webber So it seems like I can still apply the concepts of the BRRRR method with this financing option (assuming the numbers work out)? With the numbers you presented, I would still be able to get my initial cash out plus some profit.
Hey @Mike Sola
@Andrew Webber is correct. The appraisal is done beforehand because you will have to get approved for the construction portion of the loan which is based on that appraisal. If you do find a property that will appraise for 110k and the rehab is actually only 20k and your purchase is 50k. WELL SIR YOU HAVE A HOME RUN. You just bought yourself a "free" house. The down payment is only 3.5% BUT once you add in the closing costs and all that you are close to 5.5% so just keep that in mind. Like Andrew said it is based on the 70k. Some technical notes if you do have a property like this example, you need to keep the FHA loan active for 6 months before you can refinance into something else.
AND you need to live in it to some capacity while using the FHA product. These are the reasons why i was saying its not friendly to the BRRRR strategy that some people follow to the T but yes it can be done.
I hope that helped a bit more.
@Maxwell Fontaine thanks Max! I know it won't be perfect but I am letting the imagination run trying to be creative. I think it would be a win/win. Let us say I don't get a higher appraisal, I still have a cash flowing house with a minimum down payment. Best case, I get my initial investment back + more. I rather try and fail then never try at all.
@Mike Sola speak positively. If you are buying a multifamily dwelling its nearly never a bad move with an FHA. Congratulations on deciding to go that route. If the tools are there to use... USE THEM just know how first. Get a game plan together and a contractor that you'll be working with (they need to be licensed and insured) and you will be on your way. If you have someone in mind that you want to work with and they need insurance let me know and I will help out as much as I can. They need both in order to qualify for the FHA product.