Will BRRRR Strategy Work With a 203k loan?

Question

Essentially, the BRRRR strategy is where you buy the home, repair, rent, refinance, and repeat the process. I'm sure you all know this.

For my source of funding for the house repairs, I am considering a 203k loan which wraps up all repair costs into the mortgage.

Let's say I get a house valued at $90K for $60K plus $10K for repairs. My 203k loan will be somewhere around $65K after down payment is subtracted.

In the BRRRR strategy, it appears people get regular loans, pay for rehab out of pocket, and then refinance to get their out of pocket costs back. Would this strategy work for a 203k loan since rehab costs are already in the loan?

Kyle J. · Answer

You can't use a 203k loan if you are intending to rehab and then rent the property.  That loan is intended for an owner-occupant.

Nicole Jones · Answer

Sorry to provide no useful information on this but I am curious about what 203k financing is? Am I reading this right? Initially I though you meant you were financing 203 thousand which didn't make sense with the other numbers involved. After reading the responses it looks like this may be the name for a type of FHA loan? Can someone please explain? Thank you in advance! And good luck Kim...

Kim Giannola · Answer

@Nicole

An FHA 203k loan is great for someone starting out with little cash to put down.  The down payment requirement is 3.5% and the interest rates are excellent, last I checked a few weeks ago 3.375% with good credit.  You are also able to borrow rehab money and roll it into your mortgage, which will allow you to qualify for properties that would not otherwise pass FHA criteria.  The only downside with FHA loans now is that they have PMI for the life of the loan.

I used a 203k for my primary residence which is a triplex.  I'm past the 1 year mark now but still live there.  If you have more questions feel free to PM me.

Kim Giannola · Answer

@Nicole Jones

Yes you can refinance later on if you like.

Kim Giannola · Answer

Keep in mind that at 3.5% down you are starting out with very little equity.  You are assuming that only $10k in rehab will bring your house up to an ARV of $90k.  Have you done all the numbers calculating ARV?  And have you accurately estimated the rehab costs?  If you want to refinance out of an FHA loan into conventional the broker will require at least 15% equity on an owner occupied 2-4 unit.  You also will not get as sweet of an interest rate on conventional either.  Again you will still need to occupy the property.

J Scott · Answer

It's against FHA rules to use a 203K loan for an investment property.  203K is only for owner occupied properties.

Adam A. · Answer

@Austin Hughes Did you ever end up doing this with the 203k?  I'm looking at doing this same concept, with a 2-4 unit and a 203k so I can force appreciation.  Have been trying to find as much info on 203k projects in the last several months, and would love your input and to hear about your experience if you managed to do this. Send me a message, if you wouldn't mind!

John Powell · Answer

consider a Construction loan if you are financially stable with a good full time job. i was considering 203K but the fees were very high so i was able to go with a construction loan which had no hoops to jump throught. this was done through a local community bank. literally all I had to do to get a draw was tell them how much.

David Shapiro · Answer

I used that strategy on a Fannie Mae foreclosure. It may not have been a 203k loan, it might have been a HomePath specific program, but it allowed me to wrap the repairs into the loan. The downside was that as an investor I had to put down 25%. It allowed me to do the deal with a little less out of pocket compared to purchasing with a conventional loan then using cash to rehab. The downside was the bank required that all draws be paid to a GC that I had identified and contracted prior to closing. The GC cost me a couple thousand dollars.

When it was all done the house appraised for $20k higher than my all-in-cost and it cash flows nicely every month - which is partly because I put down 25% :/  Unless it's a killer deal I would avoid such large down payments, hurts cash-on-cash return.

Will BRRRR Strategy Work With a 203k loan?

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