Will BRRRR Strategy Work With a 203k loan?

15 Replies

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?

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.

ask your bank.  

I have a good relationship with my bank and they will lend me the money for a rehab but keep the rehab money in escrow and release money as they see work being done.   Of course as long as the property appraises for the right price. 

I am a commercial customer though.  No way this happens with a residential account. 

Yes, you would have to live on site for at least a year before you could rent the property and probably at least another 6 months before you could refinance. 

Yes, like stated above, FHA is owner-occupant for 1 year.

This Would work one multi (4plex) live in 1, rent the other 3. You could 203k financing for the rehab as well Up to 35k.

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.

Edit: I forgot to start out by saying that it would have to be a 2-4 unit property for the "rent" R of the BRRRR.

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...

@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.

Thank you for the answer Kim. This is great news for me as I'm interested in investing in more multi-families. I currently live in my duplex as well. I think it's a great long term strategy. The PMI is a bummer. Does this mean that there is no possibility if refinancing later to avoid that? I will PM you as well... thank you again.

Thank you all for the input.

I am working with a smaller mortgage bank specific to Texas clients only. I originally knew you had to be owner occupying it to get a FHA loan of any type, but when they found out my credit isn't showing up yet, and I will have to have my mother sign the mortgage, they said the only difference would be a larger down payment. They said nothing about not qualifying for 203k anymore. Maybe they will also consider including rehab costs in an escro account.

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.

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. 

Medium hhs llc documents logoJohn Powell, Herk Home Services LLC | [email protected] | (850) 684‑2188