FHA 203k for SF first property?

4 Replies

Hey everybody!

My name is Mike, I'm from southern New Jersey and I have a question about my real estate strategy.

My plan is to buy a SF property in need of rehab. I'm not looking for a huge renovation but something that needs the basics. My idea is to find a property in the 150k range with about 35k worth of repairs. I planned on financing through an FHA 203k loan.

My expenses would be somewhere around $1600 month and I have a friend who wants to move in with me. I would like to occupy the property for a year, then rent it out, and repeat the process.

My main goal in real estate is to eventually buy apartments buildings. I would like to buy and renovate sf for the next few years in order to fund that vision.

So my question is, is this a valid strategy? Would you do anything differently?

Thank you all!

@Michael Macaluso yes, this is a valid strategy. Many people start their real estate investing with properties they live in and keep for later rentals. You also have a Fannie Mae renovation loan out there too that is a little easier to navigate. The FHA 203k loan is very cumbersome but either loan type can work. Just make sure your lender is very well versed and can tell you about the loan in detail. And make sure they offer BOTH 203K loan types. I've attached some quick bullet points on the loan itself below. Thanks!

Other Important Items to know about FHA Renovation Loans

A FHA option to roll renovation/repair work into the loan. Down payment is based on the total of the purchase price + renovation costs. Loan can go slightly over appraised value if the need were to arise.

1.“Streamline Option” – or “Limited Repair Program”

  • a.Total financed rehabilitation costs cannot exceed $35,000
  • b.Maximum Sub-Contracts is 3
    • If more than 3 are needed then a General Contractor will be required
  • c.Repairs are limited to cosmetic repair only. Structural repairs are not allowed, such as room additions, foundation repairs, etc. Pools are also not permitted with Streamline Option

2. Ful lRepair Option

  • a.Minimum of $5,000 in improvements
  • b.203k Consultant is required
  • i.FHA Approved Single Family "construction manager" who oversees and inspects the rehabilitation work from start to finish
  • c.Nearly any type of repairs is allowed (luxury items are not). Pools are permitted.
  • d.Maximum $75,000 in repairs or 50% of the after repair value, whichever is lower

Contractor Approval

  • Contractor must be accepted by Renovation Department prior to final approval and be responsible for the entire project. Multiple sub contractors with multiple separate contracts are not allowed..
  • Repairs/Improvements must be completed by licensed contractor(s) as required by local/state municipalities
  • Repairs cannot be completed by a related or interested party (i.e. relative, real estate agent, seller, broker, etc.)
  • Borrower selects contractor

Contingency Reserves

  • Minimum 10% is required. Can be financed.
  • With “Full” version – 20% reserves if renovation is major – foundation, room additions

Draw Requests

  • “Draws” are funds paid to the contractor after work is completed.
  • For “Streamline” – pictures of completed work is permitted
  • For “Full” – Consultant inspects work
Originally posted by @Michael Macaluso :

Hey everybody!

My name is Mike, I’m from southern New Jersey and I have a question about my real estate strategy.

My plan is to buy a SF property in need of rehab. I'm not looking for a huge renovation but something that needs the basics. My idea is to find a property in the 150k range with about 35k worth of repairs. I planned on financing through an FHA 203k loan.

My expenses would be somewhere around $1600 month and I have a friend who wants to move in with me. I would like to occupy the property for a year, then rent it out, and repeat the process.

My main goal in real estate is to eventually buy apartments buildings. I would like to buy and renovate sf for the next few years in order to fund that vision.

So my question is, is this a valid strategy? Would you do anything differently?

Thank you all!

 This is indeed a valid strategy. You're going to have a lot more questions though. 

So I encourage you to read the new BiggerPockets books on How to Invest in Real EstateEstimating Rehab Costs, and Managing Rental Properties

I'd also encourage you to come out to the Meet-up on Tuesday to connect with other investors in South Jersey, this way you can get some more insights from people who have already used this strategy as well as people who are where you want to be. 

https://www.biggerpockets.com/forums/521/topics/65...

Originally posted by @Andrew Postell :

@Michael Macaluso yes, this is a valid strategy. Many people start their real estate investing with properties they live in and keep for later rentals. You also have a Fannie Mae renovation loan out there too that is a little easier to navigate. The FHA 203k loan is very cumbersome but either loan type can work. Just make sure your lender is very well versed and can tell you about the loan in detail. And make sure they offer BOTH 203K loan types. I've attached some quick bullet points on the loan itself below. Thanks!

Other Important Items to know about FHA Renovation Loans

A FHA option to roll renovation/repair work into the loan. Down payment is based on the total of the purchase price + renovation costs. Loan can go slightly over appraised value if the need were to arise.

1.“Streamline Option” – or “Limited Repair Program”

  • a.Total financed rehabilitation costs cannot exceed $35,000
  • b.Maximum Sub-Contracts is 3
    • If more than 3 are needed then a General Contractor will be required
  • c.Repairs are limited to cosmetic repair only. Structural repairs are not allowed, such as room additions, foundation repairs, etc. Pools are also not permitted with Streamline Option

2. Ful lRepair Option

  • a.Minimum of $5,000 in improvements
  • b.203k Consultant is required
  • i.FHA Approved Single Family "construction manager" who oversees and inspects the rehabilitation work from start to finish
  • c.Nearly any type of repairs is allowed (luxury items are not). Pools are permitted.
  • d.Maximum $75,000 in repairs or 50% of the after repair value, whichever is lower

Contractor Approval

  • Contractor must be accepted by Renovation Department prior to final approval and be responsible for the entire project. Multiple sub contractors with multiple separate contracts are not allowed..
  • Repairs/Improvements must be completed by licensed contractor(s) as required by local/state municipalities
  • Repairs cannot be completed by a related or interested party (i.e. relative, real estate agent, seller, broker, etc.)
  • Borrower selects contractor

Contingency Reserves

  • Minimum 10% is required. Can be financed.
  • With “Full” version – 20% reserves if renovation is major – foundation, room additions

Draw Requests

  • “Draws” are funds paid to the contractor after work is completed.
  • For “Streamline” – pictures of completed work is permitted
  • For “Full” – Consultant inspects work

 Thank you so much for this information, I was unaware of any other loan programs for my situation. This also helps clear a few questions I had.