Can you BRRRR using 203K?

Question

BP, I need your help. I am hearing contrasting thoughts on this....

If I qualify for an FHA 203K loan and I am able to find a property under market value... can I buy it, fix it up, move my family in, and after a year or so do a cash out refi on that home?￼

If I can’t do this, why not?

Thank you!

Jason Polykoff · Answer

@Paul Welden Thank you for the info on the capital gains tax strategy!

Jason Polykoff · Answer

@Whitney Hutten Thank you for the awesome info. Great idea about living in it for two years in case we decide to sell. I am not necessarily planning to use it as an investment, but I want to have my ducks in a row in case we decide to make certain life choices. Anyway, thanks again!

Whitney Hutten · Answer

@Jason Polykoff You should be able to purchase the home and do the repairs with the 203K.  I would plan to live there 2 years before you refinance in case you decide to sell (then you can take the gains tax-free).  However, I think you only have to live there 1 year before you move out and rent.  That said... from what I understand... lenders frown upon people using the FHA product as an investment product since that isn't what it was designed for.  So your lender may not be on board with your plan... But I'm unaware of anything keeping you from doing it though.

Paul Welden · Answer

Yes you can do that scenario but you want to be aware of IRS Section 121 regarding capital gains tax

If you occupy the property as your primary residence for 2 years during the 5 years prior to selling it, you can get up to $500k tax free.

But if you don’t intend on selling it within a couple years, IRAS Section 121 won’t be that relevant.

Check with your CPA regarding tax guidance.

David M. · Answer

@Jason Polykoff

You should have your lender run numbers... although they are the ones that are concerned... you might want to do your due diligence

Jason Polykoff · Answer

@David M. I think I should be ok. By then I’ll have eliminated all of my student loan debt, and will only have mortgages as debt. But, ultimately what you’re telling me is that using the FHA 203k and doing a cash out refi can work. Thank you for the info!

David M. · Answer

@Jason Polykoff

Well, that's new information...  So, your issue is qualifying for the refi.  Yes, that's could be a problem.  Lets face it, each step in the BRRRR method has potential for any multitude of problems.  Unless you wish to provide more financial info, I'm not sure any of could help you.  It is a bit odd at first that you could qualify for the two loans and still have a problem afterwards, but everybody has their own situations.

Jason Polykoff · Answer

@David M. I was told that the bank may not allow me to refi because I plan to keep my current property as a rental and that it will affect my debt to income ratio.

David M. · Answer

@Jason Polykoff

Sure...  What have you heard that says you can't?