I'll cut right to it. Im trying to walk myself through the BRRRR method while using an FHA (203k most likely) to fund my first property. Once that's done, and I refi, how will I be able to pull out enough $$ for the second property?
Since banks will only give the ~75% LTV and I won't have the full property equity (from the small down payment on FHA). Will I just have to wait until more of the mortgage is paid off before being able to pull out a decent amount of money for the second property?
FHA 203k loans use an as-repaired appraisal and will underwrite the loan based on the ARV. You more than likely won't have any equity in the property to BRRRR it since the FHA loan amount will likely be near or equivalent to the appraisal you'd get when you tried to refinance into a conventional loan.
In a traditional home purchase transaction, a lender requests an appraisal to determine a fair market value of the home. The appraiser provides a professional estimate of the value of the property and land at the time of the transaction. This type of appraisal is often called an “as-is appraisal.”
The total amount of the 203K loan is determined before the repairs or renovations are made. Lenders need a professional estimate of what the fair market value of the home will be after repairs are completed. They request what is called an “as-repaired appraisal.”
To give a general picture of how the as-repaired appraisal fits into the process here’s a very basic look at the steps involved in a standard 203K loan:
- 1. The borrower selects a property, a lender, a 203(k) consultant and a general contractor.
- 2. The lender pre-qualifies or pre-approves the borrower, and determines that the property is eligible for a 203K loan.
- 3. Working with the consultant and the contractor, the borrower submits a document that specifies all repairs.
- 4. The lender requests an appraisal. The appraiser reviews the all of the documents, as well as the actual property, and provides an “as-repaired appraisal” – an estimate of the fair market value of the home after it has been repaired.
- 5. The lender then calculates the loan amount, including the maximum renovation amount and the maximum mortgage amount, and proceeds to underwrite the loan.
Depending on how fast/slow real estate in your area appreciates, that will determine when you can refi and repeat. In the Phoenix area, we currently only need about 6 months and there will be a ton of equity to do the BRRRR.
Also pay attention to IRS Topic 701 which would allow you to get up to $500k of profits from real estate tax free.
And don't forget that FHA requires you to live in the property as your primary residence for a minimum of 1 year.
The great thing about the 203k is that is creates value through forced appreciation from the rehab and not relying solely on the market to appreciate.