203k loan on 4plex or first primarily investment property?

Question

I am very new to the concept of real estate investing having never done a deal before, but i think that can be an advantage with the right plan. I have heard from a few people that your first investment property will require a 25% down payment with a traditional loan, while I could get a 203k loan at 3.5% for a 4plex as an owner-occupant and if I understand correctly after 1 year move back out and lease the fourth unit. My questions are: If I do the 203k loan will the next loan I take out only require the 20% down payment?  If I have the 203k loan out will I be able to qualify for a conventional loan with the debt to income ratio stipulation? (I see it as good debt that I have leveraged from a bank and someone else is paying off, but will another bank see it this way?) Is there anything that I have missed in my findings?

Perry Farella · Answer

Just add a bit more on 203k. I have used it for repeat clients on 4 unit property. He bought a 4 unit and added into the same mortgage funds to rehab with 3.50% down. Then when all done he refinanced out of the 203k into a conventional INVESTMENT property loan since he gained to 25% equity. Yet he still lived there but did the new loan as Investment property so he could , legally and ethically do a new 4 unit with a 203k to repeat the process. Meaning he will in fact move into the second 4 unit once its all rehabbed. That way his lender, myself and my company could do a new 203k with him as owner occupier and the first 4 unit is now refinanced with an Investor loan which is a higher rate freeing him to get a new 203k and repeat the process.

A 203k is great because you get to use 75% of the future projected rents form the other 3 units to qualify for the loan you need; you get to use the future, finished rehabbed value off paper to approve the loan prior to any rehab work done; you get to be mortgaged to 110% of the future value if need be to approve the loan.

I write a blog called rehab Dollars & Sense about 203k and the companion Investor loan called Home Style. Im happy to answer any questions.

John Leavelle · Answer

Howdy Account Closed

Using the 203K loan is an excellent way to get started investing.  I've seen many BP members use this strategy.  You have a good chance to have positive Cash Flow on a 4plex deal even while living there.  Are you looking at properties that need significant Rehab/Upgrading?  Make sure you develop a good ARV (After Repair Value) based on recently sold comps.  As you mentioned a conventional loan may require 25% down payment.  So if you refinance you will need at least 25% equity in the property to act as your down payment.  You will be starting out with only 3.5% in equity (you 203K down payment).  I doubt you will be able to gain the additional 22.5% within one year with mortgage payments.   The good news is you should be able to Force appreciation with the Rehab/Upgrading you will be doing.  The the key is you must buy the property at the right price (below Market Value and your ARV).  If your purchase price is at or close to the Market Value you will not be able to Force Appreciation (no mater how much money yopu put into the property).

Always keep analyzing your property for Cash Flow throughout  the process.    Know what the Rental Market rates are in the area.  How do your rents compare?  Low? High? Average?  With the Rehab/Upgrade you will want to be able to raise the rent.   Your Mortgage payment will obviously change between to two loans.

Regarding the 6-unit property you would not be able to use a 203K loan.  It is only for 1 - 4 units.  You would have to use a Portfolio or Commercial Lender.  You would also need to check to see the county zoning code for the property.  That is different from Tax Assessor.

Account Closed · Answer

@John Leavelle thank you for your in depth insight, I figured the 6 unit property was too good to be true. I am mostly interested in 4 plexs that are in need of minimal to moderate rehab, the current state of the property will probably scare most everyone else away while lowering the asking price at the same time. In my area I have seen a 2,800 sqft quad in need of significant repair go for as little as 95k with completed comps at 400k-450k . I could certainly see the potential but wouldn't know what to do with that information at this stage of the game... I am currently learning about estimating ARV and Rehab costs, but would still bring a professional along to get a good estimate.

John Leavelle · Answer

Account Closed

Some how this post popped back up on my notifications.  Not sure why.  However, I see had an additional question that I did not answer.  Please make sure you tag people in your replies if you need a response.

As far as doing business with friends,  "Sub-contractors ", it depends.  Make sure you maintain a strictly business relationship (permitting, bids, contracts, billing, owner/vender, etc.) outside of the friendship.  Make sure they understand that difference.  Some people avoid doing business with family and friends because of problems that can occur.  I personally use family and friends in multiple capacities.  You may have a tendency to trust them more than a complete stranger.  Just be aware of their professional reputation.

An additional benefit can be networking.  They may know other people you need on your team.  They may find off Market deals for you.  They might even go in as partners on some deals or become Private Money Lenders.  You never know.

John Leavelle · Answer

Account Closed

Find you an investor friendly Realtor (preferably one that is also an investor).  They will be able to help you in a lot of areas.  Also, when you put a property under contract be sure to have an inspection contingency.  Have the property inspected by a professional to determine the condition of the property and the usable life expectancy of major components and appliances.  You can use this report to justify any needed renegotiated price and to determine immediate Rehab or deferred maintenance requirements.  You will be able to establish a more accurate CapEx reserves requirement based on the information.

Account Closed · Answer

@Perry Farella Thank you very much for your detailed walkthrough, I love this strategy. I am finding it hard to find multifamily properties that would be good to owner occupy in my area but I will persist. Given your experience and the fact it could be several months before I can find a good deal to work this strategy on do you think I should get pre-qualified for a loan or wait until I have found the deal? I have heard that a 203k loan can take quite a bit longer to navigate and might make me less favorable to a seller who has a more conventional offer on the table. When accounting for the potential rent income would my current W2 job be a hindrance? Before taxes I am only making 22K a year in an expensive market. Thanks again and any advice is greatly appreciated!

@Michael Cohen Thank you sir, wish I had known the benefits of investing in real estate before I got into photography. My assets could have paid for all the camera gear I have 10x by now.

Account Closed · Answer

I actually put this ad on the marketplace and got a few very promising leads that I am currently following up on. I really appreciate your advice. I have a good friend that I went to high school with that is a subcontractor for his dad, from what I've seen on social media they do really good work and it looks like they have done rehabs (possibly for investors) in the past. From your experience would it be a good idea to mix past friendships with current business that way, or is it better to look elsewhere for a contractor? I don't think it would put a strain on our friendship (but everyone says that right)

Richmond Virginia Real Estate Agents/ Investors Proposition

I am looking to learn from experienced investors in Richmond Virginia who are also Real Estate Agents. While I am new to investing I am not new to photography and would love to work out a deal with someone who has experience in locating, evaluating, purchasing, and managing multifamily properties. I would like for my first investment to be a house hack on a 203k loan within the next 6-12 months and would benefit greatly from a local mentor. I understand that time is money and while I don't have much money I can save you some when it comes to photographing your next listing or rental property.

A sample of my portfolio, I look forward to pouring as much passion into real estate as I have with Photography.

Account Closed · Answer

Hmmm, sounds like it might work then. I'd guess there would have to be full disclosure and if the lender was willing to work with me could end up being an excellent investment.

Account Closed · Answer

@Michael Cohen Thank you, and i figured that's what you meant. Basically just jumping from home to home over the course of a few years while building a portfolio with each, sounds like an amazing strategy to me. Would there be any instances where this wouldn't work? For example one of the houses I am analyzing (mainly for practice right now) is on one parcel ID number but consists of a SFR a Duplex and a Triplex (6 units in total). Under the tax assessment it is classified as a SFR. Would something like this slide or would it be disqualified as an apartment complex?

203k loan on 4plex or first primarily investment property?

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