All Forum Posts by: Adam Hermsen

@Adam Hermsen

Kudos for those that can make the 203k work.  Just my two cents...  I think its a costly way to go since you have to work with a single GC.  I'd prefer to hire my own trades and buy my own material, as necessary.  this saves the GC fee.  Plus, there inevitably will/should be an extra cost baked in to handle the extra level of paperwork required for the 203k loan approval.  Then, you have to pay for the 203k inspectors to get your payments...

When you refi into a conventional, remember that for multi-families you generally can't do a 5% down conventional.  For a 4-fam I think its mandatory to 20% or 25%.  You can Google Fannie Mae's regs on this.  So, just make sure you have enough equity or cash baked in so that you can do the rehab. 

Honestly, I've never heard about what happens if you go "over budget." That is, what if you run into problems. This is the same but different reason people shy away from hard money loans (HML). While the are owner-UNoccupied only, cut through lots of paperwork for a higher interest rate for only the 6mon or so that you are doing the reno.

Both, hml and FHA 203k, to me are more advanced options. Each have their pros and cons. Interestingly, the more experience i get and more I look at it, I very much like the hml more...

As with everything, its all about the people.

Not trying to get you down on this, but just trying to point out some of the "cons."  You should know about them otherwise how else can you manage the risk....  Good luck.

For the 203k, get a great team together --- Realtor, Lender, and contractor. 

The Realtor should have an awareness of the 203k, not be afraid/scared of the 203k, know how to write the purchase contract according to HUD guidelines, and know how to "sell" the 203k to the seller and seller's agent.

Lender needs to have 203k experience that you can verify. While any FHA lender is allowed to do a 203k, you don't want to wing it with your lender. HUD has 2 main databases of lenders with 203k experience.

Any licensed, insured, and bonded contractor is allowed to do the work, but the contractor really needs to be properly educated on the paperwork, timelines, guidelines, payment process, different versions of the 203k, etc., or have verifiable 203k experience. There are contractor who have the accreditation as a Certified 203k Contractor which will be the best route to go b/c they've been 203k-educated and had their 203k experience, insurance, license and financials all verified to ensure they have sufficient money to pay for the startup costs ang ongoing expenses associated with 203k's. 

You're only as strong as your weakest link. So, select your partners wisely. 

Buying the 2nd property may be difficult if your income cannot qualify you for both mortgages. You'll probably need to have the 1st property rented out for 1 year before you can use the rental money to offset the mortgage debt. 

Hey Adam - 

This is exactly what I did on my first deal. 

I purchased a really distressed duplex with a 203k loan. Picked it up for $270k, and the renovation was $80k. All in for $350k. 

I ran my numbers and had an idea that it would be worth in the neighborhood of $450k when I was done with it, and also that since it was a two family, one of the units covered just about all of my mortgage payment for that first year of occupancy. 

Renovation was hefty, and took 8 months roughly but once it was done I refinanced out into conventional, getting rid of the ~$225 PMI from the FHA loan, and a few months later moved in with my now wife, and I now rent out both units for cash flow.

A few months later I took out a HELOC on the remaining equity (it actually re-appraised a year later for $500K) and used that money to finance two flix and flip deals I did a year later.

Essentially, I did the househack + BRRRR method in one shot with the 203k. The difference is I just did a fix and flip, not a hold on my next deal, but that's up to you!

The best advice I can give you is that your team is the most important part of a successful 203k. 

Many will try to steer you away from it, simply because they don't understand it. 

But the reality is there are plenty of 203k experienced lenders, contractors, realtors, and consultants out there that will be able to help you. 

The most important one in the bunch is your lender. Make sure to find a loan officer that specializes in these, and they'll help drive the ship for you with vetting out some of the other members. 

A good way to find 203k brokerages in your market is by looking up the "203k endorsement summary". 

It's a list on the HUD website that is updated each month with who is doing the 203k's in every major metro area of the country.

Just search through the list and find the market closest to you, look at which brokerages have done the most in that market, and call them up and ask which loan officers do the most renovation loans at their branch. 

It's real estate's best kept secret because it takes some legwork, but I'm telling you it's worth it.

Good luck!
MP