All Forum Posts by: Jesse Byrer

You can absolutely refinance out of your FHA loan and into a conventional loan. No questions asked as long as there is a NET TANGIBLE BENEFIT. In this case it would be most likely removing or reducing mortgage insurance.

Buying the next one has to just make sense. Meaning you are buying the next building to improve the area you live in, closer commute to work, more space. You’ll probably have to provide a “motivation” letter. If you’ve lived in and owned the property for more than 12 months you should be fine. 

Over the years I've worked with clients ranging from first time home buyers to sophisticated investors. My favorite investing strategy is the BRRR technique and one of the most affordable ways to purchase is the House Hack on 3-4 unit multi-unit properties. So lets discuss combining the two strategies! What I want to talk about is using FHA's 203K Program on Multi-Units Properties. I've seen posts on this topic, but I want to highlight the group of buyers that can take advantage of it as well as break down the numbers.

What is the FHA 203(K) Rehabilitation Loan?
FHA 203(b) is the regular FHA loan that allow low interest rates for homebuyers with low down payments and less that perfect credit. One perk with FHA is that it allow as little as 3.5% down on multi-unit properties which is extremely low as it compares to conventional loans. Conventional loans require 25% down for 3-4 units! The FHA 203(k) follows the same 3.5% down payment requirement, but it allows some other major benefits. It's common knowledge that a FHA Appraisal is more stringent than a conventional appraisal. But not with the 203K! You are able to rolling all the improvement costs into the loan making this loan as close to a cash offer as possible when it comes to financing a home purchase.

FHA 203(K) terms

When it comes it investing there a few key components to focus on. Condition of the property, terms of your financing, and property management. The FHA 203(K) checks off 2 of the boxes... after you renovate the property is should be in excellent condition for years to come. When you review the terms of this loan the rate is much lower than anything an investor could get and the loan is amortized over 30 years. I've been providing FHA 203(k) loans for over 10 years now and I never imagined I would be issuing renovation loans lower that 3%. All of this means low carrying cost and high cash flow! Or in the eye of the House Hack, it means you could be living mortgage free.

What are the main benefits of Housing Hacking using the BRRRR Technique on a 3-4 unit property?

Low Down Payment | Low FXD Mtg. Amortized over 30YRs | Instant Equity | Max Cash Flow/Mortgage Fee 

Sample Scenario

4 unit property, purchase price $600,000, Rents per unit $2,500, $120,000 rehab, credit 720, ARV $760,000|6% allowable seller credit | all or a portion of Down Payment can be "gift funds"

Total Cost (est.): $720,000

Down Payment:  $25,200

Loan Amount: $706,959

Rate: 2.875%

P&I: $2,933.12/mo.

Property Taxes (2.5%): $1,250/mo.

Mortgage Insurance: $500.76

Home Insurance: $250/mo.

4 units (renting 3 units): $7,500

Carrying Cost: $8,367.76

Owner's portion of mtg. payment: $867.76

Instant Equity (est.): $40,000

** I realize there are other costs to consider i.e. vacancy percentage, utilities, etc., but wanted to give an example to foster conversation. This strategy may not require a refinance since rates are so low, but, if you want to continue this strategy at some point you'd want to refi into a conventional loan so you could buy the next property using the FHA 203(k) again. Guideline allows 1 FHA loan at at time unless exceptional hardship **

@M T Naughton in my opinion buying cash is the wrong way to do the BRRRR Strategy. The best way to do this is work backwards. When you find a property you like.

Step 1 - Figure out how much it’s with all “fixed up”.

Step 2 - Get an accurate idea of how much it will cost to fix it up

Step 3 - Take 75% of the “fixed up” value minus the “cost to fix up”. That is the number you’ll want to offer.

If the offer is accepted you’ll want a loan for 100% of or 75% of the future value.

What this allows you to do, and the main reason you want a loan vs. paying cash. Is once the rehab work is done you no longer have to wait 6 months (there will be no waiting period), but you’ll also get a lower interest rate on your final loan because you’ll be now being doing a rate and term refinance instead of a cash-out refinance. It’s different and rates are higher on a c/o refi.

I'm a lender and a BRRRR investor and 100% believe this is the best way to quickly build a real estate portfolio.

Good luck!!!

@Garrett Tierney this was Northern DG. It was on Belmont so that was one of the reasons I got the property at a discounted price. It’s a 3/2 with and extra room in the basement. Tenants are using it as a 4th bedroom. It’s 1100sq ft in 1st floor and another 1100 at the basement level.  

Investment Info:

Single-family residence buy & hold investment in Downers Grove.

Purchase price: $135,750
Cash invested: $75,000

This was my recent BRRRR Transaction. Bought it in Feb. of 2020 for $135,500 and put about $65k-$70K in rehab costs with another $5K-$6K in carrying costs. I had the deal financed for $200K so my out of pocket is around $10K. I was able to rent it out immediately and it cash flows $750 a month. When I closed on the refinance and it appraised for $275k so now have $65k of instant equity. Working on my next rehab now!

What made you interested in investing in this type of deal?

I feel its the best way to invest unless you have a bunch of extra cash you can afford to leave it the deal. When done right you have little to no money in the deal (or recoup it within the first year) and you have instant equity. This affords you the flexibility to you need as a real estate investor.

How did you find this deal and how did you negotiate it?

I find most of my own deals.... it was a foreclosure deal I found on the MLS. Financing had fell through on a prior deal so I was able to jump in an get it.

How did you finance this deal?

I have a long standing relationship with a commercial lender that knows me and the types of deals I do so they are willing to fund these types of properties as long as I set up everything up properly.

How did you add value to the deal?

All new basement... prior owner had done as a DIY and the village made me start all over. I got rid of the water tank and added a tank-less water heater. Brand New Kitchen, all new plumbing (entire house) and new electrical (basement) and new A/C. It was a single land driveway and my property is on a 4 lane road so I added an extension to the front so cars can better maneuver. Lastly, I painted throughout and sanded an poly'd the wood floors on the 1st floor. Biggest rehab to date!

What was the outcome?

$65K instant equity ad $750/mo. cash flow (not factoring vacancy and expenditures).

Lessons learned? Challenges?

Things never happen as quickly as you like and the village will always cause delays. Knowing that and expecting it will bring stress levels down.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

The key is knowing how to analyse the data so you are buying right a know your budget. I went over, but it was on items that add value and will minimize my maintenance calls for years to come.

@John Warren my advise to you would be to educate yourself so you do not have to depend on anyone to tell you the data. The sooner you can rely on yourself the sooner you’ll have the confidence to make quick decisive action. Good deals don’t last long.

As far as rents are concerned, you can look at several real estate and rental websites to get an idea of what rents go for. Zillow rent and Craigslist are a couple that come to mind.

Good luck!

@Les Goodman - In my opinion owning an asset is better then not and if you can't afford the area you live in then that leaves you with one option. Whether your house hack or buy an investment property comes down to how much capital you have. House hacking would provide a lower down payment option, but then you have to live in that property for a period of time. Is that something you're willing to do? If so, and you think like an investor I would recommend a 3-4 unit. The reason being, is as investor those properties require typically 25% down and you can buy that same property with only 3.5% using a FHA loan. Rates for investors on those properties are higher as well.. not just as an investor but because it's a multi-unit. You don't get penalized for buying a multi-unit when you buy using FHA! Last piece of advise would be if you're trying to keep the cost down and looking to get instant equity you should look at dated or distressed 3-4 units and use FHA's 203K Program which allows you to roll in the improvement costs. You'll want to be mindful of the loan limits as the very from county to county. If you need that link just connect directly and I'd be happy to help! Good luck and stay safe! - Jesse

@Austin Styer Your lender is correct. These are standard guidelines for Fannie Mae, Freddie Mac, and FHA. Would not matter what lender you talk to they would have the same guidelines. Freddie Mac has a program called HomePossible which offers only 5% down, but there are income limits. This program is not a renovation loan. If you are buying properties you want to use to rehab then FHA 203k is the best option for low down payment.

@Austin Woyshnar FHA isn't any harder than a conventional loan... if anything the guidelines to qualify are more lenient... as you mentioned it requires less money down. Now, the FHA Appraisals can be more stringent. For example, little things like ripped screens, peeling paint, and broken or cracked windows will be called out on an FHA Appraisal where often times it wouldn't be called out on a Conventional Appraisal. With that being said, your roof situation comes down to whether or not the appraiser calls it out. In my experience the appraiser's approach is "CYA" and if they are not sure they will say... "have it checked by a licensed roofer" This will trigger the underwriter to condition you to get a roof certification that called out the condition and end of life timeline. Bottom line, if it's called out either the seller will have to fix, you'll have to use a FHA 203K, or it will kill the deal.

@Kris Mann you are correct... the LLPA for 75% vs. 80% for an investment property is a significant adjustment.  If you have the money that would be the better way to go.  I would say look for better spreads, but it sounds like your market doesn't have that possibility :-) Best of luck!