Are you having trouble getting started as a real estate investor? Have you been going to REIA meeting after REIA meeting and just haven’t pulled the trigger? If so, the FHA 203(k) program might be your answer if you have been wasting time getting started and have more time, at least a year, preferably two years.
First, let’s examine why you haven’t pulled the trigger on buying your first investment property. Following are some common reasons newbies say they have trouble getting started:
“I don’t have a lot of money to invest”
“I don’t know how much repairs cost”
“I have a full-time job and I don’t have time to manage or monitor a rehab project which in turn may lengthen the time to completion and result in high holding costs”
“What if I can’t sell the house when repairs are complete”
“Even if I do a successful flip to start out, federal, state and FICA taxes will eat half of my profit!”
Do any of these barriers sound familiar? Do ALL of these barriers sound familiar?!
If so, then the FHA 203(k) program may be able to address some or all of these barriers…if you want, if you are committed and if you will actually live in the renovated house at least a year, preferably two years.
The general strategy that can be used by a hesitant investor with some resources (though not a lot), is to:
Buy a distressed property using an FHA-insured 203(k) loan at a significant discount to full retail price that will still have a lot equity after repairs
Renovate the property using funds that are mostly from the FHA-insured 203(k) loan, following HUD guidelines (including 203(k) consultant and 203(k) project manager)
Actually live in the property as your primary residence for at least one year, very preferably at least 2 years as described on the next line
Sell the property after at least two years residency and be exempt from federal tax from up to $250K in capital gains ($500K if married), assuming that the laws stay as they are in early 2017
What is the FHA 203(k) program? Here is an excerpt from the HUD (government) website description: “Section 203(k) offers a solution that helps both borrowers and lenders, insuring a single, long term, fixed or adjustable rate loan that covers both the acquisition and rehabilitation of a property. Section 203(k) insured loans save borrowers time and money.”
Further details about the FHA-insured 203(k) loan program can be found by clicking on the links shown at the government website at https://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/203k.
Some of the key basic terms of an FHA-insured 203(k) loan are that you can borrow up to 96.5% of the purchase price and repairs. While there are still a bunch of costs, such as for the 203(k) consultant and the 203(k) project manager, mortgage insurance and you also need some capital for the initial repairs before the lender pays for the initial repairs, the total amount of cash needed is much lower than for most construction loans you can otherwise get for purchasing and renovating a distressed property.
A very crucial term of getting a 203(k) loan is that you MUST live in the renovated home as your primary residence at least one year. If you do not live in the renovated home for at least a year and/or never intended to live in the home for at least a year, you would be violating the loan agreement and be subject to fraud.
That is why this program should be considered by investors who have been slow to get started and still expect t be slow enough going forward to