I can’t think of any mortgage with a worse reputation than the FHA 203K renovation home loan. But because of this mortgage, I lived rent-free for as long as I wanted, and then made a profit of over $600,000. So now I’m making it my mission to tell everyone how great these mortgages can be!
It is a common belief that renovation loans are an absolute nightmare. These loans are thought to have unfathomable amounts of paperwork, hoops to jump through, and other aggravations. Consequently, 203K Renovation loans are the most underutilized and under served mortgage there is.
However, if utilized properly, a renovation loan is one of the most powerful financial vehicles there is. It is not without its challenges, but logistically it is just a regular mortgage with a few more moving parts.
The best thing about the 203k is that with a down payment of only 3.5%, the entire home, and all the improvements can be financed at a low interest, 30 year fixed, government-insured mortgage.
What I saw as the ultimate way to reap the maximum benefit out of this loan was to purchase a multi-unit property. So long as a property is 4 units or less and one intends to live in one of the units for 12 months, this loan can be done, and it is considered an owner-occupied property.
My plan was to find a 4-unit property in an area that I saw as safe to live in with upside to become even nicer. I wanted a property in need of a full rehab, preferably a gut right down to the studs. My goal was to have a large unit where my family could live and three rental units that would cover the cost of the monthly mortgage, taxes, and other expenses. Finding, or more accurately, creating, such a place would give me significant instant equity in the home, no mortgage payment since the rents would cover this in full, and the ability and likelihood for considerable and consistent appreciation.
ATTIC (VALUE ADD!!!….NEW BEDROOM AND DEN)
One thing to note when looking for any property is the potential for “value add”. Because this home had an unfinished basement and attic, both with high ceilings and good structure, this easily allowed for incredible upgrades to the property (Take a look at the before and after pictures)
I searched through many properties and finally found a Fannie Mae owned foreclosed property that had just been listed. I got in to see it and it was exactly what I was looking for. I put down a purchase contract on the spot and my offer was accepted!
The finance took under 30 days, which confirms that if everything is done proactively and with a seasoned mortgage banker, this is a practical and reasonable mortgage product.
The home was purchased for $465,000 with $5,000 in seller’s closing cost credits. We were going to put another $230,000 in improvements. Since this is a one-time close the overall mortgage was for $695,000 (purchase price plus improvements). We put $20,000 for a down payment, and we were ready to roll.
We were gutting the house right down to the studs and when we were finished the three rental units paid for the entire mortgage, taxes, insurance and operating expenses of the building in full.
The work took 6 months, and, in the mortgage, we financed 6 months of mortgage payments so there was no cost of carry during the renovation period.
Three years went by with all the housing expenses covered in full. The area where we bought had become extremely desirable, our place was showing a massive Return on Investment (ROI) and we decided to sell the home.
Before we even put the property on the market, we received an offer of $1,200,000. We took it and closed the following month.
BASEMENT (VALUE ADD!!!…AN ENTIRE NEW UNIT)
In 3 years, on top of living rent free, we made a profit of over $600,000!
This undertaking is something I am very proud of. It shows that with a good plan and the right guidance anyone can do something like this and wisely accumulate wealth through their biggest asset.
It is also very gratifying to create something that wasn’t there before – a beautiful home that makes the community a little nicer.
These renovation loans have become a great passion for me and I have thoroughly enjoyed learning every nuance of them. There is another great government backed renovation loan called a Fannie Mae Homestyle mortgage that my clients have been using to amazing success that is a wonderful option as well. This product allows for the financing of renovations for investment properties, luxury items, and many other incredibly useful things. On a side note, these renovation loans are not just for purchases either. If you currently own a home and are looking to do improvements both relatively minor, or totally massive, this is an avenue well worth checking out.
If anyone has questions, thoughts, comments or would like to speak in person I am always available and love to talk about all types of mortgages for purchases or refinances, especially these renovation loans.
Check out the before and after listings on Redfin:
Purchased September 2014:
Sold September 2017:
NMLS #: 213442