When a homebuyer wants to purchase a house in need of repair or modernization, the homebuyer usually has to obtain financing first to purchase the dwelling; additional financing to do the rehabilitation construction; and a permanent mortgage when the work is completed to pay off the interim loans with a permanent mortgage. Often the interim financing (the acquisition and construction loans) involves relatively high interest rates and short amortization periods. The 203(k) program was designed to address this situation.  You can get just one mortgage loan, at a long-term fixed (or adjustable) rate, to finance both the acquisition and the rehabilitation of the property. To provide funds for the rehabilitation, the mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work. To minimize the risk to the mortgage lender, the mortgage loan (the maximum allowable amount) is eligible for endorsement by HUD as soon as the mortgage proceeds are disbursed and a rehabilitation escrow account is established. At this point the lender has a fully-insured mortgage loan.

To be eligible, the property must be a one- to four-family dwelling that has been completed for at least one year.  Homes that have been demolished, or will be razed as part of the rehabilitation work, are eligible provided some of the existing foundation system remains in place.

In addition to typical home rehabilitation projects, this program can be used to convert a one-family dwelling to a two-, three-, or four-family dwelling. An existing multi-unit dwelling could be decreased to a one- to four-family unit.  A 203(k) mortgage may even be originated on a "mixed use" residential property.

Leveraging with a real estate investment

Imagine there was investment you could make, where your return on initial investment was multiplied 5-10 times! 

Leverage is the use of various financial instruments or borrowed capital to increase the potential return of an investment – and it is an extremely common term on both Wall Street and in the Main Street real estate market. 

There is no doubt we have seen some changes in the past few years.  Prices have dropped, the market has “tanked”, and the growth in our portfolios is close to non-existent.  There is a bright side though.  RENTAL INCOME.  Rental rates have stay constant, which means with interest rates still extremely low and prices still towards the bottom of the barrel, the rental market becoming more relevant.  There is no better time to buy real estate and create an even cash flow to cover the expense of it!  3-5 years ago, when the market was booming, everyone was buying, but you needed 20% equity to cash flow evenly.  However, in this market, you can buy a cheap property after 2-5 years, it will cash flow into a nice income producing property.  With lenders requiring 20% down, these rental units are now cash flowing evenly (or positively), and a modest appreciation rate of the property is still better than investment vehicle 5X that!  Take a look at the example below: (For very round numbers we will look at this example without taking into consideration costs, or principle): 

If an individual has $60,000 set aside, and is trying to determine how to get the most bang for his/ her buck, then they may consider a 5% or even a 10% rate of return vehicle.  BUT…does that earn the greatest return on investment???  No.  If they were to invest that money into a 5% ROR (rate of return), then over 5 years, the net gain on investment would be about $15,000.  This is about 25% return on investment (ROI).  Even if they found a fantastic investment that was going to earn them 10% ROR, then over that same 5 year span, they would earn $30,000 or about 50%.   

In the real estate market, that same $60,000 may get them a property worth $300,000 (20% down).  At a modest appreciation rate of 2% per annum and over a 5 year span, that same $60,000 investment will earn them the same $30,000 or 50% ROI, as that 10% investment vehicle.  That’s just 2% appreciation!!!  What if we got a 5% appreciation rate on housing values?  This $60,000 investment into a home would get a $75,000 net gain and a 125% return on investment.  That $300,000 house would now be worth $375,000.  In just 5 years, the home would have equity in the amount $135,000!  WOW! 

Does leverage make sense now?

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