The Science of Flipping - The 203k Way: The Real Estate Investment Solution | Matt Porcaro

Starting point is 00:00:00 Yo, yo, what up, everybody? Welcome back to the Science of Living podcast. I am your host. If you're watching this on justincolby.tv, you will see I have another guest today because this guy blew my mind. We're actually in a mastermind together and he went up to present his presentation and I said, dude, I need you on my podcast, period, end of story. Because I think everyone has to hear this. If you're one of those individuals that are having a hard time breaking in the real estate investing space, trying to get their first deal, trying to figure it all out, then this guy actually might have your true answer as a newbie. And so Matt Porcaro is here. What is up, my friend? What's up, man? Thanks for having me on.

Starting point is 00:00:45 Yeah, man. Excited to have you. I think you and I have talked a lot over the last while, and it's just because I really do believe what you do, what you coach, and how you show people how to get their maybe their first deal, how to maybe house hack, how to not have a whole lot of money in the game. I think it's so important, especially for an audience like mine, that really is, you know, a lot of people trying to break in and get better in the real estate investing business. And if you're actually an active investor, this still pertains to you. And so what I'm talking about, what you are the spokesman for, I feel like, I mean, I think you are the only human talking about it, which is incredible, is the 203k loan. Is that correct? Yep. 203k loan. So first let's just introduce you, right? What is, what is your background? What have you been

Starting point is 00:01:39 doing? Where do you come from? And then let's move that into the 203k loan yeah man so i'll jump right into it thanks for the awesome introduction by the way um yeah hopefully i could hopefully i could live up to it anyway um yeah man i grew up like kind of super um blue collar and was you know my dad had his own business and here in new y, you know, tough market, tough place to crack it, right? It's tough everywhere, but New York, it was just always, you always feel like you're kind of getting squeezed financially all the time, right? Expensive place to live. So growing up, you know, we saw a lot of financial struggle in my family. And I think one thing, you know, I wasn't poor by any means, but growing up when you're

Starting point is 00:02:26 in a house where your father's company is like up and down, you kind of really sense that in the house, like when he's making money, when he's not making money, right? It's kind of like, it was almost like the money was always the reason for any stress or argument. And you could like feel the tension. And when you're a young kid growing up, like, and you see that, and it's so transparent in your house, like you, you start to like, really just wonder like, what is this money thing? Like, why is this important? What, what is that? Like, why is this important? Right. So fast forward a

Starting point is 00:03:03 little bit, like that was always kind of a thing of mine. Like I always just put money on a pedestal because I kind of almost saw my parents doing it for a long time and wanted to figure out like, how do I avoid this, right? Like, how do I not have this like emotional reaction to money all the time? And that was like from a really young age. So what I thought was the good idea, like everyone does is, you know, I went, you know, I wasn't the best student, but I like literally in high school looked, what's the highest paying jobs out of out of college, right? And engineering came up. And I happen to be, ironically, really bad at math, but really good at science. So I went to school for electrical engineering, got out by the skin of my teeth.

Starting point is 00:03:50 And luckily enough, gotten to a pretty good job working here in New York City, very briefly, but I was there for a very short time before I realized that like, this isn't really the, this isn't really it either, right? Like the nine to five gig, it was like, kind of like, okay, you know, I'm work, I was, I feel like I was working really hard, but then the guy next to me wasn't, and he was still making the same amount And I started to learn like, okay, you know, you need to have a business, you have to have assets, like real estate is important in this game. But when I was, you know, when I was that young, you know, 2223 years old, I'm like, real estate's definitely not. I, you know, especially in New York, I'm like, there's no way I could buy multiple properties, let alone one, right. So, you know, real estate, for me always seemed like this unattainable goal.

Starting point is 00:04:46 But that being said, I like, I started learning more about it and just wanted to, you know, dig deeper in it. And I found out about wholesaling and, you know, seller notes and seller financing, all these different ways to maybe get in without a lot of money. And lo and behold, I tried a lot of different strategies, man. Like I, I think we've talked about it sometimes, like I tried wholesaling. I, you know, I, I was, you know, doing, trying to raise capital from people trying to, you know, do flip houses on my own with no experience and no money. And, you know, as luck would have it, maybe I was young, maybe I was naive. Maybe I was just too new. I just couldn't crack it, man. It was like four years before I was able to find anything. But I still stuck to it. And eventually I found out about this thing called the 203k loan.

Starting point is 00:05:31 And the way I found out about it was I was at my local real estate investment association, local RIA, and there's a lady that runs it. And I took her to the side one day. I'm like, listen, I've been trying this thing for like a long time. Like I've just, I'm coming up short. Like I'm here in New York. I don't really have a lot of money. Right. I got like maybe 10 grand to my name. And like, that's the most I've ever seen. And I've been hustling for that. Right. You know, it's hard. I'm trying all these things. Like, what would you do if you can go back? She was very successful, had multiple properties, you know, mom of like seven, just like one of those all-star people that you don't know how they do it. So I took it to heart and she took me to the

Starting point is 00:06:09 side and she's like, if I could go back, she's like, I've never done it, but if I could do it again, I would do use something called the 203k loan to buy my first property, the 203. And I'm like, okay, well, what's crazy is in the four years, I had never heard about it once of four years of like reading about it and watching videos and everything like that. So I'm like, okay, well, what's crazy is in the four years, I had never heard about it once of four years of like reading about it and watching videos and everything like that. So I'm like, okay, what the hell is the 203k? And she's like, well, it's an FHA loan. So FHA loans, if you're familiar, they're owner occupant loans, but they allow you to buy a property for only three and a half percent down. You also get the low interest rate. And what's also cool about it is it allows you to

Starting point is 00:06:45 buy a multifamily property, allows you to buy up to a four unit property. So she said, listen, what you look for is with the 203k, 203k is the same version, but they wrap the renovation budget into the mortgage. So it allows you to basically buy fixer upper properties, foreclosure properties, as is properties, and still only put three and.5% down, but get all the money to purchase it plus renovate it. So if you're thinking through as an investor like I was, I was like, okay, this is basically the BRRRR strategy, right? What I would do is I would buy a property, find a fixer-upper, build equity into it, pull that equity out and go repeat the process, right? But just use the ability that, you know, I was young,

Starting point is 00:07:28 I didn't have a house yet. That's obviously the caveat with this. And we could talk more if you like, you already have a house or whatever. But like in the beginning, when I was a beginner, I was like, let me leverage the fact that I'm a newbie. Let me leverage the fact that I don't have a house yet and use the ability to get a house

Starting point is 00:07:43 with like this low down payment loan to basically shoot myself into the game. So, you know, that was the story leading up to it. And eventually I dug into the 203k. I kind of took it to heart, tried to find a way to do it, talk to a lot of different people, had to navigate my way through it. And it was tough. There was no information on it, as you know, right? So, I still took to heart what she said. And I did go through with it. So lo and behold, what ended up happening was, I got pre approved for it from a friend of mine that was the only mortgage lender that I knew, and went down in the rabbit hole place tons of offers on like every piece of crap property I

Starting point is 00:08:25 could find here in Long Island, which was still extremely expensive for a guy who was only like 25, 26 years old, and ended up finding a duplex property for $270,000, which was crazy though, was I was only pre-approved for about $270,000 or $280,000. So I go back to my lender. I'm like, this property would be nice, but I can't do it. And he told me about this cool special thing, which actually got me into it was he said, well, on these FHA loans, you're able to forecast the future rental income of the other unit to your debt to income. So it allows you to get approved for way more. So actually what happened was once they factored in that second unit, I got just enough to cover the renovation as well. So picked up the property for 270,000. It was literally a crack house and built $80,000 renovation budget that was built

Starting point is 00:09:22 into the loan. So the loan was 350,000. I only put 9,500 bucks down. It was my $80,000 renovation budget that was built into the loan. So the loan was 350,000. I only put 9,500 bucks down. It was my earnest money, which was actually a little under three and a half percent. We could talk more about that later, but ultimately got in for 9,500 bucks, renovated the property. It was definitely a lot of work, but got through it, renovated it. Eight months later, got it reappraised for 480,000. So I built 130,000. So I built $130,000 equity off of that $9,500. Do they cash you out at escrow? So when you

Starting point is 00:09:53 fund that and you have a renovation budget, how do they pay that out to the contractors or you or whatever? What's the scenario? Yeah, great question. So if you're familiar with hard money, right, it works on a draw schedule. So the lot of the same way a lot of constructions done, right. So basically, what you do is you submit how much money you need for the budget, the banks gives the bank gives you the budget plus a 10% contingency, they automatically build in. So it's like good practice, right straight out of the gate. When you close, they put that money in escrow. And as the contractor goes through the process, there's someone called a 203k consultant, which we could talk more about. And he comes out, he or she comes out, checks what's done with the property goes to the bank as the draw and the contractor receives the funds. Do you need to connect the bank and the contractor essentially? So essentially, the way the whole process works is you have multiple people in the game, right? So essentially the way the whole process works is you have multiple people in the game, right? So you have obviously the lender, the biggest thing with this, with this loan,

Starting point is 00:10:50 the biggest piece of advice I could give is work with a lender that actually understands these and knows these, right? Don't make the mistake that I did because I didn't do that. And it definitely could have made things a lot easier if I did. Where do you find that person? How can you find that lender, the bank that understands 203k? Great question. So there's something called the 203k endorsement summary. So since it's the FHA, since it's HUD, it's all public information. So what you're able to do is you're able to just Google 203k endorsement summary. The first link that comes up on Google bring you to the HUD website, you click on that link. You scroll all the way down to the bottom to the most recent month and year. Click that link.

Starting point is 00:11:28 It'll pull up this big kind of laundry list of every major metropolitan market in the U.S. and U.S. territories. Like you could do this in like Puerto Rico, Guam. And it'll give you a list of all the banks, all the mortgage companies that do them, and how many 203ks they've done in that market this quarter and this year. So what you do is you go through and you just see who's the one that's doing the most of them. And you call up their local branch and just say, hey, you know, I want to do a 203k renovation loan, who heads up your renovation lending department. And that's the best way to find them easiest way to find them. So let's talk about maybe a little bit of the elephant in the room.

Starting point is 00:12:08 You mentioned it briefly, previously, just about, let's say Justin Colby wants to get in this game. Well, Justin Colby owns his own home. And it's a nicer home because he's been employed for years, and he's established, but he wants to break into real estate he wants to get into this game yeah what what does justin colby do given that i already have a mortgage and it's a multi-million dollar home like how do i navigate that am i already out am i disqualified yeah i mean i wouldn't say you're disqualified really where it comes down what it comes down to is like what your goals are and everything like that ultimately this really, like if we want the perfect avatar for this, this is someone that really doesn't have their first primary home yet. Okay. Or they have one, but they're really willing to make a big, like a move into,

Starting point is 00:12:54 you know, a completely different scenario and maybe hold the existing property. Maybe not. There's some regulation with that, but really it's's like you're ready to make this your new primary residence. So really, you are you have to live in the home, it was going to be a question I was going to ask anyways, but you have to live in the home you have to. You can't live in my home and say I'm living in that home. Yeah, I mean, listen, I will I say people don't do that? No. I mean, people do try to blur the lines and gray the area. Will I suggest that? No. I mean, people do try to blur the lines and gray the area. Will I suggest that? No. I mean, again, at the end of the day, this is something that it's a way to get you off

Starting point is 00:13:32 the ground, right? And especially for guys just starting out. What is available as an option, though, is there is something called, so there's Fannie Mae's home, Fannie Mae's version of the loan is called the home style loan. It's typically better for single family homes. FHA is better for multifamily because FHA is three and a half percent, no matter how many units you buy up to four units. Homestyle, it increases your down payment out of pocket. It goes up to 25 percent if you want to buy a quadplex. So not as good, but for single family, it's a little better because there's less fees up front. It's actually what I'm doing on my forever home right now.

Starting point is 00:14:10 Again, we're making the comment right at the gate about the wood paneling. This is not my flavor. Yeah, no, it's very 80s, very like smoking a pipe in the corner on my big chair vibe, but I'm not a big fan. Me and my wife bought a fixer-upper. We're waiting for permits we were talking about, but we're using a homestyle loan on our own home. But to get back to what you were saying with the homestyle loan, homestyle loans do have a non-owner occupant version of the program. It's basically what people have been doing a lot with airbnb is you buy and you get a second home loan um as long as you qualify it for for it like dti wise and everything like that um but what you could do is you get a second home loan it's only 10 down or 15 down depending on a couple

Starting point is 00:14:58 things with like you know your personal your your credit profile and everything but ultimately it's another version where you can get into something for a pretty low down payment, right? It's way less than hard money, hard money is looking for especially if you're new 25 30% down, and it still allows you to wrap the renovation costs into the mortgage. And it also gives you a much lower, you know, interest rate comparatively to like maybe a, you know, DSCR loan or something like that. Can you, can someone like, and again, I don't, the audience, let's be very clear with the audience right now. The ideal avatar for someone to use this does not own their home. That is your ideal scenario. You're renting, you might even rent a really nice home. You just don't own your own

Starting point is 00:15:38 home. You don't have a mortgage on a home right now. So that is the ideal avatar but i'm trying to figure out also because there's plenty of people that do have a home so i keep using myself as an example because i'm actually this is why i wanted you on because i'm i'm inquisitive of how i can use this yeah no it's it's can i upgrade my home meaning like what if i want a four million dollar home and i'm willing to sell this home? Can I still use it? Yeah. I mean, you absolutely can. You could buy and use it to renovate your home. It is a renovation loan, right? FHA, they have loan limits in every market. They're very high. They're much higher than people actually think. They're pretty aggressive. And especially in the high cost of living markets, single families go up to like a million plus multifamilies go up to like

Starting point is 00:16:30 2 million 2.5. That's the loan limit. So the value could be 2 million, I'm just only going to get a 50% loan, correct? Correct. Right. That's the loan limit. Yep. Fannie Mae, they're a little more, you know, there's a little more flexibility, they do have a jumbo version of the loan, and it goes as high as like, you know, lenders are willing to lend. So ultimately to answer your question, yeah, if you wanted to take it and go use the bank's money to go do a renovation, not pay out of pocket for your renovation, you absolutely could use it. And again, Fannie Mae is a lot more flexible, right? So like you can go and do that other, and if you decide to keep your current home that you're in, as long as you're living in that new home, you still get the low down payment. Again, on a jumbo something like

Starting point is 00:17:08 you get into the neighborhood of 4 million, right? Like I don't know what the regulations are up there. But but you know, essentially say you wanted to buy something, you know, bigger and better, and still keep your original there. They're a lot easier on the right on like the requirements on keeping your original if you plan to rent it out or something like that, as long as the DTI covers it. But yeah, these renovation loans, they are, they're flexible for people that do have properties. Again, the way I teach it is especially we can get more into like the house hacking side of things to where the where the 203k way really shines in that whole process in the end, the loan really shines is like, not only are you building equity into the

Starting point is 00:17:45 deal using the bank's money and only having to come out with a very tiny down payment out of pocket, what you do when you buy a small multifamily is you find a property where you live in one unit, rent out the other units. However long you're there, this isn't your forever home. But while you're there, you are not having to pay for your mortgage. You're not having to pay for your... So if you're renting right now and in New York, it's $2,000 a month at least. You're saving $25,000 a year just because your tenant's paying your mortgage for you. Now, when eventually you move out, that's just straight cash flow in your pocket.

Starting point is 00:18:20 So the great thing about it is that not only are you getting the equity, but you're also getting the cash flow by buying a multifamily property and getting rid of your biggest expense, which is your housing expense, right? Yeah. And so let's kind of talk about, I guess, the bigger name in the space of house hacking is BiggerPocket. So if any of you guys are BiggerPocket fans, listen to the podcast,, etc. I would encourage you to reach out to Matt. And since I've said that, Matt, why don't we share now? Where can people find you? What's the best way for them to do that?

Starting point is 00:18:53 Yeah, so Instagram is where I built this whole thing, right? I really just started posting about it because I was on BiggerPockets a lot, answering questions about the 203k loan. One thing that I found is that there's, especially on BiggerPockets, not to throw shade out there, but this is the 203k loan um one thing that i found is that there's especially on bigger pockets not to throw shade out there but this is the reality alone there's just so much misinformation out there about this product um a lot of people also that consider themselves professionals in the game still will talk about it as if they know what they're talking about and they're just they're blatantly wrong and i see it all across the board. And I saw it a lot on bigger pockets. And honestly, you know, it's not bigger

Starting point is 00:19:28 pockets fault. But it's frustrating when you know what it is. And you just see people kind of like people like me that were just looking for any way to get into the game. Like people when people first hear about the 203k, kind of like I did, I was like, holy crap, I only need three and a half percent down. Holy crap, I could buy a multifamily property. Like, this is this is my shot, right? Being here in New York, like there was no way I was going to put 20% down on anything that was like 100 150 grand in New York, right? Versus 10 grand was was way easier. So the point being is, that's the reason I built this whole community. And I just like to give like people a background as to why this even exists was because I was just responding so many times to the same questions over and over again.

Starting point is 00:20:07 And I wanted to just help people use it because I saw what it did for me. And I wanted it to do it for other people. So again, Instagram is the best place to find me just at the 203k way. You know, I have a YouTube channel, which has longer form content that's like really just more deep dives into this whole process. And yeah, I mean, those are really the two main places. You also have a Facebook group, Facebook group, again, another place where I do live trainings weekly. Again, you could just search up the 203k way in any of these platforms and you'll find me. Yeah. And I think, you know, to kind of go back to this house hacking, I love the house hacking concept, right? Because it traditionally will get someone into the space of investing where they may

Starting point is 00:20:45 not have been able to, right? By no means is that the only way to do it. But if you really do believe in accumulating wealth while also making a lot of money, then house hacking is really brilliant. Again, especially for the person who is typically renting right now, breaking into the space, they really want to get into real estate. This is an incredible way to do it. So let's just talk the traditional way of your normal definition of house hacking is someone to think about buying a duplex, renting out one side, living in the other side. Talk to us about how the 203k loan works in this model, why it's beneficial, you know, et cetera. This is like, you couldn't have asked a better question. I'm so stoked that you asked this question. That's how I know you're super savvy,

Starting point is 00:21:31 right? If you're listening to Justin, keep listening to Justin because he knows what he's talking about, right? Like the, that's a key point, right? Like why not just use the regular FHA? And like you said, like that is the, that is the traditional way of going after it. Obviously, what we've seen in the last couple of years is just values rise crazy, right? Especially people are getting more and more privy to the house hacking concept. So it's making these multifamily properties a little tougher to get into and a lot more competitive. So the problem that people run into when they want to be a house hacker and they're looking to buy a multifamily property with an FHA is that these properties are just way too expensive. And the numbers actually don't even work out. They end up just spending the same amount they'd be spending if they're renting. That's how bad these numbers are tending to work out because people are just overpaying for these multifamilies left and right. The other thing is that they're finding that like with the FHA loan, the standard FHA loan,

Starting point is 00:22:33 the two biggest issues with it that sellers like, like FHA became like a bad word the last couple of years, right? In the seller's market, like real estate agents, they're a listing agent. They didn't even want to look at an offer that was FHA. Why? Number one was that FHA requires all repairs to be taken care of. If anything bad comes up on the inspection and it's like really minor stuff that they'll stop the loan for, like chipped paint, they'll literally like not allow you to close on the property for. Totally. Not having handrails, right? That's like those, that's a, that's a big detriment, right? Like, like the seller's not going to want to have to put handrails up when they have like a ton of other offers, right? So that's the first thing is they look

Starting point is 00:23:15 at that and they're like, oh, that's a big pain in the butt. The other thing is the appraisal contingency, right? So FHA is very standard. Like if your property doesn't appraise correctly, they won't let you get the loan. Even if you're willing to come more out of pocket, they have like this weird rule where like, even if you're paying a little higher than what it's valued at and your loan is lower, they'll still like not want you to take it because they'll feel like you're underwater day one. So you, the appraisal and the, and the, and the fixed and the, you know, the repairs with the property of the two deal killers. The 203k negates both of that completely. The 203k will allow you to close no matter what on any condition property

Starting point is 00:23:53 because you're going to renovate it to fix it and get it up to snuff. Also, on the appraisal side, here's what's insane, and you'll probably know how insane this is, but a beginner maybe doesn't understand how insane this is. The 203k actually allows you to get a loan to value of 110% of the after renovated value of the property. So think about that for a second. Yeah. So I mean, now I don't condone that, right? The idea is like, I want you to like my whole process is get in for 80% loan to value, build 20% into the deal and then refinance and then, you know, cash out everything like that. But you can do that.

Starting point is 00:24:30 But so what that means is, it gives you a greater ability to close on these loans. So now to wrap all this up. The reason why the 203k shines for house hackers is number one, it's allowing you to get into fixer upper multifamilies that are going to give you a better, you know, you're going to get in for a lower value, right? So your payment's going to work easier, right? Your payment's going to be lower. You're going to build equity into the deal instead of lose equity on the deal day one, right? And it's going to give you a little bit of an edge because a lot of these house hackers that I see that are struggling, again, they're just going after these like move-in ready, live-in ready properties, take a little elbow grease, do the due diligence, find this thing that is a little underperforming undervalued, and use the renovation

Starting point is 00:25:15 money to build it into that and then get all the benefits of the equity rather than going in day one underwater. I love this, dude. I and again, I could probably pepper you with a bunch of questions. But this is why you do what you do. And you coach people to this is because there's a lot underwater. I love this dude. I, and again, I could probably pepper you with a bunch of questions, but this is why you do what you do. And you coach people to this is because there's a lot to it. It's not just go get a loan and buy a, buy a duplex. Right. And so again, go to at the two Oh three K way, uh, follow him, engage with him. I know you are really running your Instagram. So it really is him talking to you guys. Um,, just just make sure you have a firm understanding. Where else can they find you one more time? Yeah, so my Instagram at the 203k way, like you said,

Starting point is 00:25:56 the my my Facebook group is a great resource. I do live trainings in there a lot, a lot of good experienced people with the loan in their lenders, consultants, like, you know, people that you'd want on your team, the 203k way, just look it up, you'll be able to find the Facebook group there. And then my YouTube channel has a lot of longer form, you know, videos and like how to's on how to get into this. I think like you said earlier, you know, there's a lot of bits and pieces to this. And that is the reality of this, right? But I to anybody that ever looks at me, and they're like, Oh, the 203k, it sounds so hard. Classic, you know, quote, with great power comes great responsibility, right? You just I just told

Starting point is 00:26:37 you how much leverage these banks will give you with with the loan to value when you think about how much money these banks are giving you with so little out of pocket, no experience in flipping properties, no experience in being a real estate, like no experience, like they're giving you so much money in return for so little. So yeah, like you do need to have your ducks in a row.

Starting point is 00:27:00 You need to have a clear scope of work from a contractor. Yes, you got to work with a contractor that's licensed and insured. Yes, they need to come to clear scope of work from a contractor. Yes, you got to work with a contractor that's licensed and insured. Yes, they need to come to the table with their requirement. This is how good business is done. This is how, you know, I was in the construction business. You know, when you run a renovation, like you have to have a clear scope of work. You have to work with the right contractors.

Starting point is 00:27:17 If you don't, it's going to blow up in your face. So, you know, that's the key point here. And that's what I help people with is just taking all that nuance out of it, building the system so you know exactly how to treat this, not just like a hobby, not that you go on willy nilly, you treat it like a business model so that at the end, you actually make a profit on the deal and can use this. I tell people all the time, getting their 203k deal, that's not the end. When people I coach, when they get to the end, I'm like, now you're, this is the beginning, right? Like the beginning is now you're going to springboard and become a real estate investor.

Starting point is 00:27:49 No doubt. No doubt. Well, dude, I appreciate you recording this right now. It's been a hot topic for me. I'm obviously talking to you a lot about it. Yeah. So hopefully guys, you go reach out to Matt, the 203k way. This is just a game changer and a story. So appreciate you being on here, dude. And for all the listeners stay tuned. We got some great stuff coming.

Starting point is 00:28:12 Appreciate y'all. See you on the next episode. See you guys.

The Science of Flipping - The 203k Way: The Real Estate Investment Solution | Matt Porcaro

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