The Little-Known Loan That Helped Me Turn $9K Down into $150K in Equity

This is arguably the best real estate investing loan on the market today. It funds the purchase, renovation, closing costs, and up to six months of mortgage payments, so you’re not on the hook when renovating a vacant property, all for 3.5% down. Today’s guest used it to put down just $9,000 on a house and, less than a year later, had $150,000 in equity. It changed his life and enabled him to become a real estate millionaire, even in an unaffordable market. Matt Porcaro (AKA The 203k Way) was working in construction in America’s most expensive market—New York City. He could only get preapproved for a loan of a few hundred thousand dollars, which doesn’t buy much in NYC. When a local investor told him about the FHA 203(k) loan, his entire world opened up, and changed his trajectory forever. Now, he has over $1,000,000 in equity and over $2,000,000 in real estate—after just starting with $9,000. Today, Matt explains the 203(k) loan from start to finish—how much money you need to put down, how to get preapproved, finding contractors, paying for the renovation, what to know before you start, and a new change that makes it even more lucrative in expensive areas of the country. Beginners: This changes the game entirely. In This Episode We Cover The best beginner real estate investing loan that only requires 3.5% down Why getting a 203(k) loan is much less complicated than you think it is How Matt turned $9,000 into $150,000 in equity in less than a year The exact steps to take when getting a 203(k) loan (easier method) A new change to the 203(k) loan that makes getting approved even easier And So Much More! Check out more resources from this show on ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠BiggerPockets.com⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠h⁠⁠t⁠t⁠ps://www⁠.biggerpockets.com/blog/real-estate-1286⁠. Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠[email protected]⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn more about your ad choices. Visit megaphone.fm/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Henry Washington?

  Matt wanted to start investing in real estate to generate some extra cash alongside his day job, but in his expensive Northeast market, he couldn't just find cheap enough properties to make it work. Even beat up multifamilies were too pricey to house hack until he discovered a little-known loan that allowed him to put down just 3.5%. But this wasn't just any typical FHA loan. Matt was able to finance in his entire renovation, his closing costs, and his first six months of mortgage payments, too. He only had to bring $9,000 to the closing table. By the time he'd renovated that house, Matt had created over $150,000 in equity and launched

• 0:41Henry Washington?

  a game-changing investing career, all thanks to a loan that most investors are completely unaware of. What's going on, everybody? I am Henry Washington, and I'm here with my co-host of the BiggerPockets Real Estate Podcast, Mr. Dave Meyer. And our guest on the show today is Matt Porcaro from Long Island, New York. You may have seen his posts on Instagram. He is @thetwoohthreekway on IG. And today, we're talking all about 203K loans, which is arguably one of the best loans for new investors looking to build some serious equity and scale. Matt's going to share his own story of how discovering the 203K loan allowed him to buy

• 1:26Henry Washington?

  properties he never could have afforded otherwise and generate huge equity by rehabbing them without taking on high-interest loans. So let's bring on Matt. Matt Porcaro, welcome to the BiggerPockets Podcast.

• 1:39Speaker 01

  What's up, Henry? How are you? Thanks for having me.

• 1:42Henry Washington?

  Good, man. Good to see you again.

• 1:44Speaker 01

  Yes, likewise, likewise.

• 1:45Henry Washington?

  All right, man. Well, let's get started. And how we always start this is tell us a little bit about your background and what got you into real estate in the first place?

• 1:53Speaker 01

  Yeah, so I grew up, blue-collar family. My parents had a little mom and pop construction business, and suffice to say, saw a lot of ups and downs with that. So growing up in that environment, I think from a really young age, I put a lot of emphasis on money because I saw how money, you know, just how it affected their life. If money wasn't coming in... I felt it. It permeated in the house, you know, love my parents, but it permeated from a really young age. And when you're seven years old, you don't realize that kind of preprograms you for being maybe not obsessed with it, but, but just knowing that it's important. So fast forward, luckily enough, was able to find work in the, in, in the city, in

• 2:37Speaker 01

  New York City. And very quickly soon after that, realized that this didn't seem to be exactly what it was all cracked up to be either. This good job with good benefits. I was commuting an hour and a half both ways on the Long Island Railroad every single day. So three hours a day, waking up at 5:00 AM, working construction in the city, coming home, eating dinner, going to the gym and going to bed. And that was my life. And it was beating the butt out of me for, you know, the first couple of years. So I kind of started just going down the rabbit hole of, you know, just exploring and listening to podcasts like this and just, and going on. And one day I was working through the city and you know how in New York City, like they have guys that sell books on the side of the street, like used books. Everyone's got a hostel there, right? And I saw a little book

• 3:20Speaker 01

  there that you probably never heard of before called Rich Dad Poor Dad. And I heard really good things about it. No, I make the joke because it really, I picked it up. I heard good things. And suffice to say, it really changed my life in the, in the sense of from a kid growing up in a blue collar environment and a blue collar atmosphere, learning that real estate like is a vehicle that rich people use to build wealth and everything. That was, that was a turning point for me. But, you know, Robert Kiyosaki talks a lot about buying multiple houses and everything like that. And as I mentioned before, I live in New York, one of the most expensive, insane, highest taxes places in the world, pretty much. So it was funny. I was like, all right, Robert, that's great. But like you talk about buying multiple houses. I don't even know if I'm going to be able to afford my own

• 4:03Speaker 01

  house. I see my parents struggle with their mortgage. Like I'm going to need a hundred, $200,000 just for a down payment. So suffice to say, there's a lady that runs the local RIA around here, still does. Her name's Melissa. And she was someone I respected. And I pulled her to the side one day and, and said, Hey Melissa, like, hey, I'm Matt, like in my later twenties, like I'm just looking to buy something, but I've, I don't have a lot of money. Like I don't have A lot in the bank like I'm saving as much I can. I think I have a decent job, but I can't afford a house. Like, what would you do if you were me, like in my position? And she told me, she said, if I were you, I would use what's called the FHA 203K loan. I was like, okay, I don't know what that is. I've never heard that. She's like, well,

• 4:45Speaker 01

  it's an FHA product, so it's an owner occupant low down payment product, you know, that allows you to buy a house. But the 203K version also allows you to buy fixer uppers and it also gives you all the money you need to repair it. So basically what you want to do is do a live and flip, you know, buy something that needs some work, renovate it using the bank's money. All you have to put down is three and a half percent and three and a half percent. I was like, oh, that's really attainable for me. That seemed, it was, it was 150,000 versus 10,000 was like, oh my God, okay, I have a shot at this. So she told me this whole thing. I'm like, wow, this sounds incredible, amazing, awesome. This is everything that I've needed because low down payment, I could find something, you know, here in New York, basements are really popular. She said, like, you live in the basement, rent out the upstairs.

• 5:30Speaker 01

  That was the first time I really ever heard about the concept of house hacking. And, uh, and she put me on my path. I looked up the 203K loan online and just like I had never heard of it for years. I didn't see any information about it online either. I did a lot of research and could not find anything on it. But she did plant that seed and before I knew it, I was going down that rabbit hole and starting to learn a bit more about it.

• 5:54Henry Washington?

  Man, there's still not a ton of information about 203K loans or other similar loan products. Like it's more widely known, but there's still, it's still not like, uh, this well-known strategy that people use. And there's not like this hub of information somewhere that people can go to. So it's super interesting. But one of the things I wanted to highlight about your story was the, the determination, right? Yes, you were in an expensive market and you realized this isn't really attainable for me in my market. But that didn't stop you from still surrounding yourself with other investors, looking for a way. And I often tell people like, you've got to decide you're going to figure this out before you actually figure it out. If you want to be. Successful.

• 6:37Speaker 01

  Yeah.

• 6:37Henry Washington?

  I mean, there's tons of people listening to this right now who probably feel very similarly like I have no idea how to do this. I want to give it a shot, but I don't know what to do. Just decide today. Write it down. I'm going to figure this out because what it does is it opens up your brain to finding the information that you need. Like you found lots of information, but none of it wasn't was for you until one conversation with one person at a meetup and it was like, oh, that's it. That's the thing I need to do for me. So for those of you that are listening to this and you're frustrated, you've, you've tried some things and it hasn't worked. Don't quit. There is a path for you. That's the best part about real estate. There's a million ways to get, to get to make a million dollars, right? Like just stick it out. You'll find your path, but you got to decide that

• 7:21Henry Washington?

  you're going to be successful before you actually know how to do it. I think that's really cool. So I want to hear more about the two or three K product because I've got, I've got questions for myself.

• 7:32Speaker 01

  Oh, yeah.

• 7:32Henry Washington?

  So you heard about the two or three K loan product, but it's an owner occupied product. Is that how you've built your portfolio? Just buying owner occupied with two or three K and then moving out after a year or so?

• 7:43Speaker 01

  I went out there. I found out about this two or three K. I contacted the only loan officer I knew, who was my cousin's best friend growing up, asked him about it. He's like, bro, this is going to be the best thing ever. Yeah. The two or three K is the best. He's like a hot, you know, hot shot New York guy, super New York accent. He's like, you know, sweet talker, like, yeah, man, we're going to do it. Before I knew it, I was pre-approved. I just had a conversation. He was collecting my bank statements, all this stuff, my W two's. And before I knew it, I was pre-approved and I was out there placing offers. And it's funny because all that one conversation did was just kind of like, if I didn't really just ask him about it, I would have never, I would have, I would have just sat and continued to mull over it for another couple of years, but I'm glad I made that phone call. He showed me it and he started sending me deals and I was looking at properties that were all messed up, placing a lot of offers, getting rejected, saying, yeah,

• 8:28Speaker 01

  you're never going to get that. And the, and New York kid, like all this stuff, right? Eventually I saw one come on market and this guy's name is EJ. EJ sent it to me. He's like, hey, do you look at this one? And I think I was pre-approved at the time for like, I don't know, 280,000 or 300,000, which in New York, if you know anything about New York can buy you.

• 8:45Henry Washington?

  It's like a parking spot?

• 8:46Speaker 01

  About a parking spot.

• 8:47Henry Washington?

  Yeah, maybe.

• 8:48Speaker 01

  Yeah. So, um, you know, suffice to say, it was a couple of years back, obviously, but the, the, you know, the, he sent me, sent it to me and the thing was a disaster. I mean, it was the nastiest looking house ever. I mean, Human feces on the walls in the bathroom. Like every, yeah, they went everywhere else but the toilet. Right. So he told me, he said, Hey, man, that here's the one thing about this. It happened to be a two family. It happened to be a duplex property. And he said, cause it was listed for like 290. I was like, I can't even afford this. He said, no, here's the cool thing about this FHA loan and the 203K also. You're able to forecast the future rental income of that other unit. So the good thing about New York and high cost of living areas is you have high rents.

• 9:32Speaker 01

  So that's the good thing is this type of, this type of thing works really well. Actually, in the higher cost of living areas, because when you house hacking, you have a multi-unit setup. We're able to use that income. So it was like 2,500 a month. That basically effectively gave me a $2,000 a month raise. You know, being a single dude buying a house. And that got me to a much higher pre-approval, like 350, 360. So we went in, I looked at the place. It was an absolute disaster. We figured it was going to be about an 80 to $100,000 worth of work. There were squatters in it. It was super nasty. Most people would run from it, but it was the only thing I could afford. And I knew just looking at the numbers and from all the research I've done on real estate investing.

• 10:13Speaker 01

  I'm like, hey, if I buy this and I'm all in for 350, all I have to put down is all I actually put down on this property was $9,500. That was it. I was able to wrap in all the closing costs and my loan amount was 350. So purchase price plus the renovation was 350. We ended up taking it down. Renovation took every bit of eight months. It was a, it was a pain in the butt. I won't sit here and say it wasn't a nightmare, but it was a little bit crazy because as we did this project and this process, to your point, Henry, like there was no information on it and I found out very quickly that EJ had never done one of these before.

• 10:48Speaker 01

  So, so, so it was, it was the blind, it was the blind leading the blind. But I think back on this and the lesson on it was really huge. I'm an engineer by trade. I'm an analysis paralysis junkie. I overanalyze everything and I know a lot of people do, especially in real estate. Like you said before, like there's so many different directions you can go in. And honestly, I think for me, that was what held me back for so long was I was trying. Kind of think like what avenue is best for me and always kind of thinking that the grass was always greener with a different strategy, right? Oh, why not trying flipping? Why not house hacking? Why not Airbnb? What? And it was like always changing. The beauty of the 203K is it forced me into something where I didn't have a choice to research it. I just had to go and figure it out as I went. And I did, and I got a lot of bumps and bruises along

• 11:33Speaker 01

  the way. So got all in, finished the renovation. Thank God. It was like, holy cow, I finally got this done. Remember getting the final inspection, smelling the new paint on the walls, you know, seeing the floor, getting a new appraisal and the appraisal came in at 500.

• 11:48Henry Washington?

  Ooh.

• 11:49Speaker 01

  So I built $150,000 of equity in eight months off of 9,500 bucks. Mind you, I didn't make a mortgage payment on it because the 203K I found out allows you to wrap up to the first, now it's actually 12, but at the time up to the first six months mortgage payments on the loan because they don't expect you to pay out of pocket for a house you can't live in while it's being renovated. So I wrapped in all those payments as well. I didn't really even start making payments until I got a tenant in the other, in the other unit. So I moved in the other. I was paying effectively $400 a month. The tenant was paying 2,501, one unit. I, my mortgage payment on it was about 2,900 a month, built $150,000 of equity, was living in a half a million dollar house in New York

• 12:33Speaker 01

  for $400 a month. And, uh, and the rest was history, man. I, I built that equity and I took that equity and started getting into the flipping game.

• 12:41Henry Washington?

  Matt, this story is incredible. There's tons of lessons and determination here and I want to jump into a deeper discussion about the 203K loan, but I want to do that right after the break.

• 12:54Dave Meyer?

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• 13:26Henry Washington?

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• 14:08Henry Washington?

  And because you're the sole manager, there's no hourly minimum to meet. That lets you use a cost segregation study to accelerate the depreciation and potentially write off over $100,000 against your income, even on your first rental. Add in cash back up to 13% of the home price, which exceeds $60,000 on some properties. With this massive cash back incentives, investors are seeing total returns up to 126%. New construction, A-class properties, and inventory is limited. Learn more at biggerpockets.com/retirement or text REI to 33777. Again, text REI to 33777. Quick word about a new pro perk you'll want to know about. Aven.

• 14:53Henry Washington?

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• 15:36Henry Washington?

  Enough to cover your entire annual Pro membership. Head over to aven.com/biggerpockets to see if you qualify. Aven Financial, Inc., MLS #2042345. Cards issued per 202 license from Visa USA, Inc. by Coastal Community Bank, MLS #462289, member FDIC. Equal housing lender, subject to approval, terms apply. Visit aven.com for details.

• 15:54Speaker 03

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• 16:28Henry Washington?

  All right, we are back on the BiggerPockets Podcast. Dave and I are talking with investor Matt Pacaro, who used a little known tool called the 203K loan. Why it's still little known? I have no idea, but we're going to dive into more details about that with Matt here in just a second. Matt, before we get there, talk to us a little bit about what your real estate portfolio looks like now and maybe how you leverage the 203K loan to help you build that portfolio.

• 16:54Speaker 01

  So my background was in construction and I was very drawn to flipping. So still while working my nine to five job in New York City, I flipped about a deal or two a year up until 2020 and didn't hold on to anything. I really truly regret that. That's my only regret in real estate. I guess you live and learn, but the flipping taught me one thing, which is it's a job. And the second you stop flipping is the second you stop making money. And unless you start investing that into other units, the money goes away. So I got another one. I took another one down as a hold with just my renovation loans, 203K and the financing. I have three units. They're worth over $2 million and I have over a million dollars in equity just from

• 17:39Speaker 01

  those renovations. So three units through that. And then I flipped about four properties before 2020 hit. When 2020 hit, you know, big thing happened in the world and all of a sudden my pipeline of leads, which was foreclosures evaporated overnight. And I realized very quickly that I got exposed and, and I pivoted a little bit in my business. But Yeah, the, the ones that I did do were for my own owner occupant properties. You know, three doors and you know, they all cash flow very nicely because I put so little down on each of them. But the goal now is to build a bit more of the portfolio now, little by little. Times have changed. I got two little ones. I'm not house hacking and moving on and moving every, every two years.

• 18:25Speaker 01

  My wife wouldn't love that. We settled down. Funny how that happens. So, but I'd say, you know, I wish I held on to more for sure.

• 18:33Henry Washington?

  I've got several questions about this 203k loan and I'm sure, and I'm sure many of the listeners do as well. So before we ask our questions, can you just give us a clear definition of what the FHA 203k loan is for the listeners?

• 18:47Speaker 01

  So the FHA 203k loan is a, another product offered by FHA, right? So I'm sure a lot of people are familiar with the FHA loan. It's a mortgage that allows you to buy a house with only three and a half percent down. The 203k is the same thing. It's an owner occupant loan, obviously, right? So that's why you get the nice three and a half percent down. You get the lowest possible interest rate. It's a 30 year mortgage. But the 203k has a really cool thing on it, which is it allows you to buy fixer uppers and allows you to buy properties that need work and gives you all of the money to rehab it and all the money you need to upgrade it and really do anything. A lot of people are kind of, you know, wonder like, is there limitations on what you can do, can't do? No, as long as it fits into your budget.

• 19:30Speaker 01

  So the way it works is you have a house in mind that needs work, like mine. And then you get an estimate and we could go through the process, sure. But you get an estimate of what the work's going to be and your total loan amount, your total mortgage balance becomes that total purchase price plus the renovation budget and your payment for, you know, your 30 year mortgage is based off of that.

• 19:50Henry Washington?

  I often say it's very similar to like a construction loan from a commercial bank. They'll give you the purchase price. They'll give you the renovation money. You've got to put a little bit down. Commercial loans is typically 15%. In this case with the 203k, it is three and a half percent because it's an FHA product, which is really cool, but. In my experience, there's some more difficulty with the 203K loan than there is with like going to the bank and getting a commercial loan. There's red tape around. You have to have a contractor on the front side, right? And you've really got to have a scope of work worked out. You've got to have your ducks in a row, it seems more so than if you're just going to get a commercial loan. So do you want to talk a little bit about what some of the red tape is and why people

• 20:35Henry Washington?

  may think this is not as achievable? But I tend to disagree with that, but go ahead.

• 20:40Speaker 01

  So the way it works is, you know, the extra paperwork is to your point, right? Like, the bank is lending you all the money to buy a house, all the money to renovate it, giving you payments while you're living, you know, before you live in there, you know, the ability to wrap in closing costs. And all you need to give them is three and a half percent of the total loan amount and you need a 600 or better credit score. Like, they're giving you a lot. So they want to make sure that everything's good. But when I looked into it and I asked them, okay, what's all this extra paperwork? What's all this crazy stuff they need? And they said, well, you need a line item scope of work broken out by material and labor.

• 21:17Dave Meyer?

  Which like you need anyway. Like, you're not going to do a construction project without that.

• 21:22Speaker 01

  I was like, okay, I've been working construction for 15 years. I don't know, there's no project I've done that doesn't have that.

• 21:26Dave Meyer?

  Right.

• 21:27Speaker 01

  It's like, okay, line item scope of work, beautiful. Okay, what about the contractor? Is there, there's like a very common misconception that contractors need to be 203K certified. I don't know where it happened or where this came up. HUD does not approve contractors. The bank approves the contractor, but all they're looking for is, are they a real contractor? Are they licensed? Are they insured? Is there a licensed in business? And then they have them fill out like a little resume. Hey, do you, what supply houses do you work with? Can you give us two references? And that's it, right? So again, okay, licensed and insured contractor, great. Not sure why anyone else would do anything otherwise, but good. And then, and then you need to bring on someone called an FHA or a 203K consultant, who is a home inspector, right?

• 22:11Speaker 01

  So when you buy a house, regular transaction, you buy a house, first thing that happens is you go and you get a home inspection. Same thing happens with this, what that 203K Consultant does is they also wear a feather in their hat, which is HUD consultant. And what they're able to do is inspect the property, but also give you a breakdown of, hey, here's all the things that need to be fixed per code and safety and like, you know, you got, you got a leaky roof and, and you got to repair the boiler and all this stuff, right? And then they talk to you and they're like, hey, Henry, like, what do you want to do to the property? All right. Well, I want to renovate the kitchens and bathrooms. I want to put new floors in. I want to put a new roof on, blah, blah, blah, blah, blah. Right? And what they'll do is they write out the scope of work for you of everything that needs to be done, as well as everything you want to be done.

• 22:54Speaker 01

  Now you hand that to contractors hate paperwork more than anything else on the planet. When I started to really do this and started to do more of them, I started to realize that when you present it the right way, like these contractors realize, oh, the paperwork's done. The money's guaranteed because the money goes into escrow, right? And it's, and it's how you understand it and how you sell it. So all these kinds of different things that go into the process, you go in, you get the scope of work done by this, you know,

• 23:18Henry Washington?

  A professional.

• 23:19Speaker 01

  Third party, a professional that writes out everything, gives you a rough estimate of what you need to do. You shop it out to a couple of contractors. Now, of course, yeah, you don't want to like start looking for contractors that day. Hopefully you have a little bit of a pipeline of contractors you know from your agent or people in your personal network or whatever.

• 23:35Henry Washington?

  But this is all during the part where you're under contract, right?

• 23:38Speaker 01

  Correct.

• 23:39Henry Washington?

  Okay.

• 23:39Speaker 01

  So, you know, once you have that and you have the scope of work, then the appraisal is done based off of that scope of work.

• 23:45Henry Washington?

  So it's an as complete appraisal?

• 23:47Speaker 01

  Yes.

• 23:47Dave Meyer?

  So I just want to emphasize for people, because you named a couple of things here, Matt. And for anyone who's sitting there thinking, this is a pain in the butt. I would challenge you to think about, this is a pain in the butt compared to what? Like compared to the alternative, right? Like what is the alternative option? Putting 20% down, that's a pain in the butt, right? Paying for your mortgage while you're doing the renovation, that's a pain in the butt and it costs a lot of money. Going out and finding contractors, you're going to do that anyway. So like, just because it's from the government does not mean that it's necessarily more work. The other

• 24:29Dave Meyer?

  Thing is HUD and like what they do. Yeah, some things are probably annoying, but it's meant to make sure you just do it the right way.

• 24:37Speaker 01

  These are fail safes.

• 24:38Dave Meyer?

  Helping you do this, right? So it's just like, what do you want? Like, it's like basically free money with consultants to help you do a project where you have autonomy to make decisions about what you're going to do to this property. Like, it's gotta be one of, if not the best, like, it's like one of the best things you could possibly do.

• 25:00Speaker 01

  It's investing with training wheels on, man. And to your point, that's what I always racked my head around is because once I finished this, I'm like, how do people, more people not know about this? Right? Like, why does nobody know about this? And why am I just the guy that's answering questions on BiggerPockets and in Facebook groups? I'm like, when everyone asks about the 203K and they're like, my agent tells me it's too much of a pain in the butt and the lender tells me it's too much of a pain in the butt. And it's like, again, for who? For you? Because for me, it built me $200,000 of equity, which was triple my salary in six months. And I was living for almost free in New York. Like, I don't know about you, but getting a scope of work and having to find contractors, you know, maybe, I'm going to do that every time. I do paperwork for a living at work.

• 25:43Speaker 01

  If I'm going to do it for my financial future, you bet I'm going to do it all day, every day. Right?

• 25:48Dave Meyer?

  For sure. And for anyone who's like, what's a scope of work? It's a piece of paper. It is a piece of paper.

• 25:53Speaker 01

  Which you don't even have to do.

• 25:54Dave Meyer?

  That just says what you're going to do in your project.

• 25:57Speaker 01

  Yeah, the 203K consultant's doing it for you.

• 26:00Dave Meyer?

  It's not something complicated. People, you know, you make it sound like this. It's like, it's a checklist and it's not that big of a deal.

• 26:10Speaker 01

  Combining this with house hacking, I think, is, is one of the key things here and why I think it's so great. Especially with the new ADU laws and everything like that. That's what we're seeing like, like crazy. A lot of these things updated now where like now FHA, Fannie Mae, Freddie Mac, they will all lend to you based off of an accessory unit. It used to be like when I bought, it was like, I needed, it needed to be a legal two family to forecast that future rental income. Now, if you have another space, there is a casita, a mother in law suite, or with the 203K, you could Build it. If it doesn't exist already, FHA, Fannie Mae, Freddie Mac are allowing you to forecast that future rental income.

• 26:47Henry Washington?

  That's a game changer.

• 26:48Dave Meyer?

  Everyone go do that. Like just, just stop thinking. Just stop listening to this episode. Just go do that. That's such a good idea.

• 26:56Speaker 01

  Yeah, it's, it's a game changer.

• 26:58Dave Meyer?

  Will they still lend to you? So they'll lend to you 110% of the ARV, including a new build on a DADU?

• 27:05Speaker 01

  Yeah.

• 27:06Dave Meyer?

  What?

• 27:06Speaker 01

  Yeah. That's been the big thing.

• 27:08Dave Meyer?

  How do I convince my wife to move? That's the question you need to answer.

• 27:15Henry Washington?

  That's a whole different episode, Dave.

• 27:18Speaker 01

  When you find out, let me know. I'm gonna have the same conversation.

• 27:20Dave Meyer?

  All right, we'll talk after the episode.

• 27:23Henry Washington?

  Man, that's really cool. I didn't know that, but that could be a very powerful tool. I do want to ask you about some of the risks or downside of this loans, or things that people should just be aware of prior to starting this process. And we're going to do that right after the break.

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• 32:19Henry Washington?

  All right, Dave and I are back on the BiggerPockets Podcast. We're talking with investor Matt Pocaro, who has been building a real estate business using the FHA 203K. And honestly, Dave and I are learning things. We had no idea we're even a part of this process because it's changed over the years, which is really cool. We talked about some of the myths behind the 203K loan, that it's too difficult and people don't want to bother with it. There's too much paperwork. We dispelled those, threw them out the window. But there are downsides to every process. So can we talk about some of the downsides or the things that people should just be aware of? With the 203K loan prior to getting started.

• 33:01Speaker 01

  You know, the number one thing is you gotta work with a lending team and a lender that knows how to do this. Right. And people say like, oh, what banks offer this? It's not really about what bank. It's about the team you're working with, right? I always say like, if you want to get heart surgery, do you care more about the heart surgeon that's working on you or the hospital they work out of? The heart surgeon, right? Because the heart, you know, they're the one working on you. If they're the best in the world, they could do it on the beach. I don't care where it is. Like, I just know that the person that's actually working on me is good. So working with the right lender is huge. It's not like, oh, I've done it before, or I know what to do, or I, you know, someone else in my, it's like, no, this is not the time to kind of figure it out as you go. I did it. Don't make the same mistake I did, right? When you do them right, it could go really quick.

• 33:45Speaker 01

  So that's really one of the most important things. The second thing is the order of operations. Contractors don't really design and build scopes of work. They're really just supposed to build, right? You're supposed to hand them plans and a scope of work and they build. That's at least how we do it in the construction business, right? But what I said before is like going in there, the first thing you should do is get that 203K consultant. A good bank is going to have one for you. They're going to set you up with one. They're going to send one out. And you build that scope of work first. Now you can compare contractors apples to apples. If you go and try to bring three different contractors in at three different times, they're going to have three different visions of what you want, and it's going to be hard to compare the bids. So that's another big one is just having the contractor go off of the bid that's created for you after the fact.

• 34:30Speaker 01

  And then also the other thing is like, and this just goes in real estate and investing and everything in general, like, don't go with the cheapest contractor just because it's your brother's friend or you know, you know, if you get three contractor bids and it's like 110,000, 90,000 and 50,000, I can guarantee you that guy that's giving it to you for 50,000 doesn't just think you're pretty, right? They missed scope, but the problem is, is you're not going to find that out until they start the project. And the downside with this is again, once you get that loan approved, now hopefully your consultant's going to call that out and hopefully the bank will see that, right? That they're like, hey, there's no way you're going to get this job done for that much, right? They'll always Try to give flexibility and try to like, see like, hey, where's the rub here?

• 35:12Speaker 01

  But it, let's say that there's some banks that don't know, they don't know construction, they just let it fly. You start with that contractor, the contractor starts, works a little bit, walks off the job. Now you're in trouble, right? Because now your uncle Charlie's brother said he could do it for 50 grand. And he's on a bender in Las Vegas and you haven't heard from him in two weeks. Now you have to go find a contractor to finish that scope for $50,000 because that's all you have in the escrow. Now you're in a tough position because now you're going to have to come up with whatever that gap is. And if everyone else was quoting you 90 to 100, do it, right? If there is someone that's going to do it for a little bit of a better price or whatever, still price it out and build in some contingency there because you never know what's going to happen.

• 35:56Speaker 01

  And, and it couldn't be like a thing that's, that's malicious. It's just like the contractor might get busy or get sick or something happens like that. You're is not in your control and you have to go out and find another contractor that's going to be willing to finish it. The job at a market rate.

• 36:10Dave Meyer?

  That's great advice, Matt. I think one of the only, you know, they say like, there's like two shirties in life, death and taxes. The, the other one is like going with the cheapest contractor is going to screw you over. Every time. I don't know a single person who has ever succeeded with that strategy. And I've talked to, I don't know, a billion investors. Uh, just don't do it. And it's like, if it's close, if three of them are like, using Matt's example, if it's like 95, 98 and 100, you go with 95. But if there's a, if there's an outlier that's just like way cheaper, there is a reason and it's not a good reason. It is not a good one. Now you, you said something about escrow. So I actually, I wanted to ask this earlier and forgot. So how are the payments made on this?

• 36:52Dave Meyer?

  Cause you know, if you use a traditional construction, hard money loan, like usually need to take draws. So how, how do you actually get the money from this project? How do you get the money from the bank to the contractor? Cause that can cause some challenges, it can hold up projects. How does it work with a 203K?

• 37:12Speaker 01

  Yeah. So it's really very simple. You know, when you close on the property, right? The seller gets their money, they're gone. The remaining balance plus you, a minimum of a 10 10% contingency goes into. So Matt, what happens if we go over? Well, they, they, they thought of that, right? They, they build in a mandatory 10% contingency that goes into an escrow account that operates just like a construction or a hard money loan. It's a draw. So it's in the escrow account and then that 203K consultant stays on board with you. And what they do is they come in through the project and they look and make sure that the work that you said was going to get done is done on the property. Once they see that, they just submit a draw request to the bank and then the bank either overnights a check directly to the contractor or they could wire it to them too. Believe it or not, it's not a long holdup. It usually happens in like

• 37:55Speaker 01

  a day or two. And you know, there's a common misconception that you have to lay out money. You don't. Contractors can get a draw at the beginning of the project to start. It's like a common misconception. Now, it does depend on the bank, but at the end of the day, these days, you know, they could give you an initial for startup and you know, the days of giving a contractor a giant deposit are scary. You shouldn't be doing that anyway. Give them enough to get them, get them started and they're not financing your project. It's not a thing. They're getting paid as they complete, just like they would anywhere else.

• 38:24Henry Washington?

  So you, as the homeowner, never have to write a check to the contractor. The intermediary is always going to come verify that you say what's been done has been done. And then they help you initiate the wire or the payment from the bank to the contractor.

• 38:42Speaker 01

  Exactly. You, think of a 203K consultant as like a referee.

• 38:46Henry Washington?

  It's great if you're new because having someone come in and verify that the things were done like they were supposed to be. If you don't have a construction background, what a blessing.

• 38:55Speaker 01

  It protects the contractor too, right? I tell them like, man, growing up, I can't tell you, again, we saw a lot of like tough times. I can't tell you how many times my dad comes from a much older generation. He's 76 now and he was a handshake guy and he was a man of his word. And then, you know, he'd do things in favors for clients and stuff and they'd be like, oh, I don't have the money for you. And just like, sucks. Yeah. Push them off and he finished the work and he wants to get paid or hey, I'm not getting paid until two weeks or two months or something like that. And my dad was stuck and didn't get paid, right? For the contractor, it's like, hey, man, mister, or, or they're like, well, I don't love the color of the, of the hardware. So I'm not, I'm going to hold back 10 grand. People do that, right? So it's like, it's protecting the contractor too. Like, hey, mister borrower, like, I know you don't

• 39:37Speaker 01

  love the look of the kitchen, but they did do what you asked them to do. If you don't like the way it looks, I'm sorry, but like, contractors are still getting paid. Yeah, yeah.

• 39:46Henry Washington?

  All right, Matt, this has been so informative. Like, this is really cool. I'm still so surprised that this isn't more widely known. Is there a website or a place people can go if they're just generally curious about this product where they can go check out the details?

• 40:02Speaker 01

  Yeah. So, um, so the 203kway.com is like my website. Um, you know, I, I think there's not a lot of information on it. I talk about it from the, from the place of someone that's used it and gone through it tons of times. And I, I've been helping people with it for years now. We help a lot more people directly with it. And I make a lot of, you know, stuff on YouTube and my Instagram is the 203kway. But yeah, I mean, generally speaking, you know, it's an FHA product. It's out there. There's, if you want to get really bored, um, instead of listening to me talk about it, you could go to the 4000 dot one FHA HUD handbook. Uh, you could try to use that if you need to go to sleep. Yeah. I think the biggest thing is like, the reason why lenders and agents

• 40:44Speaker 01

  don't really talk about it as much, or, or you don't hear about it is because they don't, they don't know about it beyond just their role in it. Um, I've seen it from the very beginning inception to finding the deal and understanding the deal to being part of it, being a product of it with me and my family, doing it, helping my friends, family, hundreds of people over the years with them, um, all across the US. I've seen it from a lot of different avenues and modes. And most importantly, I've just seen what it can do for people, including myself. Like, I'm a product of it. That's awesome. So at the 203kway on Instagram, uh, at Matt Porcaro on YouTube, or you could look up the 203kway on YouTube are the best places to find me.

• 41:19Henry Washington?

  Awesome. Thank you so much, Matt. Thank you so much for all the valuable information, all the valuable insights, especially coming From someone who is a product of the product we're talking about. So hopefully you all listening have learned something about this product. You're going to go do some research and I'm telling you, if it seems like it's a good fit, man, just do it. What amazing benefits this tool offers, especially to new investors who haven't built that confidence in getting in reps yet, because you're going to be supported along the way. Thank you so much for all your help. Thank you everyone for listening and we'll see you on the next episode of the BiggerPockets Podcast. How many discounts does USAA Auto Insurance offer? Too many to say here.

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