Welcome back to the Science of Flipping Podcast, where we dive into the strategies and secrets behind successful real estate investing. In this episode, we're joined by Matt Porcaro, a young real estate investor who's made a massive impact in the industry through his innovative use of the FHA 203K loan. Dubbed real estate's best-kept secret, Matt shares how this loan program can transform the way we approach investing and homeownership. Matt Porcaro's innovative use of the FHA 203K loan offers a new path to real estate investing that challenges traditional methods. By sharing his experience and knowledge, Matt hopes to inspire new and seasoned investors to explore this underutilized tool for building wealth through real estate. Connect with Matt! Instagram - @the203kway Website - www.the203kway.com The #1 training and coaching system to launch, grow, and scale your investing business! 𝐋𝐞𝐚𝐫𝐧 𝐌𝐨𝐫𝐞: http://www.thescienceofflipping.com Turn cold real estate leads into engaged motivated sellers on auto-pilot using the power of A.I! 𝐋𝐞𝐚𝐫𝐧 𝐌𝐨𝐫𝐞: https://www.rocketly.ai/ Have a question? Ask me anything at https://www.askjustin.ai/ 𝐀𝐛𝐨𝐮𝐭 𝐉𝐮𝐬𝐭𝐢𝐧: After investing in real estate for over 17 years and almost 3000 deals done, Justin has created a business that generates 7 figures in active income through wholesaling and fix and flipping as well as accumulating millions of dollars of rental properties including 5 apartment buildings, 50+ single family homes, and 1 storage facility Justins longevity in real estate is due to his ability to look around the corners, adapt to changing markets, perfecting Raising private capital, and focusing on lead generation which allows him to not just wholesale and fix & flip, but also accumulate wealth through long term holds. His success in real estate led him to start The Entrepreneur DNA podcast and The Science Of Flipping podcast and education company, where he has coached and mentored thousands of aspiring and active investors over the last decade. He is a nationally recognized speaker and is on a mission to educate as many people as possible on becoming a successful dynamic real estate investor. 𝑾𝒉𝒂𝒕 𝒕𝒉𝒆 𝑷𝒓𝒐𝒔 𝑯𝒂𝒗𝒆 𝑻𝒐 𝑺𝒂𝒚 𝑨𝒃𝒐𝒖𝒕 𝑱𝒖𝒔𝒕𝒊𝒏: “Justin is one of the best trainers in this space. He really gives everything to his tribe.” – Brent Daniels (TTP) “Justin’s ability to connect with people and help them understand what he is teaching, is unparallelled” – Kent Clothier (REWW) “We have been in the trenches flipping homes in Phoenix for over a decade, he is one of the best to do it.” – Sean Terry (Flip2Freedom) Subscribe To Justin Colby: http://youtube.com/justincolby View All My Videos: https://www.youtube.com/c/JustinColby
Chapter 1: What is the FHA 203K loan?
So the two Oh three K really just pours gasoline on that, on the house hacking method, because not only are you able to buy a multifamily property, but you're also able to fix it up, build, you know, some equity into the deal, which is what I did. Um, and take that equity to go repeat the process, take that money back out and go buy more multifamily real estate.
So it is like, House hacking on steroids.
It's like the Burr method and house hacking. In your own home. In your own home with only 3.5% down.
So you know I love the Burr method, right? Because as an investor, I'm buying a rental, a true rental that I'm not going to live in, right? Alabama and throughout Florida and whatever. Sure. So I love the model. And the reason why I love the model is because essentially, at the end of the day, first, you have the option to have no money left in it, right? You do it. You do good enough rehab.
You refi all the money out that you already have in it. the like cherry on top in the good old days, which is only about a year and a half ago is you could actually even get cash out refi. You could actually get cash in your pocket.
Yeah.
When the loans were a little bit nicer to us now that all may come back here, you know, in the next year or two, but. The Burr Mile for a real estate investor is like, to me at least, it is the perfect model because you don't leave in, if you do it right, you don't leave any money left in.
Now, even if you have to leave a couple dollars, you're ROI on that model, meaning I'm always looking for a 20% return. So that means if I leave 10 grand in, I want to make sure. I get that 10 grand back out as whole within five years, right?
And that's a very similar model to what we're talking about here where you're basically going all in on your personal home, renovating it, updating it, making it pimped out And you have very little money left in the deal because they finance it all? Yeah. I mean, this is insanity.
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Chapter 2: How can the FHA 203K loan help first-time homebuyers?
Is this a real story?
Yeah, it's a real story. It was literally a crack house. You know, nobody wanted to touch it with a 10-foot pole, but I... It was kind of the only thing I could afford, even in the New York market. I still had to scrape the bottom of the barrel. And I was using the bank's money, and it was very low risk for me. I only had to put $9,500 down on this two-family, right?
$9,500.
You had $10,000. Let's call it $10,000.
Yep. into this property. And you renovated it. It was a full crack house. I mean, this is like the end all be all for real estate. If people are watching this at justincolby.tv or listening to it on Apple or Spotify, like everyone should be looking into this. Like if you were sitting here, I have friends that literally last night text me like, I really want to buy a new home. Yeah.
But the homes I want that are already pimped out look beautiful. They're the ones... I can't get there with the loan rates right now. Exactly. So what would you tell them? Go find it, not find the neighborhood, not the nicest one. Bingo. And go renovate it yourself. Yes, it takes time. This isn't, listen, we can paint the perfect picture, but it takes time, right?
Like this isn't, but you're going to be into it for a fraction. I mean, legitimately a fraction of what you would be in if you bought the already done model.
You're using other people's money, which is real estate investing 101, right? And in addition to, like you said, buy the ugliest house on the nicest block. And most of the thing, like when you're a real estate investor, you're just starting out, right? You're looking, you're watching the TV shows and- HGTV and you're like, you want to flip a house, whatever.
And you look at a house and you're like, oh, all right, well, I have to purchase it. I have to put 20, 25% down. And then I have to come out. Then I have to finance the renovation portion of in there looking at hundreds of thousands of dollars. And that was what I was struggling with. I was like, how the hell does anybody do this? You know, I was 20 something years old. Yeah. Like I had, you know,
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Chapter 3: What are the benefits of house hacking with the FHA 203K loan?
But ultimately what it did for me was it just leveraged me in really quickly because off of that 9,500 bucks, again, we'll call it 10 grand, the 10 grand, In the first year, I built $150,000 in equity into the property. And then I rented out both units after I moved out a year later. And it's still, to this day, cash flows me like $2,000 a month, $2,500 a month.
So when you look at like, when you say like you look at, you know, for example, if you're looking for a deal, right? You're like, I want to make a 12% cash on cash return, right? That's a respectable deal. Return, right? On a property, right? My cash on cash return with that 203k property was like 600%.
I was just going to say, I don't want to say infinite, but it's like, God, at that point, you're like... It's like not even in the same... No, you can't find that anywhere.
It's not even the same universe.
You know, it's funny. I use the analogy like... In our world of real estate, a lot of people talk about like a 3X return on investment, right? Like if you're going to go market, you want to get a 3X return on your investment, things of that nature, right? This would be like, you can't even compare the two. When you take our normal world and you say, hey, great, you want a 3X return?
I'm getting a 600X return. Yeah. Like, you say, why aren't more people doing this? Now, the caveat is, is more traditionally for a home you're going to live in, right? This is the BRRRR model, but owner-occupied BRRRR model, right? House hacking.
So there's a trade-off with everything, obviously, right? The reason they're giving you the very low down payment, the reason they're giving you the lowest possible interest rate that you can get at whatever it is at the moment that you get it,
is because owner occupancy to a bank is the most stable you know you know stable asset class right so but you're able to do this to leverage yourself into the game and and it's not a first-time home buyer loan like if you're really you're saying like with your friends if they're willing to go move into another property it just is owner occupancy it's not exactly first-time home buyer now obviously you know it works well for that it's um you know it's also for the person that
already has like a consistent income, right? Nine to five person, someone that's already working that maybe wants to escape it kind of like I did. This is your way into it with very little out of pocket and then reap the benefits very quickly. Because what I did was once I had that equity, not to mention the equity, but also the experience of doing it, the track record.
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Chapter 4: How did Matt Porcaro leverage the FHA 203K loan for success?
Does that and the home I'm gonna want is in the millions, right? Is there a price point that this loan won't work for? If I already have a home, am I not allowed to use this? And let's just use me as the example, because now I'm like, maybe this is a move. Yeah, so. And I'm not working the system. No, move. I would make this next thing a permanent home, right?
The guidelines are very black and white. I mean, you know, at the end of the day, to answer a bunch of the questions, right? First off, it is based off of national and local loan limits for Fannie Mae FHA, right? So those you can Google, you look up FHA loan limits or Fannie Mae loan limits in Scottsdale or in Arizona, wherever you are looking to move, and you'll see that they're there.
Now you'll be surprised, often people are very surprised that it's a lot higher than you think.
for example you know in in where i'm at in new york a single family home the fha loan limit i think is like 1.4 million or something right now so respect so there is a there is a baseline obviously you're looking you're looking at some some sweet pads yeah but remember that's the loan limit now what's not to say that you you being a great deal finder yourself you find a deal that you know the arv is going to be 2.4 but you picked it up for 1.4 or one or a hundred
Or I mean, a million and you're putting 400 grand into it, it's going to be worth two and change.
The loan limit they give you is based on- It's not the value of the home, it's the loan limit. Correct. That's the highest loan you can get. So it doesn't mean I have to buy a home that is only worth 1.4. Right.
And so long as you qualify for it is the big thing too. And then again, if you're going into the new residence, they're going to ask you and you plan to keep your Miami residence, they're just going to say, okay, what are you doing with the Miami residence?
are you renting it out what are you like if you're if you're covering or if you could afford both that's that's doable too it is a dock loan right so they are looking at your income sure and your debts and what that dti ratio is they look at a 50 percent debt to income ratio. That's really what they judge you off of. So that's your maximum, right?
So whatever your income is versus your debts, you want to be, your gross income needs to be 50%.
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Chapter 5: What makes the FHA 203K loan a strong investment tool?
So there's a couple of different loan products that exist and they have different requirements. FHA is the stricter one. Sure. Fannie Mae has a product called the homestyle. I'm actually doing it on my own home right now. So I practice what I preach, man. We use a homestyle loan. We're renovating our own house. That's another example. We picked it up for six fifteen.
We're putting about two, three, two, three hundred into it. But it's going to be worth like one three when we're done. So we're building almost a half a million in equity.
So did they finance your purchase and rehab on that as well? Yeah, absolutely. So again, getting the worst. So my neighborhood, I literally was just messing around the other day. So I go and buy the $800,000. But let's just say I even have to add square footage. Does it allow for that? Everything. There's really no limit. Let's just use the example. It's $1.4 just like in New York. Sure.
Just to keep the example. Yep. As long as I'm all in for the loan at 1.4 or less, it doesn't matter. Additions, add 1,000 square feet, add a pool, whatever. We added 800 square feet to my house. Say that I can add a pool if it didn't have a pool.
Great question, great question. FHA, the 203k FHA is a little more strict. They're not really that strict. really just has to be integral to the house itself. So it needs to be, you know, you could renovate, you could get nice finishes, you could get like... So I could have a pool and I could redo a pool. You could redo a pool. Add the pool.
Now, the homestyle loan, which is Fannie Mae's product, which is the conventional product, is a lot more flexible. You can build a pool, a pool house, a basketball court, whatever. It kind of just gives you carte blanche. Now, they will... So obviously, there's the loan limit. But what they really look at for your average buyer is they look at what the ARV of the property is going to be.
And they give you up to 100% of that on the home style. On the FHA 203k, this is pretty wild. They'll finance 110% of the ARV. So they'll actually let you over leverage it by 10%. Obviously not something I am a big fan of as a real estate investor.
I feel like we've seen that story before with 2006, 2007.
Yeah, you do, but I think the reason that FHA probably does it is because, again, they know that you're renovating it for your own home, and they probably, again, it's the owner occupancy, so they're assuming you're going to be there for a little while, so if you're willing to over-leverage it. If you're there in 10 years, the appreciation is going to make up for it and you'll be fine.
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Chapter 6: What are the requirements for using the FHA 203K loan?
But again, I think his point is when you add up all the expenses and you add up like the interest that you pay over it on 30 years, you ever look at it. You know what? Obviously, a truth in lending statement is right. So when you when you take out a 30 year mortgage on a five hundred thousand dollar property over the course of 30 years, you're actually paying over double. of that 500 grand.
So in what universe is that a good investment? Right. You paid a million dollars to make 500,000. Right. Right. Now, of course it'll appreciate a little bit, but okay, maybe you break even with this method with building, you know, again, it's, it's value add investing, right? It's the BRRRR strategy.
It's a way to force yourself into some equity and basically just like press the fast forward button on the process. And that gives you that leverage and that creates it into a true, a true investment.
Now, to make things even better, again, you can buy a multifamily or even now, just as of like really last year, they're letting you forecast the future rental income or letting you use the rental income of accessory units. Like down here in Miami, they have like casitas, like little mother-in-law suites, right? Typically, they wouldn't use that rental income to qualify you.
So you're able to take that rental income and really offset your mortgage or if not cover it all in these higher cost of living areas, right? And one cool thing to know is that for every $1,500 in rent that you'd be getting from either, you know, there's ADUs, accessory dwelling units, which are becoming huge right now because there's such a lack of housing in the U.S. right now.
ADUs are sweeping across the nation. So if you're saying to yourself, oh, I can't buy a multifamily. I live in an area that's only in single family homes. Well, you could just plop down a casino. I mean, you could even buy one of those like Amazon houses, those pre-built prefab houses and drop it in your backyard. The 203k will finance that.
You're just blowing my, I mean, the whole Amazon housing thing. It's crazy. Amazon's just going to own the world at some point. Yeah, they will. I mean, this is getting insane.
Yeah, yeah. So, like, you could buy a prefab house. Obviously, you have to, like, you know, finish it and do some, like, stuff inside. But, like, it's a pre-built structure that you drop in your backyard as long as your zoning allows it. You can get the rental income from that, qualify yourself for more. Again, now that's a true investment. You're making money off your own home.
And that's an investment. And that's where you're basically beating the system. When I say like the American dream's new, like this is the new American dream, right? When my family came over from, you know, like Italy and, you know, from, you know, from Ireland, right? And they moved to New York City, they all house hacked.
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Chapter 7: How does the FHA 203K loan compare to other financing options?
It was called like, this is how we're going to afford to live in New York City. They had multifamily properties. They lived in these tenements. They all pitched in. One of them in the family was the lucky one that had the note and they took all and they all combined their rent together. That was how people that immigrants came over to the United States. That's how they were able to afford it.
And that's how a lot of people do it. You see it. You still see it to this day. Immigrant families come in and they share housing. House hacking is like the most American thing you could do.
in my young kid i mean i don't know and i know you coach a lot of people for this but i would even say if you're a young kid and what i mean young you know 20 to 30 yeah if you're in your 20s going to college just out of college this is the move go buy a home in house hack using this loan this would be everything now you might need can can you do like co-signatures co-signers on it you know because yeah
Of course, 21, you may not have the DTI kind of ratio and all that other stuff. But yeah, then you get all your friends to pay you rent. You effectively are living for free. You're actually paying down your home mortgage, which we know the first five to seven years is heavily interest rate bill anyways. They're all paying that down. You now have your very first investment.
It is a 21 year old, 25 year old, 30 year old that essentially you're going to have the bankability from having all this equity that all your friends just paid you down. Right. You have a party house that you're going to love anyways. You're going to be with your friends all the time anyways.
You now actually have your very first investment that could make you a millionaire before you're 30, depending upon where you buy it. This is like the, I keep saying no brainer to me because I'm even sitting here just thinking like, instead of giving my kid,
fund or a college fund or whatever you go buy her a house to do this with and actually help her understand the value of money help her understand business and if for sure get her into the real estate game it's it's free money that everyone could take advantage of right and it's it's you know I'm not the biggest fan of the government by any means sure but I think it's one program that they really did get pretty right
And just with like anything else, like you said, it takes effort. Now, you know, what's the quote? Like to the victor gets the spoils or whatever it is. Like, listen, you like you're not going to get something for nothing. Right. Do you live in the home? Like while it's being renovated? No. So you don't have to actually like physically occupy it. So what happened in my case, right?
You know, I bought the property. It was an eight month renovation. So the requirement is you have to be you have to intend to be there as your primary residence for a year after the closing date. So what happened was the renovation took me eight months. Now, in my position, I was lucky enough. I was able to live with my family at the time.
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Chapter 8: Why should everyone consider buying a home with the FHA 203K loan?
As long as you follow the guidelines on what you're doing, you have something that's going to cover the debt on the previous property and you qualify income wise and you're moving in earnest into the next property. Absolutely. Sanity to me. Yeah. And 5% down every time.
So I know people right now are probably feeling the same way I'm feeling. The best place for them to inquire more is just go hit you up on Instagram. Instagram is the best place. Now, is there any place that they can like...
apply or is there something that they can because i know i'm sitting here and i get the privilege of essentially asking the questions i want to know yeah but i'm sure these watchers and the listeners are like matt what the how do i know more how do i learn more so instagram yep 203k way the 203k way on instagram i've been posting consistently every day for six years on there and again my my
When I built this, all I wanted to do was, you know, I got done with that first deal. And I just remember sitting in that property, being done with the renovation, smelling the paint on the walls, smelling the new floors, like looking around and just being like, how the hell? do not more people know about this? Right. Why did this take me so long to even know it existed?
And mind you, like my, it wasn't a walk in the park for me because I didn't have someone like me that knew about it to walk me through it. I kind of had to just figure it out on my own, which I'm glad I did. Right. Cause it taught me so much about it. Um, so when I created my whole platform, the two or three K way, I just wanted to let everybody know about it.
So my Instagram, um, you know, my YouTube, I have all the information you could ever want or know step by step. Um, you know, obviously people are like, okay, listen, I get it, Matt. I understand it. I want to do it, but I just want to do it and get it right the first time. Make sure I slam dunk it. So I do work with people, right? One-on-one and I coach people through it. And.
you know, guarantee that we walk you through the process to get you six figures of equity, get you cash flowing day one, right? Using this strategy. So you could go to the 203kway.com slash apply to apply to work with me. It's not for everybody. You just have to make sure that you're the right fit for us to work together. But that's an option as well.
So when, I mean, I just want to not be totally selfish with the questions I want to ask. Keep doing it. I always say like the questions that you have are probably the questions that everyone else has on this. Not many people know about it. And that's kind of the benefit I have going on podcasts and stuff like this is like, you know, people are like, oh, what do you want to talk about?
I'm like, you're interested in it. Just ask. Because there's so much to know and there's so much I could tell. But the questions that are obvious to you are probably what everyone else is thinking of.
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