[00:02:53] Matt Porcaro: Ultimately, these were all new things to me that I thought were never accessible. The caveat with 203K loans is that you have to occupy the property and in my case, being in my mid twenties, that was perfect for me cuz I already didn’t have a house yet, or didn’t have a house yet at the time.

[00:03:09] Matt Porcaro: You know, when I heard about the way the 203K works, I was actually kind of blown away. I actually thought it was too good to be true when I first like found out about it.

[00:03:18] Robert Leonard: Why didn’t some of those other strategies work? Why didn’t traditional rentals, maybe Airbnb or even wholesaling, like what, what didn’t work for those strategies for you?

[00:03:27] Matt Porcaro: So in New York, right, the, you know, it’s a high cost of living here, right? 20% down or 30% down. You know, if I was looking to buy a rental, right, you know, I had to come up with 20% down equity, 15% down equity, right? In my market, that’s a hundred thousand, $150,000, right? You know, at 25 years old, I was barely scratching five grand together, let alone 10 grand Wholesaling was the same.

[00:03:53] Matt Porcaro: With wholesaling, as wholesaling is promoted, it’s, you know, it’s a way that you can get into real estate investing, even though it’s not really investing, but you’re deal finding and you’re able to get started with low money down or, or a little money outta pocket. The trade off was, and one of the things that I didn’t think was that communicated was, if you don’t have the money to invest in marketing and really pushing out there to find these off market deals and good seller leads, you better be putting in a lot of time.

[00:04:20] Matt Porcaro: Right. And I was working a full-time job, Right. I was, I had a nine to five job. I was working as an engineer in New York City. It was hard for me to kind of do both. And I, I did try, I’d say wholesaling was the one that I tried for the longest, just came up. I think one of the main reasons too, and this is talking from the off market, real estate side, right?

[00:04:39] Matt Porcaro: So the thing about off market and going off market, going to buy deals off of the mills, right, is you’re looking to find sellers that are in some type of situation that you’re able to help them and ultimately if they, ideally for you, you’re gonna be able to capitalize on a discount, right? Or better terms from someone going direct to seller rather than if you just went on b MLS or Zillow to find a property right on the regular.

[00:05:03] Matt Porcaro: One of the things I learned from that was that now this house I’m sitting in now and we can get more into it, I’m doing a renovation loan on this. This I bought with a renovation loan as well, and this I bought off market. But one of the things that I didn’t know then that I know now is when you go, when you go direct to seller, right, When you don’t have that agent involved, part of your value that you bring to the sellers being able to solve their problems and listen to them and see what their situation is.

[00:05:27] Matt Porcaro: When I first started out, I was just focused on money, money. As a wholesaler, I just wanted to get them at the price that made sense for me. I didn’t have conversations with them to learn their situations and try to understand what was going on with them. In retrospect, there was probably a couple deals.

[00:05:43] Matt Porcaro: You know, I did get leads, right? I got some leads, but I never closed any of them. But there were probably a couple that I wouldn’t been able to close if I just listen to people. And I think the biggest takeaway is like real estate investing is a, and real estate in general is a people. And if you’re just thinking about the dollars and cents and you’re not thinking about the people and their situations and their problems, you’re not gonna last very long in this bus.

[00:06:04] Matt Porcaro: When you say that you’re in New York, are you talking New York City or New York State? Cuz you know, upstate New York. I’ve spent some, I’m, I’m right in New Hampshire. So New York upstate. New York’s not too far. Even New York City’s not too far. It’s like a three and a half, four hour drive. So Upstate New York’s a lot different than, than Downstate or even New York City.

[00:06:18] Matt Porcaro: So I just wanna kind of get some idea of where you’re. Yeah, so I’m in Long Island, so currently the house I’m sitting in right now is in Long Island. Uh, I invest in Long Island. So Long Island’s, you know, about an hour outside of New York City. It’s a very high cost of living. Very different than upstate New York in many cases.

[00:06:34] Matt Porcaro: It’s a big suburb of New York City, right? Most of the people that live here commute to the city to work every day. Again, stating from New York’s huge as you know, upstate New York and, and downstate and Long Island, New York. Might as well be two very different places. We’re about an hour outside of New York City, and again, a lot of people work outside, you know, New York City.

[00:06:54] Matt Porcaro: You know, I lived there for a number of years. I grew up in Long Island, but I moved to New York City for a little while. We had just moved back into now this house that we’re in. But overall still, you know, New York across the board is just, is just trickier than a lot of other states. I mean, every, every state’s tough, right?

[00:07:10] Matt Porcaro: At the end of the day, I like to say, you know, everybody comes to me with the same issue. Oh, how do I do this in my market? My market’s so hot, right? I’m in Florida, My market’s so hot. I’m in California. My market’s so hot. Listen, everyone’s market’s hot, you know, especially in the last couple years it’s been cooling off a little bit.

[00:07:27] Matt Porcaro: But yeah, at the end of the day, inventory is low. Every market’s gonna be hot. Right? It’s funny when I have people that come to me and they’re like, Yeah, I can’t do this in my market. And I ask where they are and they’re in like St. Louis, and I’m like, I can’t get on your side with that. Right? I did it here in New York. If you could do it in New York, you could do it anywhere, Right? So it’s, it’s the same. Rules apply every.

[00:07:42] Robert Leonard: So for those who aren’t familiar with the 203K loan product, like you weren’t, give us an overview of it. Mm-hmm. , what some of the requirements there are for using one, et cetera. Let’s dive deep into kind of this loan product.

[00:07:59] Matt Porcaro: Sure. The 203K loan is an FHA loan. Okay. So it’s, you know, FHA became like a, almost like a bad word in the last two years with the seller’s market that we had because FHA loans are typically, There’s a lot of things that we’re holding people back and it, it’s not a good case in the seller’s market, but just because the 203K is an FHA loan doesn’t mean it acts the same way a traditional one does.

[00:08:21] Matt Porcaro: Right? What’s unique about the 203K loan is the 203K loan allows you to purchase properties that need renovation or they don’t need a renovation. But the whole point of it is that it allows you to wrap the renovation budget into your mortgage, into your purchase price of your. So what it allows you to do is still purchase properties for three and a half percent down the way a traditional FHA works, but also use the bank’s money to finance all the renovation costs so you don’t have to finance any of it out of pocket.

[00:08:49] Matt Porcaro: Now, where the 203K and FHA loans really shine when you’re first starting out, right? You know, this is, we’re talking about people that are just getting into the game just like I was when you’re first starting out, you wanna own a couple doors, you want to get into passive income, you want a house hack, stuff like that.

[00:09:05] Matt Porcaro: 203K is beautiful for that because the 203K, just like the traditional FHA, allows you to purchase up to a four unit property so long as you live in one of the units. When I got started, I purchased a duplex, I purchased a two family. It was actually kind of by accident mostly because I was very, I even at the time, even with a pretty decent job in the city, I still didn’t make enough money to purchase like the worst stuff on Long Island.

[00:09:32] Matt Porcaro: Right? Again, talking about cost of living here and how expensive everything. I was looking at the bottom of the barrel in my market, okay? And I came up on this property and, you know, it was completely dilapidated. It was a literal crack house. It had, you know, there was crap everywhere. Literally like human feces and animal feces everywhere.

[00:09:53] Matt Porcaro: It smelt horrible. It was disgusting. However, kind of my realtor and loan officer were like, Well you could kind of, you know, this is something that’s maybe in your price range. And I was like, Well, no it’s not. Cuz I think at the time I was only approved for about like 300,000 or something like that, which again is like the bottom of the barrel in New York.

[00:10:10] Matt Porcaro: Right? I was like, Well I can’t get approved for this. And then they mentioned to me, Well listen, with the FHA loan, the 203K loan as well, you’re able to forecast the future rental income that you’d be getting from the other. This property happened to be a duplex, so what it allowed me to do was it allowed me to forecast 75% of the future rental income from the other tenant, and that put that on my debt-to-income ratio, which elevated my approval rating quite a bit.

[00:10:35] Matt Porcaro: It approved me for like an extra 50, $60,000. It was essentially, it was another great way to get into something because again, on my own I couldn’t do it. But again, where this really shines is you’re able to use this for multifamily proper. You know, some of the guidelines and everything, again, is all to the FHA loan.

[00:10:51] Matt Porcaro: So if you’re listening and you’re familiar with the FHA, they’re all the same guidelines, which are at the end of the day, pretty much the most liberal guidelines there could be for buying a house, right? The whole idea of the FHA loan was to allow as many people as possible to give them the opportunity to purchase their own home in their market, right?

[00:11:08] Matt Porcaro: What do you have? You have very low-down payment required, so three and a half percent down out of your pocket is all. In the 203K’s case, the three and a half percent down would be three and a half percent of the purchase price of the property, plus the renovation budget that you requi, that you’re gonna be required to do the renovation that you wanna do on your house.

[00:11:26] Matt Porcaro: Easy numbers, for example. You purchase a house for $50,000 and you have a $50,000 renovation budget, you’re all in for a hundred thousand. The 203K is gonna require you to put three and a half percent down of that total, so that would be 3,500 bucks. All right, so that’s where that comes in. Credit score five 80 credit score is the minimum in the guidelines.

[00:11:46] Matt Porcaro: Most banks now FHAs just guidelines, right? They actually, the government’s not the one giving you the loan. What they do is they write the guidelines and then the banks give you the loans based on those guidelines. They get incentives to do. However, five 80 credit scores the guidelines. But truth be told, most banks are gonna be looking you for you to be in the sixes.

[00:12:04] Matt Porcaro: Six plus, right? Again, still very forgiving. A lot of conventional loans out there are looking to have you in the seven. Stuff like that again, gives you another opportunity. There also debt to income ratio. It’s somewhere around the neighborhood of 50%, give or take. There’s different situations where it could come up or down, but 50% of your debt to income ratio is what could go towards your, your monthly.

[00:12:24] Matt Porcaro: When people ask like, what can I get approved for? At the end of the day, everything is based off of that debt to income ratio. Right? And again, that’s why it’s great that you can buy a distressed multifamily property. Not only build equity into it doing the renovation, but then you can also get forecast that future income to get you approved for more than you would’ve on your own.

[00:12:42] Matt Porcaro: So those are the really main factors of it in terms of guidelines and what they require from the borrower to. It needs to be you. It needs to be under your name. What people love to, uh, people love to talk about using their LLC. You’re not there yet, right? There’s no LLC to be had here that you’re buying with your own name.

[00:12:58] Matt Porcaro: That’s how you get all of the benefits and make sure that you’re getting the low interest rates, the low down payment.

[00:13:04] Robert Leonard: So my understanding is that since this is an FHA product, if somebody already has an FHA loan, just a regular one without a 203K, they wouldn’t be able to do this as well. Correct? You can still only have one FHA product at a time?

[00:13:17] Matt Porcaro: Right. That’s correct. So obviously it depends on your situation. The whole point of this loan is to really get people started and get people off the ground. Right. Especially with the 203K. Right? The FHA by itself is, is great again for the multifamily, at least. However, what I really loved about the 203K loan has allowed me to build equity into the deal.

[00:13:36] Matt Porcaro: Depends on your goals, right? But yeah, to answer your question, at the end of the day, you have to make sure that you’re within the confines of the FHA guidelines, right? The FHA guidelines state that you’re using this as your primary residents, right? That has to make sense. That has to be what you’re doing, right?

[00:13:50] Matt Porcaro: They don’t wanna see you using it over and over again. Obviously, it’s a really lucrative loan. It’s a great loan product. It’s giving you an advantage above, you know, other loans that are out there. So when you use it, you wanna make sure that you’re using it in earnest and you have to have, you know, the rule is to have, you can have one under your name at any given time.

[00:14:08] Matt Porcaro: There’s one caveat to that rule, which is that if you are moving over 150 miles away or something like that, you could keep the remaining as long as you have a plan on what to do with. Guidelines are kind of weird on if you’re leaving the property, if you’re renting it out, you know, you have to have good reason.

[00:14:24] Matt Porcaro: You still have to be able to get approved, that the income ratio to pay for both properties. But yeah, to answer your question, it’s, it’s just one at a time.

[00:14:33] Robert Leonard: So how are you doing this logistically? You’re buying one, renovating it, et cetera, living there for a year and then, and then what, are you selling it?

[00:14:40] Robert Leonard: Are you so that you can get rid of that FHA loan and do it again? Are you refinancing into conventional so you can then use the FHA again for your next property? Like what does that look like?

[00:14:48] Matt Porcaro: So the short answer to the question is, I, I don’t repeat the process. So me and my wife we’re in one now, and this is now years later.

[00:14:55] Matt Porcaro: Again, the 203K strategy and the 203K way that I promote and I, I tell people about is basically combining house hacking and the birth strategy into one. Okay. So what it’s allowing you to do is number one, so all my first deals, so just to give you, just to back up right, give you a little bit on my first one with my 2k, right?

[00:15:11] Matt Porcaro: So I purchased this property for two 70,000. Ok. This du. And I put $80,000 of renovation budget into the property. It was a full gut rehab and it was a pretty heavy rehab and, but I knew going into this, when I looked at it through the eyes of an investor, you can really see how impressive this loan could come to be.

[00:15:30] Matt Porcaro: Right? Ultimately, what it allows you to do again is, is use all the bank’s money to get all the benefits of the equity that you’re able to build. I knew that after the renovation that this property would be worth somewhere in the neighborhood of the 4,000 range. Ok. I knew right there that I was gonna build some equity.

[00:15:46] Matt Porcaro: I also knew that I was gonna be able to live in one unit, rent out the other one, basically have the tenant pay my mortgage, or close almost all of it, and then eventually down the line, move out and then, you know, rent out both units for cash. What ended up happening was I ended up finishing the renovation eight months later.

[00:16:01] Matt Porcaro: It was about, so I was all in for 350,000. After the renovation was completed. I got a reappraisal because I was gonna immediately refinance into conventional. Right. One of the cool things, again, to your point about having multiple FHA loans at any given, FHA is great, but it does have that thing called mortgage insurance on it, right?

[00:16:19] Matt Porcaro: For anybody that doesn’t know what mortgage insurance is, mortgage insurance is basically the fee you pay for using a low down payment loan. You’re basically paying into this big insurance fund for all other people that are getting low down payment loans, and you know it’s anywhere from, it’s a couple hundred bucks a month on your.

[00:16:37] Matt Porcaro: So I wanted to get rid of that Also, 203K loans are usually like a quarter point interest rate higher than than other loans. So I wanted to get into a better, a better rate as well. So I immediately refinanced out. But the reason I was able to refinance is because I built 30,000 of equity into the deal.

[00:16:53] Matt Porcaro: Okay? So I had more than enough equity to refinance into conventional. And then once I did that, I no longer had an FHA under my belt. But most importantly, I had a lot of equity in this property now that I was able to use and leverage to go buy more deals. And that was kind of the point. So for me, I got that first property.

[00:17:09] Matt Porcaro: I basically did a birth strategy with only three and a half percent down, right? I bought it, renovated it, rented everything out, and then repeated the process. Now, the way I repeated the process was I took that equity and now I combine it with hard money on my next deal. So I actually got into flipping afterwards.

[00:17:25] Matt Porcaro: That was, that was really my primary focus was to getting into the flipping game. So I wasn’t really into the whole game. I’m still not as much. What ended up happening was I, that equity that I had was all the money that I felt like I needed for the longest time that I couldn’t get on my own right. I went from only having, my down payment for that property was 9,500.

[00:17:45] Matt Porcaro: I created 130,000 out of that. So when you think about, I mean, how much I 10 xed my money or more, not counting the money I was making on the, on the, on the cash flow, that opens so many doors for me. So what I like to tell people is like, you know, I have people in my community. People that I, that I walk through this process and ultimately, like they all, and I thought myself that you would go and repeat it and go do another 203K loan.

[00:18:11] Matt Porcaro: Right? Because the 203K loan, like, sounds great. Right? If you could keep staying within the confines and the loans and, and listen, it’s possible. Can you repeat it? Absolutely. However, you have to stay within the guidelines and it has to make sense and the banks need to approve it and everything like that, but as long as you play by the rules and you’re doing it in earnest and you’re not doing anything shady, 100%.

[00:18:29] Matt Porcaro: This is something that you could repeat a couple times over the years, right? However, what people realize is, again, especially what people that are looking at it through the eyes of an investor, you do one, you’re really not gonna need to repeat it because what’s gonna happen is you’re gonna create a lot of equity from it.

[00:18:44] Matt Porcaro: You’re gonna get a lot of experience. And you’re also gonna learn the process on how you’re going. You’re gonna be able to leverage your experience and everything like that. You know, what ended up happening was I actually didn’t even tap into the actual equity on my house. I had something laid out with a hard money lender that I did, and they basically gave me a line of credit secured by that property.

[00:19:03] Matt Porcaro: But they, I didn’t actually need to tape pull the equity outta the house. They just gave me a line of credit that was secured on the property. And then I, that covered up by equity and then they covered the, They also liked that I had just done a flip that was a very profitable flip. So now they were willing to gimme better terms, everything like that.

[00:19:19] Matt Porcaro: A lot of people that go through this, they realize that they don’t even actually even tap into that equity because they realize that money is actually isn’t the issue. It’s the experience in learning how to find good deals and then the money you could raise via private capital or, or what have you. So that’s usually what ends up.

[00:19:34] Robert Leonard: How do interest rates compare on a 203K loan to a traditional FHA or owner occupied loan? And, and I don’t necessarily mean like what percentage exactly are they today? Cause somebody could listen to it today. You could listen to it in three weeks a year from now. Interest rates are obviously gonna be different, but I’m just curious what is like the relationship with a 203K loan interest rate versus regular?

[00:19:52] Robert Leonard: Are they traditionally like one point higher? Are they two points higher? Are they about the same? Like-

[00:19:59] Matt Porcaro: Yeah, no, not even close. Like a quarter. Remember, FHA is like the lowest interest rate product that’s out there, right? They’re actually always traditionally a little lower than conventional in many cases, right?

[00:20:08] Matt Porcaro: But when you add in that rehab component, it becomes a little bit more risky for the bank. So I, it becomes a little more risky. So they’ll add like the quarter point in. Banks actually make more money on these loans. They actually like FHA loans. That’s kind of part of the reason why fha, you know, they built it into the loan product to give them a little bit of motivation to do these loans, right?

[00:20:26] Matt Porcaro: It’s behoove of the banks. Now we can get into why kinds, Sometimes it gets a bad name. Reality is it’s more involved right now. There are plenty of lenders out there that specialize in these types of things, and that’s always what I, what I recommend to people that are looking to get. But yeah, I mean, you could look and shop around and notice, you know, that they’ll be a little bit higher on a renovation loan, but really not much.

[00:20:47] Matt Porcaro: You know, 203K loans and Homestyle loans. It’s another, It’s Fannie Mae’s version of the two. Very popular. Just as popular as these are products that are out there, but again, it really shouldn’t be that much different than conventional.

[00:21:05] Robert Leonard: How about the rehabs themselves? What rehabs can be done with a 203K loan? Does it have to be a full gut renovation? Can it be a light rehab? Can you pretty much do any rehab you want? Like how does that work?

[00:21:12] Matt Porcaro: Ultimately, there’s no really limit to what you can do on, on rehabs. When I say no limit, I mean virtually no limit. You can, you can buy anything from a house that’s barely got a foundation sitting on it, barely sitting on a foundation.

[00:21:27] Matt Porcaro: And as long as it’s within your budget on what you’re approved for, if you can afford to do the new build on top of that existing, you know, I shouldn’t, let’s not mix it up. So what you’re not allowed to do is you’re not allowed to just buy land and use a 203K to build, okay? There needs to be some sort of existing residential s.

[00:21:46] Matt Porcaro: Now that existing residential structure could be really dilapidated as long as you have the budget in your, what you’re approved for, for your. And you can afford to do like all the construction that needs to get the property up to snuff your game, right? It’s totally within what you’re approved for. You know, So you can get anything from something like I bought, which was like completely falling down to like, it just completely crap to, You could buy something that’s completely moving ready and maybe you’re just like a, you know, you’re just Harry and Sally home buyer and you just wanna renovate your kitchens and bathrooms and you want the bank to pay for it.

[00:22:19] Matt Porcaro: You don’t wanna pay it outta pocket. You wanna finance it over 30 years on your. So there’s no in between, right? But again, where the value comes in for me and people that wanna be investors and everything like that, is to find something that’s really messed up. Find something that’s really beat up in the same way a flipper would, because ultimately that’s where you build in the most equity, right?

[00:22:36] Matt Porcaro: You’re only putting in, you’re putting in such a low amount of money out of your pocket to be able to finance a ton of money on the other end. When you think about how powerful of a loan that. You know, the other caveat to it is like they won’t let you really do anything outside of the existing structure.

[00:22:50] Matt Porcaro: Like generally speaking, they, they’re not gonna let you build a pool house or like big basketball court or stuff like that. It has to be integral to the property.

[00:23:01] Robert Leonard: So occasionally these types of properties that you’ll wanna do this with will hit the MLS, but not too often, and at least in my experience, when I see that they have hit the MLS, they’re still usually overpriced.

[00:23:10] Robert Leonard: People are still asking too much money for. So how are you finding the types of properties that work well with a 203K loan, especially for somebody who’s newer who might not know these off market strategies, cold calling, things like that.

[00:23:20] Matt Porcaro: You know, I’ve always said that that 203K loans allow people to buy in kind of the goldilock, right?

[00:23:28] Matt Porcaro: To your point, right. When it goes to the mls, you know, in this day and age, it’s like, although that’s changed a little bit, and you know, as, as, as we’re talking right now, the market’s softening up. But, you know, for the last two, three years yeah. You were finding that it was, you know, it was maybe tougher to find something that would pencil out.

[00:23:44] Matt Porcaro: So, traditionally when I, when I first started this and, and I, I was helping some other friends and family do this, you know, foreclosures were big, right? And I always felt that foreclosure properties, properties that were listed on the MLS by the banks, We’re always kind of priced in a position where there was still a little high, but again, given the terms of the 203K loan, you’re putting so little outta pocket.

[00:24:04] Matt Porcaro: You’re getting such a low interest rate. You were able to afford more than like a flipper would. Right? If I was a flipper, I’d be looking to pick up at 60 cents on the dollar, 65 cents on the dollar, where banks are listing it at 80 cents on the dollar, 75 cents on the dollar. But when it’s your own property, you’re living in it, you feel like you’re gonna be having and holding onto it long term.

[00:24:22] Matt Porcaro: The numbers can really work. The first end of it I would say is that there’s a goldilock zone in the sense that anything that’s kind of a fixerupper on the MLS is a great, great thing to go after with the 203K. Cause what you’re gonna find is, you know, again, the last two years kind of holding aside, you’re going to be able to pay more than cash buyers and, and flippers and stuff like that.

[00:24:43] Matt Porcaro: Cause flippers have a lot more, they have to, they have to account for in terms terms of revenue and overhead and cost of capital and everything like that. Again, you have the lowest cost of capital. You’re putting the lowest amount outta pocket. So you have so much ability to just to leverage this stuff to the hills that other people don’t have.

[00:24:59] Matt Porcaro: So traditionally, again, you’re able to play more. So that’s why I say like, if you really want to succeed with this, you need to play the numbers game. Right? And this isn’t everything people in my community, people that I’ve worked with, myself included. You gotta place 10, 15, 20 offers to find a deal. Right?

[00:25:17] Matt Porcaro: Listen, if it was easy to just go on Zillow and just find something that penciled out and you and like, and you just like go like, Okay, Mr. Seller, this is what I’m gonna pay and I’m gonna make 20% equity, it wouldn’t be a deal. Right? Deals are made not found, right? So at the end of the day, like what I tell people is you just need to place as many offers as.

[00:25:36] Matt Porcaro: You need to just constantly place offers on anything and everything that could possibly pencil out and place the offers where it makes sense for you now off market. Yeah, absolutely. I mean, that’s a great arsenal to add, but I would still say like 90% of the people in my community and people that I’ve spoken to still get their deals off of the mls just because again, you’re in that goldilock zone, you’re, you’re not where retail buyers are, cuz retail buyers are looking for move in ready.

[00:26:00] Matt Porcaro: They wouldn’t even be able to get approved for something that couldn’t pass in. You have the flippers and everybody down here and wholesalers and stuff, and they’re down here and they’re looking for like super, super cheap properties. So you’re kinda in this like little bit of a limbo zone where you have a little more play than most people do.

[00:26:16] Matt Porcaro: And that’s why I would say just MLS still hit it. Still just place a lot of offers more than you think. And what I’m finding is you place about 10 to 20 offers, you’re gonna find something that works out and you’re gonna find a seller that’s willing to negotiate and you’re able to scoop something up for a good.

[00:26:33] Robert Leonard: What are the rules around who can do the work on the properties? What are the contractor rules, things like that, when it comes to 203 loan?

[00:26:40] Matt Porcaro: The rule really is that they just wanna make sure that it’s a licensed and insured contractor that has experience, has some trade lines, and is able to financially back the project.

[00:26:51] Matt Porcaro: It’s funny because this ends up being a sticking point for a lot of people. People say like, Oh, I can’t find contractors that’ll do this. That’s a good thing, right? Those are red flags. The, the reasons that contractors don’t like doing this is because, and I could say this because I grew up in the business.

[00:27:06] Matt Porcaro: My dad’s a general contractor. I know what, I know what they’re referring to. There’s guys in the business that work outta the back of their truck, and that’s most of the business. I would say that’s 80, 90% of the business, okay? They don’t have a back office. They’re not built as a business. They’re a guy that’s really good with their hands, and then they become a business by default.

[00:27:26] Matt Porcaro: Again, my family’s included in that. My mom does the paperwork. My dad is the general contractor, like I know how this game. Now my dad has done multiple 203K loans at this point. He understands them now. And you know, in the beginning he hated the paperwork. But now once he’s done it once or twice, he realizes what it is.

[00:27:43] Matt Porcaro: And you know, I tell people to tell contractors it’s guaranteed money, right? I tell people all the time, like if you talk to a contractor, a contractor goes and does a project with a new client and they say, Okay, you wanna sign the contract? All right, we’re gonna start 10% deposit. Great. They give you that 10%.

[00:28:00] Matt Porcaro: Do you know for sure that that seller or that, or that property owner has the other 90% of the money, or they’re just gonna lead you down? They’re just gonna lead you down the path and you’re gonna find out that they don’t even have the money to pay for it. This is guaranteed money. The way that it works is you create the renovation budget during one year in the contract.

[00:28:18] Matt Porcaro: So once you go into contract, you’re gonna bring in someone called a 203K consultant. They’re basically like a home inspector. They also, but they’re, what they’re also adding to the report is a scope of work of what you wanna do to the property to renovate it, getting it up to snuff. Then they’re gonna create a scope of work from that, and then you’re gonna bid that scope of work out to contractors, and contractors are gonna come back to you with numbers.

[00:28:38] Matt Porcaro: And then you pick the contractor that you wanna go with and the number that makes sense once you close on the property, that renovation budget plus a 10% slush fund goes into, uh, into an escrow account. That money’s there. It’s guaranteed, it’s there to be paid out for you. What the bank wants to know is the bank wants to know that these contractors are good enough to do it now.

[00:28:59] Matt Porcaro: The banks are looking for license ship insured. They also look to make sure that you have trade lines, right? So you’re able to go and you’re able to get materials. What they don’t wanna see happen is the contractor run outta money on the project and then not be able to continue without more money.

[00:29:14] Matt Porcaro: That’s a bad thing, and what I don’t think people understand, Again, having been in the business for a very long time, worked in New York City doing very high end construction. One of the things that people have a sticking point on 203Ks is now some banks are better than others, but usually banks are not gonna give you a deposit upfront to start the work.

[00:29:31] Matt Porcaro: The contractor needs to be able to mobilize and start the project without their first deposit or draw. Now, I know that sounds foreign to a lot of people, but believe it or not, in big construction, again, big construction in Manhattan are pretty much anywhere in the us. No contractors start with a deposit.

[00:29:48] Matt Porcaro: There’s no such thing as deposits because they wanna make sure that you’re financially able to run the project. This is, this shouldn’t just be for 203K loans. This should be at all loans. The reason why contractors get bad rap are because people continue to pick bad contractors that aren’t suited for these types of projects.

[00:30:04] Matt Porcaro: What happens is the, these contractors get into scenarios where they’re not spending the money on the project, they’re spending the money on their rent, their car, their kids, everything else, and they’re mixing up the profits and they’re mixing up their deposits with things that happens. I know this is a long answer to your question, but I think I just wanna get a point, the point across, because people come to me all the time with that saying like, Oh, I can’t find a contractor that’s willing to do.

[00:30:28] Matt Porcaro: Good. There’s only a small percentage that should be able and would be able to do it. And when I, you know, on my side, I wanna make sure that I’m working with the best of the best contractor that I can afford. The cheap guy will never work out. There’s price versus cost. You get the lowest cost guy, lowest price guy, it’s always gonna cost you longer, more in the long run.

[00:30:48] Matt Porcaro: Okay? You get what you pay for in this business, and you wanna make sure that you always hire the best contractor that you can afford that’s licensed and insured, and has the wherewithal to make this project done.

[00:31:00] Robert Leonard: When it comes to rehabs or really any project or service that you’re paying for, it’s said that there’s this triangle of cost, quality, and the cost is how much you’re gonna pay all three time is how long it’s gonna take. Quality is how good it’s gonna be. And you can’t have all three, you gotta pick two. It’s, you know, you always gotta pick the two you want. And so I, It sounds like it’s the same case here.

[00:31:17] Matt Porcaro: No, it’s everywhere. Right. You know, it’s, it’s, And again, like I, you know, when I tell people about this, I’m like, this is no different than I, listen, I see flippers in the business. I have guys that are contacting, you know, my dad all the time. And just like that, use the cheap guy. Listen, you’re never gonna save money on the re. You don’t save money on the renovation.

[00:31:37] Matt Porcaro: I’ll say it again, right people, Newbies. I don’t know why. I don’t know why this is a thing. I don’t know why it continues to perpetuate. While everybody, like people that are experienced, continue to scream from the mountaintops, you cannot cheap your way out of a renovation. Every person getting into real estate still thinks they can do it.

[00:31:55] Matt Porcaro: The renovation number is the renovation number. You’re not gonna get a deal because your dad’s friend’s brother is a plumber. You’re not gonna be able to shave money off the renovation. Cost is always gonna be the renovation cost. There’s nothing you could do. That price is fixed. You have to understand it as that.

[00:32:13] Matt Porcaro: The way you get around that is by buying better. You make money on the purchase. Right? I’m sure you’ve heard that a thousand times. If you’re listening to this, you probably heard that a thousand times as. If you need $10,000 more in renovation budget, it’s way easier to try to get the price lower $10,000 than to try to save 10 grand on the renovation.

[00:32:34] Matt Porcaro: 10 grand goes a lot longer way on a renovation than it does on just asking for a price reduction. It’s way easier to do that than to try to scrape out $10,000 worth of work. I mean, again, I think like to your point of the triangle, it’s just you can’t have all three. And I mean, I would always prefer to always have the people that are good quality and I’m willing to pay for that quality cuz I know it’s gonna cost me less in the long run.

[00:32:57] Robert Leonard: What are some of the mistakes that you’ve made using 203K loans. And what are some of the mistakes that you see? New people you help new people do this all the time. What are some of the mistakes that you’re seeing them?

[00:33:05] Matt Porcaro: So it’s kind of just piggyback off what I just said, just buying too high again, especially if they’re looking to use this as an investment, right?

[00:33:12] Matt Porcaro: Looking to use the 203K to basically do a bur strategy or house hacking strategy. But really more importantly than that is the number one mistake people make is they work with lenders 203K consultants and or contractors that just don’t understand this process. Mostly starting with the lender, right?

[00:33:27] Matt Porcaro: The lender kind of is gonna quarterback the entire thing in the sense that like if you have a bad lender, nothing else is gonna work. There’s not many banks that specialize in this many will actually try to steer you away from it. The reason they steer you away from it is not because they want it your, they want it to be in your best interest.

[00:33:45] Matt Porcaro: The reason they steer you away from it is cause they don’t understand it, and then they can’t sell you as a, they can’t sell you. So they’re gonna try to put you in something else. They don’t care about your best interest. They care about their best interests, which is fine. That’s right. How to win friends and influence people.

[00:33:57] Matt Porcaro: Everybody cares about themselves. So at the end of the day, if you decide this is something that you wanna. Just know that there are plenty of renovation specialized lenders that exist out there that are more than willing to do these loans and actually specialize in these types of loans. What you’ll find is when you work with someone that specializes in them, the paperwork process is not that difficult.

[00:34:19] Matt Porcaro: It’s pretty, pretty clear cut. And again, when you talk about what the 203K loan does in terms of, in terms of leverage, right? When you think about how much money the bank is giving you in exchange for three and a half percent, They’re giving you, they’re giving you the purchase price to a house, Plus they’re financing all of the renovation costs for.

[00:34:38] Matt Porcaro: Yes, they’re gonna want your ducks to be in a row. Yes, they are going to want a contractor that knows what the hell they’re doing. Yes, they’re gonna wanna make sure that you have a clear scope of work that’s not outlandish. To think the fact that people use, Oh, there’s extra paperwork as a reason not to use this loan, just goes to show me that people just don’t like money or they want the easy way out.

[00:34:59] Matt Porcaro: And you know, honestly, if that’s the way that you’re gonna go through life, you’re gonna have a really rough time regard. What they’re asking for in return for what they’re giving, I still think, in my opinion, is still insane. It’s by far the most powerful form of leverage that exists for the average borrower period.

[00:35:13] Matt Porcaro: I would go, I’d go to the grave with that. The biggest thing though is require, is making sure that you have a lender that’s experienced with this process. So that’s the first thing. I talk a lot on my, you know, on my, We could give like info on my socials and everything like that. I talk about it all the time.

[00:35:27] Matt Porcaro: But you know, one of the quickest ways you could do it is just looking up the 203K endorsement summary. It’s something that you can Google. It’s the HUD directory, and you can go in, scroll down to the most recent month in year, and then you can look through your market and see who’s doing the most 203K loans in your market.

[00:35:43] Matt Porcaro: One of the ways you do that is you go through and you look at which brokerages are doing the. Then you call your local brokers. Some of ’em are national, right? Some of ’em are like Loan Depot or some of the big guys. But you call the local branch to your market and say, Hey, who’s the head of renovation lending in your market?

[00:35:58] Matt Porcaro: And what they’ll do is they’ll put you in contact with that person, and generally speaking, you’re gonna be put on the phone with someone that’s gonna actually, actually know what they’re doing. I would still say call around and call a bunch of those different ones that come up on the list. I just feel ’em out.

[00:36:10] Matt Porcaro: And at the end of the day, you can know very quickly if these people are just BSing you. By the way, they answer some questions to you, but that’s probably the biggest thing. The last thing I would say is to the point of contractors and 203K consultants, 203K consultants can be bad too, right? Just because they’re, They’re certified 203K consultants doesn’t mean they’re not good.

[00:36:30] Matt Porcaro: I’ve dealt with a lot of bad ones. I’ve dealt with a lot of good ones, and I’ve seen the difference that it can make. The 203K consultant is basically a, a hybrid between a, between an inspector and a cost estimator and like a project estimator. Okay? They only, they not only need to understand how to, how to inspect the house, but they also need to understand what work needs to go into a house and roughly what it would cost.

[00:36:51] Matt Porcaro: So where a lot of people screw up is they get their contractor in the house first and their contractor builds up a scope of. And then the 203K consultant comes in and they tell you, they basically muddy up the waters. It should be in the opposite direction. What you need to do is you need to bring the 203K consultant in first cause they’re gonna inspect the property and tell you what the property needs.

[00:37:10] Matt Porcaro: They’re also gonna tell you what you would, you know, and they’re, you’re gonna go through and then tell them what you’d like to do with the property. They’re gonna create something called an SOR report. It’s a schedule of repairs, but basically what that is, is that’s the scope of work. Denoting what needs to be done to the property, to get it up to code, and make sure it’s up to FHA guidelines and it’s safe.

[00:37:28] Matt Porcaro: And then they’re also gonna go into what you wanna do to the property to renovate it, to make it your own. From there, Once you have that scope of work, that scope of work should go to the contractors that you are bidding on the property and you show them that scope of work and you let them know, Hey, what is for this scope of work?

[00:37:44] Matt Porcaro: What is labor and material gonna be? It actually makes the process a lot easier for the contractor. And now what you’re doing is you’re doing something called leveling the bid, which again, in the construction business is extremely important. It gets done on every single project. But leveling the bid makes sure that when you’re getting multiple contractors to bid, which you should always do, that’s another mistake people make, is they just get one contractor come in.

[00:38:03] Matt Porcaro: You should always have multiple contractors. I always say three to five contractors bidding on your project. Now you can compare all, they’re all bidding on the same scope of work. Now you can compare numbers across the board and you can see where guys are high guys are low, and that’ll actually help you get the best bang for your buck as well. When you decide on a contractor that’s gonna be best for.

[00:38:19] Robert Leonard: Matt, you briefly mentioned your socials. Let’s give a handoff to everybody who’s listening as we wrap up the show to know where they can go to find you, connect with you, learn more about what you’re doing, what you’re teaching more about 203K loans.

[00:38:34] Matt Porcaro: Yeah, sure. Instagram’s where this all started, right back in like 2018, 2019. You know, I was like, I asked my wife, I was sitting on a couch one day. I was like, hey, do you think if I like made an Instagram account about this, people would care? And like, you know, I would answer some questions about 203K loans.

[00:38:47] Matt Porcaro: Cause honestly, there was no one out there answering them. I feel like prior to me, you know, when I did this, the first time, I was kind, I really just figured it out on my own. Anyway, so that’s a little story behind Instagram. So Instagram happens to be where, Where you could find me the most. It’s @203Kway.

[00:39:01] Matt Porcaro: @203Kway on Instagram. There’s the 203Kway.com, and also I’m on YouTube as well. That one, you could just search the 203K Way. You’ll see my face popping up everywhere. You could subscribe to that channel, and that’s where I go a little more in depth into a lot of different strategies, finding contractors, how to find the right deals for two or three Ks stuff.

[00:39:19] Robert Leonard: I’ll be sure to put a link to all your different resources in the show notes below for anybody that’s interested in checking ’em out. Matt, thanks so much for joining me.

[00:39:27] Matt Porcaro: Robert, thanks, man. Good to be here. Thanks again.

[00:39:34] Robert Leonard: All right, guys. That’s all I had for this week’s episode of Real Estate Investing. I’ll see you again next week.

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