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

0:00Matt Porcaro: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 three and a half percent. But this wasn't just any typical FHA loan. Matt was able to finance in his entire renovation, his closing cost 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 a game-changing investing career, all thanks to a loan that most investors are completely unaware of.

0:53Matt Porcaro:What's going on, everybody? I am Henry Washington, and I'm here with my co-host of the Bigger Pockets Real Estate Podcast, Mr. Dave Meyer. And our guest on the show today is Matt Piccaro from Long Island, New York. You may have seen his post on Instagram. He is at the 203k way 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 properties he never could have afforded otherwise and generate huge equity by rehabbing them without taking on high interest loans.

1:35Matt Porcaro:So let's bring on Matt. Matt Piccaro, welcome to the BiggerPockets podcast. What's up, Henry? How are you? Thanks for having me. Good, man. Good to see you again. Yes, likewise, likewise. 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. 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.

2:14If 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 pre-programs you for being maybe not obsessed with it, but just knowing that it's important. So fast forward, luckily enough, was able to find work in the city, in 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.

2:52So three hours a day, waking up at 5 a.m., 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 the first couple of years. So I kind of started just going down the rabbit hole, you know, just exploring and listening to podcasts like this and just going on. And 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 use books. Everyone's got a hustle there. Right. And I saw a little book there that you probably never heard of before called Rich Dad, Poor Dad.

3:24And I've 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 sense of from a kid growing up in a blue collar environment and a blue collar atmosphere, you're learning that real estate like is a vehicle that rich people use to build wealth and everything. That was a, 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.

3:57So 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 house. I see my parents struggle with their mortgage, like I'm going to need 100,$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 is Melissa. And she was someone I respected. And I pulled her to the side one day and said, Hey, Melissa, like, hey, I'm Matt, like, in my later 20s, like, I'm just looking to buy something. But I've I don't have a lot of money.

4:26Like, 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, 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.

5:06All 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 one hundred fifty thousand versus ten thousand was like, oh, my God, OK, 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 Basements are really popular. She said, like, you live in the basement, rent out the upstairs. That was the first time I really ever heard about the concept of house hacking. And and she put me on my path.

5:36I 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.

5:54Matt Porcaro: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 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 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.

6:37Matt Porcaro: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 was, 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.

7:11Matt Porcaro: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 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 203k product because I've got questions for myself. So you heard about the 203k loan product, but it's an owner-occupied product. Is that how you built your portfolio? Just buying owner-occupied with 203k and then moving out after a year or so? I went out there.

7:44I found out about this 203k. I contacted the only loan officer I knew, which is 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 203K is the best. He's like a hot, you know, hotshot 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-2s. 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.

8:20But 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, you're never going to get that in 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. like a parking spot about a parking spot yeah maybe yeah so um you know suffice it was a couple years back obviously but the the you know the he sent me to sent him 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 yeah 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.

9:15And he said, cause it was listed for like two 90. I was like, I can't even afford this. He said, no, here's the cool thing about this FHA loan and the two Oh three K 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. 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.

9:50And that got me to a much higher pre-approval, like$350 ,000,$360 ,000. So we went in, I looked at the place, it was an absolute disaster. We figured it was going to be about an$80 ,000 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, 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.

10:25So 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.

10:48Matt Porcaro: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 to think like what avenues best for me and always kind of thinking that the grass was always greener with a different strategy, right? Oh, why not trying flipping?

11:18Why not house hacking? Why not Airbnb? 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 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, seeing the floor, getting a new appraisal. And the appraisal came in at 500.

11:48Matt Porcaro:Oh, wow. 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 unit. So I moved in the other. I was paying effectively$400 a month. The tenant was paying$2 ,500 on one unit.

12:25My 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 for$400 a month. And the rest was history, man. I built that equity and I took that equity and started getting into the flipping game.

12:41Matt Porcaro: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. Summer bookings sound great until someone slips by the pool, gets hurt on your dock, or damages your property during a long holiday weekend. A lot of short-term rental investors don't realize their standard policy may leave gaps when it comes to short-term rental activity. That's why investors use Steadily. They offer landlord insurance built for real estate investors, including short-term rentals. And if you're a BiggerPockets pro member, you'll also get 5 % off your landlord insurance premiums.

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16:24Matt Porcaro:All right, we are back on the BiggerPockets podcast. Dave and I are talking with investor Matt Piccaro, 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. 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.

17:05I 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, have three units. They're worth over 2 million and I have over a million dollars in equity just from those renovations. So three units through that. And then I flipped about four properties before 2020 hit.

17:43When 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 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.

18:21My wife wouldn't love that. We settled down. Funny how that happens. Yeah, yeah. So I'd say, you know, I wish I held on to more for sure. I've got several questions about this 203k loan.

18:33Matt Porcaro:Let's do it, man. 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? So the FHA 203k loan is 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 3.5 % down. The 203K is the same thing. It's an owner-occupant loan, obviously, right? So that's why you get the nice 3.5 % 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.

19:20A 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. 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 your mortgage is based off of that.

19:47Matt Porcaro: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.

20:23Matt Porcaro:You 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 may think this is not as achievable? But I tend to disagree with that. But go ahead. 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 there, 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.

20:56Like 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, OK, what what's all this extra paperwork? What's all this crazy stuff they need? And they said, well, you need a you need a line item scope or scope of work broken out by material and labor. Which like you need anyway, like construction project without that. 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. It's like, okay, fine. I'm 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.

21:32I 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 license 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, um, and then you need to bring on someone called an FHA or a two or three K consultant who is a home inspector, right?

22:08So 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 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?

22:37All 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. Now you hand that to the 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.