BRRRR Strategy Help - Focusing on the Refinancing Aspect

[Dylan Bednarz]

Hello everyone,

I am new to BiggerPockets and relatively new to real estate investing in itself (I have been doing a lot of research within the past 4-6 months), but this BRRRR strategy has made its way to the top of my list of ideas to begin my real estate investing. However, I am having a hard time fully grasping the concept. Let me give you some background:

I am looking to purchase my first house, as well as, start a real estate investing journey. I graduated college in May of 2017 and now I work a full time 9-5 (well 7-3:30) job, that I am very happy with, but I have always had an interest and passion in the real estate world and would love to start part-time investing to make some extra cash and increase my yearly salary (as you can imagine I do not have "a lot" of money saved up at this moment). My true interest lies in house flipping, so my initial idea was to get an FHA loan, buy a house in distress, rehab it, then live in it. This would primarily be a test run on how I did as if this was an investment house that I would be flipping. I would treat it exactly as if it were only an investment property, I'd analyze the numbers and see (if I wanted to sell it) how much profit, if any, I would've made. Then I would take the system I used for this house and apply it on another house but using a hard-money loan instead of an FHA (this is with the great assumption that there is no way a bank would give me another loan right after my FHA loan), purchase another house in distress, rehab it, and hopefully flip it for a profit. Upon researching hard-money loans, it appears that the interest on the loan would completely obliterate my profit margin, so I decided to start brainstorming other ideas which is where this BRRRR strategy came into place. I am very very VERY hesitant to renting simply because of the idea of managing tenants, but if the deal and strategy really is that great, then I may have to change my mind.

My idea now is to purchase a two-family/multi-family house in distress (with an FHA loan, unless another more beneficial option is available - which I would love to hear from the readers about), rehab both units, rent one unit and live in another, then "refinance" the property. My misunderstanding is the refinancing aspect, hence it is in quotations. If I refinance my FHA loan, does that mean I am now taking a second loan out or am I replacing the FHA loan? I honestly do not even have any tangible questions to ask in regards to the refinancing aspect because I truly do not understand how this can build growth and help me move forward with investing.

I have read many forum posts, and many articles, in regards to the BRRRR strategy, but none of which go into deep detail with tangible examples. They especially do not go into thorough detail on the refinancing aspect. So, if someone can please first go into deep detail on the BRRRR strategy, and then primarily focus on the refinancing aspect, I would sincerely appreciate it. I would also greatly appreciate the use of an example with some numbers as well.

My apologies for the lengthy post, but I thank you very much in advance for your time, patience, and help.

[Aaron K.]

You have mixed two strategies here which typically don't work extremely well together, house hacking and BRRRR. The refinance part is typically for people who use cash or a HELOC to purchase and rehab a property they then refinance into a conventional loan thus freeing up their cash to do it again. Unless you have the money to put 20% down for conventional, you'll probably be better off just sticking with your FHA loan. Keep in mind that if you buy something that needs work you will probably be looking at an FHA 203k loan and not straight FHA. Hope that helps.

[Dylan Bednarz]

Thank you for your quick response Aaron. When you stay sticking with my FHA loan, you mean the trial flip scenario correct? If so, what would be my next best option for financing the purchase of the actual house to flip (house 2) that I mentioned? Is refinancing the initial house an option, or should I look for the best hard-money lender I can find?

[Mike McCarthy]

FHA loans are great to ‘House hack’. Buy a duplex or triplex, live on one side, and get a loan for 3.5% down.

Flipping requires more capital upfront. Most HML won’t lend anywhere near 100%, and most will require some experience, since it’s a lot of their money on the line. Also flipping is typically more risky, especially for new investors as there’s a lot that can go wrong, and because of carrying costs, you don’t have a lot of time to learn as you go.

That’s why a lot of people recommend the house hacking route. There’s less that can go wrong, and even if things do, it’s more of a longer term investment, so issues and extra costs can get averaged in.

[Aaron K.]

Yes sticking with the FHA for your primary. If you want to get into flipping you probably will need a fair bit of capital to start and you'll want to go through hard money or private lenders, because banks don't typically like to lend on flips.

[Corby Goade]

In my opinion, you are getting too far ahead of yourself. Your strategy has many "if and then" scenarios. Focus on one deal for your first time, make sure it cash flows well and you are walking in to equity and forcing more. If you do that on your first deal, you will have options for your next deal. I think house hacking is the best way to start, and if you want to go the FHA route and do some rehab, I highly recommend looking in to a 203K loan. If you are living in a competitive area, keep in mind that offers with FHA loans are usually much less desirable to sellers. Best of luck!

[Allan Anderton]

brrrr buy-rehab-rent-refi-repeat basically to me "<<<FHA live in do to the 5% down rehab your side for the year that is required while enjoying the added income of the second side rehab the second side after your complete with the other then at that point and time I would refi to a conventional loan OR heloc depends on your life choices 1. you can only have 1 fha loan. IF you intend to buy more properties and leave your multi you need to refi into a conventional loan as you would want that FHA back to be able to take another property with the 5% IF you would like to stay in said property then you might want to look at a heloc that is basically you taking a credit loan on the equity of the house which after rehabing you should have a good chunk of plus a year or 2 of payments that you could then use as a down payment of the 20% you would need for a conventional loan for your next property

[Dylan Bednarz]

Thank you all SO much for your replies, they helped so much.  I do know I am ahead of myself, but I am trying to ensure that I do not put myself in a bad position to dive deeper into real estate investing by financing my first home incorrectly.  I am trying to figure out the best way to purchase my first house, and start a career in investing in real estate, all at the same time.  Or at least I am attempting to create the path to do so.