BRRR - Really a viable investment?

Question

I have been running the numbers of an example BRRR to help get my head around this investment strategy and there are a few things I am confused about.

Here's a theoretical deal:

(ARV * 70%) - Rehab costs = Purchase price

($150,000 * 70%) - $30,000 = $75,000

But what about closing costs, loan costs, refinance costs?

One of the suggestions I've seen is to get a hard money loan because the condition of these houses don't usually qualify for traditional financing at time of purchase. If I put 25% into the deal, $26,250, and take out a hard money loan for the remainder, $78,750.  The loan will likely cost around $11,000-$12,000 - assuming 15% for the year in some combination of interest and points. Since there is usually a 1 year seasoning period needed prior to refinancing, the loan would be needed for at least the full year.

Let's assume closing costs are $3k.

Purchase price + Rehab: $105k

Closing costs: $3k

Loan cost: $12k

...gives a total cost of $120k

The appraisal comes to $150k as expected and with the refinance, we are able to pull $105k out (70%).

After we pay the total costs, we  are in the hole for $15k.

I am under the impression that the appeal of a BRRRR is that you are able to pull all your money back out. Cashflow is assumed to be low.

It seems like a lot of work to leave money into a deal and not receive much cash flow.

Please help me understand where my logic or calculations are off.  Thanks in advance!

Jack Inman · Answer

@Anthony Torres If your options are to buy a fully rehabbed house or to do a BRRR deal, then  you cash flow should be roughly the same assuming the rental rate and loan amounts are similar. However, your cash-on-cash return should be higher with a BRRRR than with a conventional purchase of a similar property.

Going back to the hypothetical scenario, If you've left only 15k in the property, then you've cut your investment by half when compared to a conventional down payment of 30k. By reducing your investment by half you've doubled your cash-on-cash return.

Bob Woelfel · Answer

@Anthony Torres sorry for the delay on this.  Putting up your own money isn't really free.  There is an opportunity cost to everything, including that "free" money.  I'm not saying you shouldn't use your own cash, just encouraging you to look at it from all angles.  I don't know how much money you have, but using OPM allows you to scale much faster than tying up all of your own money in a single deal, etc.   Just something to consider.

As far as commercial rates I'm seeing/getting in our market.  Right now you can get a 20 year amortization for around 5.25%.  Rate adjustment at 5 years and a balloon in 10.

Anthony Torres · Answer

@Sean Sloop You are absolutely right. I just added that in and it offsets a lot of those costs. Thank you!

Sean Sloop · Answer

@Anthony Torres

You would also want to account for cash flow during this period  to offset your costs. After rehab, you can get a tenant to pay those holding costs.

Makes the math a bit better.

Good luck!

Sean

Anthony Torres · Answer

@Bob Woelfel

Putting my own money up is free so I think it's appealing to use as much of my own cash as I have available. Is there any reason I should try to go in with more Hard Money? (Keeping some cash liquid for emergencies of course)

BRRRRing in an LLC and getting a commercial lender is a great idea. What kind of terms do you usually see at the refinance in this scenario?

I would say that whichever scenario generates the higher Cash on Cash Return would be the better strategy for me. If the $15k BRRRR deal doesn't cashflow but the $30k traditional has great cashflow and takes less time, I'm thinking I'd rather go with the latter.

Anthony Torres · Answer

@James Marshall

Absolutely. It is more appealing than the alternative. What Cash on Cash Return would you expect to see once the deal is done - for the money left in compared to the cash flow.

I don't have any sense of what cashflow should look like after the refinance. That part is usually glossed over.

How are you able to refi in 6 months?  Is it just about finding the right bank?

Great tips! Thanks so much.

Anthony Torres · Answer

Thanks @Jason D. I got it from a BRRRR post on BP. I see the difference.

Bob Woelfel · Answer

Couple points....if you used a HML to finance the deal you shouldn't need to put 20-25% down as you would a traditional loan.  Now you might have some money in the deal initially, but the HML should finance most of it of the purchase and rehab.

I would probably keep looking for a lender that will refi after 6 months.  You shouldn't have to wait a year.  We do all of our BRRRR's in an LLC and use a commercial lender for the refinance.  They don't have a seasoning requirement.

Isn't 15k left in the deal and a newly renovated property better than a 30k down payment for a traditional purchase?

Jim D. · Answer

In my experience, it is quite rare to actually get all your money back out of a BRRR once you account for interest, holding costs, loan closing costs, etc. But having $15k into a $150k purchase is still fairly attractive compared to the usual 25% down you would have to put in. Here are a few additional notes you can factor in:1. LTV on a cash out refi is typically 75% for single family and 70% for 2-4 units2. I cash out at 6 months, not 12, so that saves me a good amount of interest3. If I am able to finish the rehab and get it rented, I would also factor in that rent received. If I can finish rehab in 3 months and get it rented for $1,200/month, then that's $3,600 of income that helps offset all the holding expenses. This is one reason speed is critical and it's not worth it to do your own work and move slowly.4. Most private money lenders will be more affordable than hard money, if you're able to find one.

No doubt, it is a more labor intensive way to grow a portfolio, but that's the tradeoff if you don't have a lot of capital available.

Jason D. · Answer

@Anthony Torres your error is that 70% of ARV, minus repairs is designed more as a flipping formula than a BRRRR formula.

In your scenario, being all in at $120k and selling for $150k brings a decent profit, depending on how long it took to complete.

BRRRs analysis that all in cost should be less that 70% ARV. That includes closing, financing, holding, and refinancing

BRRR - Really a viable investment?

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