BRRRR Into Your Permanent Home?

Question

Hi all,

My fiancé and I are looking at homes in the Atlanta area, and I've thought about using the BRRRR method to find the home we want to move into. I would follow every step in the process, similar to how I plan on executing my real estate plan. Search for off market deals, go through a hard money lender for the purchase and rehab, then go to the bank for refinancing. Difference would be I would use the new mortgage as my own for my home.

Does this makes sense, and more importantly is my thought process correct?

We've been looking in the Stone Mountain area, and see on Zillow that quite a few homes were flipped in the area. Ie. some have been bought for around $250k within the last year, were completing renovated, and now on the market for $500k.

I'm seeking more clarification on when moving into a home, to avoid PMI, do you have to put down 20% or just have 20% equity? As a rough example, I would love to have an all in budget for a home to be $400k, and see the value come to $500k. This way I can take out a loan for $400k, thus leaving 20% equity in the home. Is this possible?

On a separate note, what is the process for designing a floor layout? Do you design the house yourself, or do you expect the contractor to have a design plan? I think this is my biggest fear in getting started with BRRRR. I have concerns regard knowing regulations for room sizes to convert a 3/1 into a 3/2.

I look forward to hearing everyone's thoughts. I could be completely wrong, or maybe I'm onto something, that's what I love about the site!

Jon Ferraiolo · Answer

Thank you all for the advice! I won't have any trouble getting a conventional mortgage. However, I thought if you find a house in rough enough shape, you will often have trouble getting a conventional mortgage from the bank on it?

This would be our permanent home, in essence we would be the renters. It was just my thought because then I could see all the steps of the process. Plus, I thought it came with the added bonus of possibly being able to find a way to put less than 20% down and use that capital for another property, while also gaining equity in my primary residence.

In regards to a 203(k) loan I heard they can be quite cumbersome, and time consuming. Only experience I've heard is from podcasts and books I've read. Is this true?

Corby Goade · Answer

This is a great way to get the ball rolling, just a couple thoughts regarding your strategy:

-You need 20% equity, not necessarily 20% cash, but this will depend upon the type of loan you refi in to.

-Just because houses are on the market for $500k, does not mean that is what they are worth or that they will sell- find an investor friendly agent who can help you with comps and ARV for the area you like.

-If you are looking at your primary as your forever home, but also as a springboard to investing, it only works if you can build lots of equity relatively quickly AND you plan and understand how to leverage that equity into investment properties.

I used this exact method you are proposing to get my start, and it worked like a charm.

Best of luck!

Marc Brenner · Answer

Hey @Jon Ferraiolo, if you take a loan out for $400k, thats a mortgage payment of around $2400. What rent would you need to charge for this property to cash flow? Is that number realistic in Stone Mountain? From my experience, it will not be.

Odie Ayaga · Answer

As the others have stated you'd be better going conventional. Two similar threads have popped up the past week. Hard money lenders don't lend on owner occupied and are very unlikely to lend if your exit strategy involves moving into the property.

Jason Pennacchio · Answer

I'm completely inexperienced in BRRRR method but one of those Rs stands for rent. I always thought the income played a part in the bank's underwriting for whatever reason (debt to income or some other equation), is this not the case? The question then becomes why not get a conventional mortgage and forgo the hard money lender, I'll make an assumption here that perhaps you cannot get approved for one and forgive me if I'm overstepping. But then my concern becomes if you can't get approved for conventional at the start, and the house won't be rented for additional income I'd be concerned with getting approved for a refinance. Perhaps of course the ARV will be increased but I don't know if that will increase eligibility for a loan?

I may be completely missing the mark here, if that's the case just ignore or ask and I'll delete the post, but from my rudimentary understanding of BRRRR, some assumptions I made about the situation there could be issues.

Mike McCarthy · Answer

The whole BRRRR concept for your home is valid idea, but you need to be realistic of your plan - as there are other options as well.  For example, many people instead:

- Buy a house, conventional mortgage during purchase, then slowly renovate it while they live in it.  This obviously takes some patience as you're potentially living in a construction zone.  But the benefit is that you can renovate over a period of years.  Then eventually, either refinance or take out a HELOC on the increased value/equity.

- If you buy a house that needs a lot of work, it's obviously better to do the renovation up front before moving in.  You have some options with a 203K loan, or hard money as you mentioned. You'll likely need to wait 6 months to get a cash-out conventional loan based on the new ARV, similar to a rental.

As for a floor plan - it really depends on how much changing you plan.  If you're rebuilding the whole house, an architect or at least a GC who can draw/draft would probably be helpful.  It also depends on what your city/township will require for permits.  Moving a few non-load-bearing walls would probably just require some sketches on graph paper.  Major changes will require architectural drawings and possibly an architect or engineer's stamp.  Again, depends on what you have planned.