BRRRR Strategy - Refinancing Question

[Tim Porsche]

Hi all, so since hearing and reading about the BRRRR strategy I have become very interested in possibly doing it. I would be looking for fixer upper multi-unit properties to renovate, rent out and refinance. There are a few areas of the strategy that I am unclear on though and would really appreciate if someone could shed some light on those areas.

1. Lets assume I purchase a fixer upper triplex for $130,000 using a hard money loan and putting 20% down for the house plus $20,000 in renovations. So the total investment would be $150,000, with $30,000 (20%) coming out of my pocket. Lets say the renovations get completed successfully and I have great tenants and have all the units rented out. Right now I have a triplex that's fully rented and is financed with a high interest hard money loan, and lets just say the appraised value of the property is now $190,000. What does refinancing look like when I go to the bank and try to get a traditional 30 year mortgage?

Do I get a mortgage based on the initial $150,000 investment ($130,000 + $20,000 renovations), or a mortgage based on the current appraised value of $190,000? Basically could someone break down how the numbers work, and how (or if) I would still have money in my pocket after refinancing that I could use to purchase more properties? Sorry if this is a dumb question, I'm just having a bit of a mental block here.

Total Initial Investment - $150,000

$130,000 for property

$20,000 for renovations

Financing with Hard Money, Total Out of Pocket Investment = $30,000

ARV = $190,000

Mortgage Down payment Amount = 25% of $150,000 or 25% of $190,000??

Again sorry if this is a dumb question, just trying to wrap my mind around this. Thanks in advance for any input!

[Ben Leybovich]

Originally posted by @Tim Porsche:

Hi all, so since hearing and reading about the BRRRR strategy I have become very interested in possibly doing it. I would be looking for fixer upper multi-unit properties to renovate, rent out and refinance. There are a few areas of the strategy that I am unclear on though and would really appreciate if someone could shed some light on those areas.

1. Lets assume I purchase a fixer upper triplex for $130,000 using a hard money loan and putting 20% down for the house plus $20,000 in renovations. So the total investment would be $150,000, with $30,000 (20%) coming out of my pocket. Lets say the renovations get completed successfully and I have great tenants and have all the units rented out. Right now I have a triplex that's fully rented and is financed with a high interest hard money loan, and lets just say the appraised value of the property is now $190,000. What does refinancing look like when I go to the bank and try to get a traditional 30 year mortgage?

Do I get a mortgage based on the initial $150,000 investment ($130,000 + $20,000 renovations), or a mortgage based on the current appraised value of $190,000? Basically could someone break down how the numbers work, and how (or if) I would still have money in my pocket after refinancing that I could use to purchase more properties? Sorry if this is a dumb question, I'm just having a bit of a mental block here.

Total Initial Investment - $150,000

$130,000 for property

$20,000 for renovations

Financing with Hard Money, Total Out of Pocket Investment = $30,000

ARV = $190,000

Mortgage Down payment Amount = 25% of $150,000 or 25% of $190,000??

Again sorry if this is a dumb question, just trying to wrap my mind around this. Thanks in advance for any input!

 Why are you asking us? Go ask some lenders!

[Michael Seeker]

It depends on the type of loan, but since you've mentioned a 30 year fixed loan then I'll assume it's a typical residential loan (not commercial). In this case, for a triplex doing a cashout refinance the max LTV you can have is either 70 or 75% based on this Fannie matrix.

When you go to refinance, the bank will use the minimum of the appraised value and your cost basis to determine the value of the property.  If your basis is $150K and appraised value is $190K then they use $150K.  This is the case if you try to refinance before the property is seasoned (meaning enough time has passed that the bank will strictly base value off of appraisal and ignore cost basis).  Last time I checked the seasoning period was 1 year on Fannie/Freddie loans but it has been a few years.

When I ran into this situation in the past I explained what I was trying to do with my hard money lender and encouraged him to extend his typically 12 month loan out an extra month or two so I could refinance based on appraised value.

[Ben Leybovich]

Originally posted by @Tim Porsche:

Hi all, so since hearing and reading about the BRRRR strategy I have become very interested in possibly doing it. I would be looking for fixer upper multi-unit properties to renovate, rent out and refinance. There are a few areas of the strategy that I am unclear on though and would really appreciate if someone could shed some light on those areas.

1. Lets assume I purchase a fixer upper triplex for $130,000 using a hard money loan and putting 20% down for the house plus $20,000 in renovations. So the total investment would be $150,000, with $30,000 (20%) coming out of my pocket. Lets say the renovations get completed successfully and I have great tenants and have all the units rented out. Right now I have a triplex that's fully rented and is financed with a high interest hard money loan, and lets just say the appraised value of the property is now $190,000. What does refinancing look like when I go to the bank and try to get a traditional 30 year mortgage?

Do I get a mortgage based on the initial $150,000 investment ($130,000 + $20,000 renovations), or a mortgage based on the current appraised value of $190,000? Basically could someone break down how the numbers work, and how (or if) I would still have money in my pocket after refinancing that I could use to purchase more properties? Sorry if this is a dumb question, I'm just having a bit of a mental block here.

Total Initial Investment - $150,000

$130,000 for property

$20,000 for renovations

Financing with Hard Money, Total Out of Pocket Investment = $30,000

ARV = $190,000

Mortgage Down payment Amount = 25% of $150,000 or 25% of $190,000??

Again sorry if this is a dumb question, just trying to wrap my mind around this. Thanks in advance for any input!

 Why are you asking us? Go ask some lenders!

[Shaun Weekes]

@Tim Porsche

Here is the easy way to look at this.

If you wait 6 months in the scenario that you just outlined you can cash out on a triplex at 70% LTV ( loan to value )

So 190k × 70% = 133k loan amount.

So in this hypothetical scenario the only benefit would be that you cutting your interest rate in half.  Which is obviously a good thing.

In conclusion you need 6 months to use new appraised value.

I hope this helps and check out my interview on the Joe Fairless Show I had earlier this year.  The link is on my profile.

[Jamal Pitts]

Hi @Tim Porsche

It depends on the bank. Typically the big banks will go off of the purchase price if you own the property under 12 months at 70% to 80% LTV. Which in your scenario would be ($130,000 x 70% = loan amount $91,000 / worst case scenario if they won't go higher then 70%) which wouldn't be enough to pay off the hard money lender because you borrowed 80%.

I recommend going with a local bank for the refinance. They might offer you a portfolio loan( which is not sold on the secondary market) therefore they can be more flexible and base the loan off of the ARV. Which would be $190,000 x 70% = loan amount of $105,000.

The first scenario(going with the big banks) with a loan amount of $91,000 would will not be enough to pay off the hard money lender.

The second scenario(going with the local bank) basing the loan off of the ARV(after repair value) with a loan amount of $105,000 probably still will not cover the cost of the hard money loan once you factor in the points charged.

You getting your cash back is out of the question on all scenarios.

You need to get the property at a lower price, reduce your rehab cost, or locate another deal. 

FYI: I'm basing this off of my market in Philadelphia, your local banks might be different.  It's worth giving them a call to see what they offer to investors.

[Michael Volek]

Originally posted by @Jamal Pitts:

Hi @Tim Porsche

It depends on the bank. Typically the big banks will go off of the purchase price if you own the property under 12 months at 70% to 80% LTV. Which in your scenario would be ($130,000 x 70% = loan amount $91,000 / worst case scenario if they won't go higher then 70%) which wouldn't be enough to pay off the hard money lender because you borrowed 80%.

I recommend going with a local bank for the refinance. They might offer you a portfolio loan( which is not sold on the secondary market) therefore they can be more flexible and base the loan off of the ARV. Which would be $190,000 x 70% = loan amount of $105,000.

The first scenario(going with the big banks) with a loan amount of $91,000 would will not be enough to pay off the hard money lender.

The second scenario(going with the local bank) basing the loan off of the ARV(after repair value) with a loan amount of $105,000 probably still will not cover the cost of the hard money loan once you factor in the points charged.

You getting your cash back is out of the question on all scenarios.

You need to get the property at a lower price, reduce your rehab cost, or locate another deal. 

FYI: I'm basing this off of my market in Philadelphia, your local banks might be different.  It's worth giving them a call to see what they offer to investors.

 It's 3am so I could be sleeptyping right now, but 70% of 190k is 133k. Doing a cash out refi at that amount should put a few grand in his pocket and cash flow.

[Jerry Dengmanivanh]

It's 3:24am here in Central Illinois and I have to agree.. My math shows 70% of $190,000 is $133,000 as well.

Best of luck to you on your BRRRR investing venture!

[Tim Porsche]

Originally posted by @Jerry Dengmanivanh:

It's 3:24am here in Central Illinois and I have to agree.. My math shows 70% of $190,000 is $133,000 as well.

Best of luck to you on your BRRRR investing venture!

 Thanks Jerry! I can't wait to get started. I should have the funds I need to start making deals by Spring 2016 if all goes well. I'll be posting my deals for analysis when I start to come upon them at that time. 

[Tim Porsche]

Thanks for the breakdown of the numbers everyone. That helps a lot, I feel like I have a better understanding of what the numbers look like now. So basically I need to assume that if I refinance with a traditional 30 year mortgage, they are going to only loan up to 70% of the ARV. Did not realize that before. Thanks again

[John Warren]

@Tim Porsche I have a good investor friendly mortgage guy if you need one for this strategy. In fact i was just discussing this strategy with him last week over breakfast. Let me know if you need his info.

John

[Tim Porsche]

Originally posted by @John Warren:

@Tim Porsche I have a good investor friendly mortgage guy if you need one for this strategy. In fact i was just discussing this strategy with him last week over breakfast. Let me know if you need his info.

John

 Thanks John I will definitely keep that in mind. Does he work with out of state investors? I am from Pennsylvania. I haven't talked to the place I got my current two mortgages from yet on my duplex and single family home (Mortgage America), so I'll probably talk to them first but it would be great to have someone else to talk to as well. 

[John Warren]

I think he does. He is with loan depot, and they are national company

[Jeremy S.]

@Tim Porsche, I think you have the have the concept of BRRR correct but the numbers are just to tight on the deal you are describing.

I recently posted a recap of a multi-unit BRRR deal I completed over this past summer. It's not too far from your area and it may be helpful to you. Check it out

https://www.biggerpockets.com/forums/223/topics/243750-my-first-mixed-use-muli-unit-brrr-recap

[James Ihssen]

The key I have found to a successful BRRRR strategy is getting the deal at the right price. If you cannot get the property for under 70% ARV all in (purchase price plus rehab plus holding costs) then you will need money to put into the cash out refi. The goal is to recycle your money and keep using the same money to build your portfolio, which will not be possible if your numbers are not right.

The local banks do not always have seasoning requirements so that you can begin the process of a cash out refi as soon as you have a tenant in place.  This is nice because you can ramp up your holdings quicker and build your portfolio faster. @Jamal Pitts is exactly correct, the local banks will often keep the loan in their portfolio which is more favorable for you.

A lot of the banks require a seasoning period and that keeps your cash trapped for a longer period of time, which can be especially costly if you are using hard money to finance your buy and hold properties.

BRRRR is a great strategy that allows you to take chunk of cash and use it to buy many houses over time. Just keep your numbers straight and you will do well. I am a broker so I have access to the mls to run my own CMAs, which is a huge help when determining ARV. I ALWAYS go conservative with my numbers and that keeps things safer for me. Worst case the appraisal comes in a little low and I have to keep a couple grand in the deal on the cash out refi side, but even still my cash on cash return is Phenomenal! That never happens to me though! Just know your numbers in advance and you will be successful!!!

Best of luck!!

[Tim Porsche]

Originally posted by @James Ihssen:

The key I have found to a successful BRRRR strategy is getting the deal at the right price. If you cannot get the property for under 70% ARV all in (purchase price plus rehab plus holding costs) then you will need money to put into the cash out refi. The goal is to recycle your money and keep using the same money to build your portfolio, which will not be possible if your numbers are not right.

The local banks do not always have seasoning requirements so that you can begin the process of a cash out refi as soon as you have a tenant in place.  This is nice because you can ramp up your holdings quicker and build your portfolio faster. @Jamal Pitts is exactly correct, the local banks will often keep the loan in their portfolio which is more favorable for you.

A lot of the banks require a seasoning period and that keeps your cash trapped for a longer period of time, which can be especially costly if you are using hard money to finance your buy and hold properties.

BRRRR is a great strategy that allows you to take chunk of cash and use it to buy many houses over time. Just keep your numbers straight and you will do well. I am a broker so I have access to the mls to run my own CMAs, which is a huge help when determining ARV. I ALWAYS go conservative with my numbers and that keeps things safer for me. Worst case the appraisal comes in a little low and I have to keep a couple grand in the deal on the cash out refi side, but even still my cash on cash return is Phenomenal! That never happens to me though! Just know your numbers in advance and you will be successful!!!

Best of luck!!

 Thanks James! That is some great information. I will talk to my current mortgage broker and see if they would require a seasoning period on something like this or not. I have two mortgages with them already and like dealing with them, so I hope not. 

So if I'm hearing you correctly about the 70% rule in this circumstance, if I bought a property with an ARV of $200,000, then ideally I wouldn't want to pay more than $140,000, less whatever rehab costs, closing costs, and holding costs there are correct?

One last question, what is the best way to find good comps in your opinion, for someone without a real estate license and access to the MLS? Do I just rely on my realtor for that information? What if there is a time sensitive deal and they don't get me good comps quick enough to make a decision, what do you do in that case?

Thanks again for your advise, really appreciate it. 

[James Ihssen]

@Tim Porsche 

Your numbers are correct regarding the 200k ARV, assuming your plan is to buy, rent, rehab, and refi to get all of your cash back for the next deal.

Regarding your question of finding comps, I would recommend finding a competent realtor to gather comps.  Some ideas otherwise would be to check zillow and trulia, as I know they do syndicate sold listings, I just do not know the time lag (meaning any sold listings in the past week or two may not be on the site).  One site I recommend for the 'realtor challenged' is redfin, but that is for active listings.  I am not sure if they show sold but you can check.  I have no affiliation with them I just know that they are one of the fastest sites to post listings to syndication.

Another option is to learn your local market.  Know your target neighborhoods like the back of your hand.  Local Market knowledge will be the key to success, although nothing substitutes hard factual data; but for example you can know right away that a home in a certain part of town typically sells for a certain amount, which is helpful right off the bat.  

I would not trust zestimates as true guides, but I do use them sometimes for getting a base for an area that I am unfamiliar with (out of state).  I would not base investment decisions of of zestimates alone however.

Hopefully this helps!

[Rich Hupper]

Could someone tell me what holding costs are? Taxes, Insurance, Water, Electric, would there be anything else? When do I need to start paying these after I close?

Also could you tell me how to get accurate numbers on rehab costs? Who do I need to hire to do this? How much would their estimate cost roughly?

I have very little money to work with only $15,000. Does this mean I can only look at properties I could purchase for 60000 or less because hard money, commercial, and portfolio lenders all want 25% down?

[Joe Bertolino]

Talk to some lenders.  There are often local portfolio lenders that will loan up to 80% after 6-12 months.  They may not do it for your first deal but you will find somebody willing to do it.  

[Rich Hupper]

I have spoke with many lenders and none of them will loan me money as I do not own anything, have only $15000 working capital. and I currently rent. My credit is great and I have very little debt. 

Everything "dump" in my neck of the woods is at a minimum of 100k. I just don't know what do other than look 100+ miles away.