Is a deal like this fantasy or reality

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Is a deal like this fantasy or reality

Joshua Manning
Realtor · Shreveport, LA · Member since 2015 · 79 posts · 23 votes

Hello everyone,

So one thing I've started doing recently is running different imaginary real estate deal through my head and on paper just to tory and get a sense for ways I could use the different real estate investment strategies mentioned here.

So the other day I was thinking about the BRRRR strategy and the house hacking strategy and was wondering if there was a way to try and combine them.

Here is what I was thinking. You find a multi family property unit for sale (For argument sake lets say a 4 unit) that is need of a few good repairs. So you buy the buy the property and rehab it, and screen it rent out the other three units based on the ARV and live in the fourth unit. And then of course you do a cash-out refinance on the property for a high LTV rate with a longer term for lower monthly payments.

I figure in theory this could work with enough patience, effort, and luck. I was wondering if any more experienced investors might know of other problems that may arise from trying something like this

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John Leavelle
Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
9y

Howdy @Joshua Manning

First I am still fairly new. Have 3 properties (total 7 units). All are BRRRR strategy. There are a lot of newbies that want to combine these two strategies. I haven't heard of anyone being successful yet.

The first thing you need to understand is the BRRRR strategy is like a long Flip. You need to try to keep your All-in costs to 70% (or less) of your projected ARV/Market Value. All-in costs are the Purchase price, Rehab costs, Closing and Holding costs. That means you are buying at a significant discount (because it is a distressed property), and it will require a decent amount of repairs to get it to Market standards (and force equity appreciation). When you Refinance the lender will provide a loan that is 70 - 80% LTV based on a new appraisal (the average is 75%). Keeping your costs at 70% or under provides the best chance to get 100% of your cash out (the actual goal of BRRRR). The closer your costs are to ARV the less cash you get.

The 70% rule (distressed property) has an impact on your House Hacking strategy. You will need to use the FHA 203K loan to finance the purchase and Rehab. That is not a problem in itself. However, you may have a larger mortgage as a result. You will also be required to live in the property for at least one year. That means no rent income from one unit for a year.

The House Hacking strategy has both pro and con's. It allows you to get into REI with a minimum of cash invested. However, small deposits cause you to have larger mortgage payments and require you to pay PMI. The combination of large mortgage payment and reduced rental income typically results in neutral or negative Cash Flow for the first year you own the property. It is important to analyze any potential property (for House Hacking) as if it is fully rented when you are not living there. If it will meet your Cash Flow criteria then you can proceed with the strategy. It is also difficult to Refinance out of the FHA loan (to lower mortgage payment) because you have minimum equity. You need to have a minimum of 25% in equity to make it work.

Basically what I'm saying is the idea sounds good, but, the reality is much more complicated and hard to achieve than you realize.  If you can figure it out and get it done, then, my hats off to you.  It will take an extremely well researched and laid out plan from initial purchase to the Refinancing.  You must have multiple exit strategies ready.

As a Newbie I would only pursue one or the other at this time.  If you still desire to continue with the plan be sure to post your analysis here on BP to get feedback.

Hope this helps.  Keep moving forward.

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  • Rolanda Eldridge
    Investor/Realtor · Hoover, AL · Member since 2010 · 1k+ posts · 459 votes
    9y

    @Joshua Manning..Sounds like a plan!  Make it happen. There are no full proof plans.  If problems arrive, solve them.  Believe!  GL

    0Reply
  • John Leavelle
    Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
    9y

    Howdy @Joshua Manning

    First I am still fairly new. Have 3 properties (total 7 units). All are BRRRR strategy. There are a lot of newbies that want to combine these two strategies. I haven't heard of anyone being successful yet.

    The first thing you need to understand is the BRRRR strategy is like a long Flip. You need to try to keep your All-in costs to 70% (or less) of your projected ARV/Market Value. All-in costs are the Purchase price, Rehab costs, Closing and Holding costs. That means you are buying at a significant discount (because it is a distressed property), and it will require a decent amount of repairs to get it to Market standards (and force equity appreciation). When you Refinance the lender will provide a loan that is 70 - 80% LTV based on a new appraisal (the average is 75%). Keeping your costs at 70% or under provides the best chance to get 100% of your cash out (the actual goal of BRRRR). The closer your costs are to ARV the less cash you get.

    The 70% rule (distressed property) has an impact on your House Hacking strategy. You will need to use the FHA 203K loan to finance the purchase and Rehab. That is not a problem in itself. However, you may have a larger mortgage as a result. You will also be required to live in the property for at least one year. That means no rent income from one unit for a year.

    The House Hacking strategy has both pro and con's. It allows you to get into REI with a minimum of cash invested. However, small deposits cause you to have larger mortgage payments and require you to pay PMI. The combination of large mortgage payment and reduced rental income typically results in neutral or negative Cash Flow for the first year you own the property. It is important to analyze any potential property (for House Hacking) as if it is fully rented when you are not living there. If it will meet your Cash Flow criteria then you can proceed with the strategy. It is also difficult to Refinance out of the FHA loan (to lower mortgage payment) because you have minimum equity. You need to have a minimum of 25% in equity to make it work.

    Basically what I'm saying is the idea sounds good, but, the reality is much more complicated and hard to achieve than you realize.  If you can figure it out and get it done, then, my hats off to you.  It will take an extremely well researched and laid out plan from initial purchase to the Refinancing.  You must have multiple exit strategies ready.

    As a Newbie I would only pursue one or the other at this time.  If you still desire to continue with the plan be sure to post your analysis here on BP to get feedback.

    Hope this helps.  Keep moving forward.

    4Reply
  • Joshua Manning
    OP
    Realtor · Shreveport, LA · Member since 2015 · 79 posts · 23 votes
    9y

    @Rolanda Eldridge Thanks for the encouragement!!

    @John Leavelle Thanks for the advice. I really needed to hear that and am glad for you sharing your experience with me. I really think this is something I can pull of so I'm gonna Keep doing Research on it, and try to create a full fledged plan like you said.

    0Reply
  • David Zheng
    Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes
    9y

    The idea itself is fine. But just be wary of how conventional/FHA/commercial loans work with primary/residential/commercial/rental properties

    For example:
    commercial loans don't usually require a seasoning period, but they wont loan on a primary
    A 5% conventional loan will be good for a primary house hack, but you cant tack on a contruction loan and there's a seasoning period before you can exit it

    can be done, but do your research so you have good exit strategies

    1Reply
  • Dustin Ruhl
    Flipper/Rehabber · Indianapolis, IN · Member since 2015 · 204 posts · 89 votes
    9y

    That is an excellent idea. A problem can arise any of the strategies you work on. Its totally depend on the circumstance. Need to be prepared for it and just go for it. I believe Every problem come with a lesson and solution.

    1Reply
  • Joshua Manning
    OP
    Realtor · Shreveport, LA · Member since 2015 · 79 posts · 23 votes
    9y

    @John Leavelle When you said that I would need 25% of equity built into the property was that 25% of the original purchase price of the property or 25% of the ARV of the property.

    0Reply
  • Joshua Manning
    OP
    Realtor · Shreveport, LA · Member since 2015 · 79 posts · 23 votes
    9y

    @David Zheng Thanks for the encouragement, I'll definitely have to do a lot of research to find a loan that fits to this deal.

    @Dustin Ruhl Thanks for the encouragement! I really want to find a way to make this deal possible, and I don't wanna mess this up.

    0Reply
  • John Leavelle
    Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
    9y

    @Joshua Manning

    The 25% is the equity remaining when you Refinance. Your lender will require a new appraisal to determine the current value. Hopefully the appraisal will match or be close to your projected ARV. The lender will then provide you a new loan that is 70 - 80% Loan To Value (LTV) based on the new appraisal. The average is 75% LTV.

    Not sure how you can build 25% in equity, in a short amount of time, in order to get the 75% Refinance loan when you are starting off with 3.5%.

    0Reply
  • Mike G.
    Real Estate Agent · Las Vegas, NV · Member since 2016 · 589 posts · 275 votes
    9y
    John Leavelle excellent breakdown of a BRRRR. I'm looking to finance one and get it to a brrrr myself just running into financing stipulations due to lack of equity in my FHA loan on my 4plex. I'm working on reaching a stronger equity position before I refi so what you said totally hits home. David Zheng likewise I will def do my research on the multitude of financial loans and the rules and regs that come along with each. Thanks for the heads up on that.
    0Reply
  • John Leavelle
    Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
    9y

    @Mike G.

    Nice job getting a 4Plex. FHA is a good way to "get your foot in the door " when you have limited cash. But, it becomes a double edged sword if you want to Refinance out of it. As you are well aware of.

    Will your property Cash Flow once you move out without Refinancing?

    0Reply
  • Mike G.
    Real Estate Agent · Las Vegas, NV · Member since 2016 · 589 posts · 275 votes
    9y

    yes it does I moved out last July and it's been positive cash flow since with minimal issues and 100% occupied 

    0Reply
  • Joshua Manning
    OP
    Realtor · Shreveport, LA · Member since 2015 · 79 posts · 23 votes
    9y

    Okay so I've done a little more research into the refinancing portion of this deal. It seems that if I do choose to purchase with a FHA loan, then in order to do a cash out refinancing I would have to have lived in the property for a year. The downside is that this is a much longer seasoning period than I would've liked and gives tenants way too much time to mess up the property. But the upside is that if I were to do that then I could have a higher LTV Rate up to 85%, However this would only work with a high equity built into the property as @John Leavelle stated. The alternative would be to refinance into a conventional loan, which would have a lower seasoning period but also a lower maximum LTV rate as well.

    What are your thoughts on these solutions. With the FHA I could live in the property for a year and that would give me a chance to build up equity into the property from holding it, as well as rehabbing it. I guess would have to be extra careful when screening tenants for that first year to make sure they don't break anything. Or I could try refinancing into a conventional loan

    0Reply
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