Is a deal like this fantasy or reality

[Joshua Manning]

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

[John Leavelle]

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.