I think I understand BRRR - someone gut check me.

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I think I understand BRRR - someone gut check me.

Gavin Davie
Rental Property Investor · Wilmington, DE · Member since 2019 · 39 posts · 27 votes

So - here's a high level run down of how I understand this - and a few questions.

Premise - let's say I have about 20k to invest here.

Buy - simple, run the numbers, make sure they'll work - in the case of BRRR you want to find ideally the crappiest property in the nicest (or best/up and coming) area for the best price - hopefully without structural issues. Let's say for example - a neglected 14,000 town house that empty and boarded up falling/apart. So at the end of the day, I've got this property outright for about 20k (14 + closing)

Rehab - hard money loan for ~40k for argument. Let's say term is 6 months. And barring issues, let's say rehab is done in 5 months on budget. (yes, I know there are crazy factors here - bear with me for sake of example). Do you make payments on the hard money while rehabbing?

Rent - Now, I've got a nice property, worth about 65-70k now, I rent it out for $1,000/month. I owe a full amount of 40k+ to my lender in a month or two.

Re-finanace (here's where my questions come in) - so I engage a traditional mortgage company? - to refinance the house and put a traditional mortgage on it for the 40k+ ? How does this work - are the specific companies that will do this are these non-traditional mortgages? - regular lenders or do you need something more specialized? Do you need an addt'l down payment $$ here to secure the refinance? This is where things get murky for me, I find lots of info on the other 3 steps - this one seems vague.

Thanks in advance!

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Chris T.
Investor · Downers Grove, IL · Member since 2015 · 1k+ posts · 955 votes
7y

To refinance, you could use any lender (whether it is traditional banks, mortgage brokers or maybe your HML has another program that can refinance you from the fix/flip loan to a 30 yr mortgage)

ONCE your property is fixed up, and stabilized with a tenant, you've a lot more options. This is assuming your ARV is correct.

If your appraisal is lower than you expected; and/or your costs are higher; and depending on how much the lender will lend you (whether it is 70-85% LTV), you may need to bring money to the table.

The key is the appraised value when your property is fixed up. 

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  • Chris T.
    Investor · Downers Grove, IL · Member since 2015 · 1k+ posts · 955 votes
    7y

    To refinance, you could use any lender (whether it is traditional banks, mortgage brokers or maybe your HML has another program that can refinance you from the fix/flip loan to a 30 yr mortgage)

    ONCE your property is fixed up, and stabilized with a tenant, you've a lot more options. This is assuming your ARV is correct.

    If your appraisal is lower than you expected; and/or your costs are higher; and depending on how much the lender will lend you (whether it is 70-85% LTV), you may need to bring money to the table.

    The key is the appraised value when your property is fixed up. 

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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    7y
    Originally posted by @Gavin Davie:

    Re-finanace (here's where my questions come in) - so I engage a traditional mortgage company? - to refinance the house and put a traditional mortgage on it for the 40k+ ? How does this work - are the specific companies that will do this are these non-traditional mortgages? - regular lenders or do you need something more specialized? Do you need an addt'l down payment $$ here to secure the refinance? This is where things get murky for me, I find lots of info on the other 3 steps - this one seems vague.

    Thanks in advance!

     Provided you can find a lender writing $40k RE loans, a conventional fannie/Freddie should fly after seasoning (owning for) at least 6 months.  Nothing special, normally, but the $40k amount makes it 'special'. 

    Hopefully 75% of the ARV will put you over the $50k mark which seems to be the minimum banks will do for RE loans they don't have to hold in their portfolio. Portfolio loans are more expensive and higher risk with rate adjusts amd/or calls and balloons usually. Then again, I haven't borrowed in a long time and am no borrowing expert. Nothing disrupts a nap schedule like banks and qualifying for loans.

    Hard money is pretty expensive with strict payback deadlines so be careful.  They don't all ask for monthly payments during the rehab though.  A good rate out here is 8.5% with 2-3 points.  May have higher points or origination costs because of the low value. 

    Be careful and good luck!

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  • Gavin Davie
    OP
    Rental Property Investor · Wilmington, DE · Member since 2019 · 39 posts · 27 votes
    7y

    @Chris T. - thanks, that makes sense. Seems like some research on HML that has a re-fi in house might make life a lot easier. Also - Downers Grove... random. My cousins grew up there.

    Best way to estimate/determine ARV? Comps I'd guess?

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  • Chris T.
    Investor · Downers Grove, IL · Member since 2015 · 1k+ posts · 955 votes
    7y
    Originally posted by @Gavin Davie:

    @Chris T. - thanks, that makes sense. Seems like some research on HML that has a re-fi in house might make life a lot easier. Also - Downers Grove... random. My cousins grew up there.

    Best way to estimate/determine ARV? Comps I'd guess?

     DG !  Downers Grove ranked #46 on the 2018 Top 100 Best Places to Live published by Livability.com.

    You're welcome. Easiest way is to use a realtor to give you comps. 

    if not, pull data on CLOSED SALES, last 6 months. Same style / bedrooms / bathroom / year build / square footage within a few miles from your target property.  Use 3 or more comps.

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  • Erik W.
    Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes
    7y

    BRRRR is a pretty simple strategy, and it's been around for a lot longer than the term 'BRRRR'.

    Buy the property cheap, rehab, rent it out, refi it, repeat....

    Hard money is expensive and short term.  You want out of that scenario ASAP, because every day the weather or an incompetent contractor holds you up you're accruing a crazy amount of interest in addition to other holding costs (insurance, taxes, lawn mowing, etc).

    ARV is a key factor, although it's a loosely used term. ARV has nothing to do with what someone will actually pay you for a house: it's what an appraiser says they think your house is 'worth' and that makes the bank feel comfy enough to lend you the amount you need to pull most or all of your cash back out so you can do the next deal (the final 'R' in BRRR is 'repeat'). Ideally ARV is based on comps, but market trends can quickly make comps obsolete. Say if you find 5 comps sold within the past 180 days, but the market is cooling. The appraiser will give the most weight to the most recently sold, and if the prices are going down, they will factor that decline into the final value.

    I recently refi'd a home.  The appraise CALLED ME and asked, "What are you wanting this to look like?"  I told her.  Guess what?  The house "appraised" for EXACTLY what I asked for.  Not a penny more or less.  Ironic, eh?

    There are many risks with BRRRR, so I'll list a few that are within your sphere of control: cost overruns due to faulty estimates, firing incompetent contractors, incomplete knowledge of market conditions, "hidden" problems not covered by contingency funds, delays in acquiring materials. Then there are things (mostly) outside your control: vandalism, theft of materials and tools, market downturn during rehab/renting phase.

    All this leads up to failing to hit the ARV so you may not get all your money back out and you're stuck with less cash to do the final R (repeat). Ideally, when you refi you want to get every penny back. Some folks take out even more if the ARV comes in REALLY good. But be careful. Just because you CAN take out more doesn't mean you SHOULD. The rent from that property still has to cover the debt service and expenses, and the more debt-service burden you put on Property A means you may have less wiggle room if the market softens and you have to lower rents.

    Commercial lenders are typical choices for the refinance stage. Some of them will require "seasoning" (how long have you owned the property) of 6-18 months. Others don't care as long as the LTV numbers are good. If the LTV is 75%-80% or less, you won't need any cash down payment as the equity spread covers the bank's risk, at least according to the appraiser. Be aware most commercial lenders will only fix your interest rate for 3-7 years, then it will float and what was a cash flow property can turn into an alligator that you have to "Feed" with personal funds.

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