Does BRRRR work with 20% down?

Question

Hello,

I plan to speak with a bank on how the refinancing process works (that should help clear this up, too), but I was curious if BRRRR works with only putting 20% down?

It sounds like you are heavily relying on getting a LTV of 75% of your property's ARV. So some hypothetical numbers:

Property: $100,000 ($20,000 down, $80,000 private money lender)

Rehab: $20,000

All-in: $120,000

ARV: $140,000 (75% = $105,000)

This is where I get lost. Assuming I use a private money lender (and give them let's say 10%), I write them a check for $88,000 and I am left with $17,000. Meaning I currently have a cash-flowing property with $23,000 ($3,000 left-over from 20% down payment and $20,000 rehab) invested? How much equity is now in the house?

Is there any better way of doing this? Seems like having $23,000 invested with each property I purchase will take some time to build up capital in between properties.

Thanks for your time and help in advance!

Jose Batista Abikarram · Answer

If you want to start investing with no or low month down, BRRRR might not be the best strategy to use.

In order to make your first deal with BRRRR you need a good amount of cash. The cash doesn’t need to come from you but as a first timer is going to be hard to have 0 cash invested. This cash is basically recycled every time you make a good deal which as @Herndon Davis says the numbers you have wouldn’t be good enough.

If you want to start with low capital look into house hacking and doing an FHA WITH 3.5% down.

Jose Batista Abikarram · Answer

I would recommend to look at more than cashflow when doing a deal. Remember to always think in 3D @Zach Shahan. An FHA loan may give you MPI which is slightly different than PMI. However since you are putting so little capital your ROI can be bigger even if you are losing a few hundreds in the insurance. Especially since you can Refinance a few years later when 20% is payed and go with a conventional

To your equity question I’ll go with the dictionary definition. “Equity is the difference between the market value of your home and the amount you owe the lender who holds the mortgage”. In your case 140k (assuming the appraisal did say that) - 80K of Liana = 60K

Herndon Davis · Answer

Yes I estimate 3.5% for closing. It works most of the time but sometimes it can be overstated.  You can get Title Costs quoted to you from your Title Company which include Title Insurance plus their other Title Costs BUT the prepaids can vary dramatically depending on the following:1-The Type Loan you are getting.  If you do Conventional, you will likely pay MORE in Prepaids.  This would be 1 year Upfront Homeowner's Insurance + up to 6 additional months insurance at the Underwrite's discretion; 1 Year Upfront plus Taxes + up to 6 months additional Taxes at the Underwriter's discretion; plus HOA upfront if applicable If you have a Non-QM (Non-Qualified Mortgage) they may NOT require additional months taxes and insurance if you can show a certain amount of liquidity after you close.  OR they may require 3-4 months PITI that is refunded back to you after you make your FIRST paymentEither way its about liquidity and showing that you won't go broke after closing.  Again 3.5% is what I use and sometimes that's overstated but I'd rather that than be surprised in the end.

JD Martin · Answer

My experience has been that BRRRR works best/most efficiently if you are going in all cash on the front end, waiting for the seasoning and then refinancing. If you are going in financed on both ends, closing costs are going to eat a significant amount of money. As to whether you can pull all of your money, it can be done (I've done it on a couple of properties) but in my market as prices have gotten higher it would be much tougher to avoid leaving some capital behind. Finding houses that have enough spread between purchase+rehab and ARV in order to pull all funding has become really tough. It could work if you are in a rapidly rising market, however, and can push your seasoning out to a year or more.

Lindsay G. · Answer

In your example it looks like you would have 35k in equity. 140k-105k = 35k unless I’m missing something.

Zach Shahan · Answer

@JOSE BATISTA ABIKARRAM I wouldn't mind having some of my own money invested, however less is better. Another quick question, once you refinance and pull your (the lenders) money back out, how much equity is in the house?

Also, looked at FHA loans already, I don't want to get stuck paying PMI if I don't have to so I ruled that one out.

Thanks for your feedback!

Zach Shahan · Answer

@Herndon Davis could you roughly estimate closing costs? Could I expect to pay an additional $5k (on average) in closing costs? Also, I always assumed I would be the one funding repairs/rehab. It makes sense to have the lender do that as well. Thanks for your feedback!

Herndon Davis · Answer

When you refinance at 75% your Money Lender gets $80K they financed you to purchase + $20K they loaned you to rehab + any interest payments.  Your ARV has to be high enough to clear this amount PLUS closing costs.  So in this situation, your ARV: $140,000 (75% = $105,000)$105,000-$80,000 Purchase-$20,000 Rehab-Interest payments etcSo you have $5,000 - interst payments - Closing costs.Your ARV is TOO LOW.  Even if your Refinance LTV was 80% of $140,000 that only leaves you with $112,000-$100,000 = $12,000 - Interest payments and closing costs.You would be lucky to break even in that scenario.  I would recommend you find another property that you can find a higher ARV to pay off your Private Money Lender and clear your closing costs or else you have to come out of pocket.

Does BRRRR work with 20% down?

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