BRRRR... but with financing?

[Gayle Melnick]

Hi everyone,

I'm new to real estate investing. This website has been a great resource. I've been making my way through reading basically everything that Bigger Pockets has published.

I'm currently reading about the BRRRR method. I was wondering if the BRRRR principles could be applied to a conventional financing situation by buying a property that needs work but would still qualify for conventional financing. The purchase price + rehab costs adding up to 70% of ARV. Rent the property out, then do a cash out refinance to recover the initial capital. I tried to see if this would work running the numbers with a deal I'm looking at.

Purchase price: $82k

ARV: $134k

Down payment at 25%: $20.5k

Loan: $61.5K

70% of ARV: 93.8K

Rehab budget: 93.8k - 82k = $11.8k

Cash out refinance for 80% of ARV = $107.2k

$107-2.k - $61.5k of original loan = $45.7k cash out

New mortgage of $107.2k with $26.8k equity

Total cash in: $31.5k

Total cash out: $45.7k

Would this work? Are any of my assumptions or calculations wrong? I didn't factor in closing costs, refinancing cost, etc. But I just want to know if the basic principle would work.

Thanks!

[Christopher Phillips]

@Gayle Melnick

No. In general, it doesn't work. The BRRRR strategy relies on getting the heavy discount during the purchase. Without that, it's hard to get enough equity remaining. Also, since it will be a rental property, you aren't going to rehab it to the top of the market in the same way as if it was a flip for an owner. So, the ARV won't be the same as a top rehab for resale in the area.

Simple example: You buy an average house at $100K, 20% downpayment.

Put $15K into the kitchen and bathrooms. Now it's worth about $115k. You're all in at $80k purchase plus rehab $15k for $95k.

At $115k, your equity is now $20k + $15k, or 30%.

When you go to the bank, they will likely only cash out at 65%, maybe 75%. And, the closing costs on the refi won't make it worth the headache.

You will also find that many banks might only consider the refi at purchase price, not ARV, if within 6 months of purchase. You'll have wait 6 months or more for it to based on ARV. That's another reason why people avoid using a conventional loan. Use cash and it's considered delayed financing and you don't have to wait for the seasoning period.