Lots of BRRRR questions

[Kim Forgione]

Hi! Complete newbie here. I'm interested in buying multi-families using the BRRRR method but have several questions:

1. From what I understand, the main perk of BRRRR is getting your initial investment back out to buy the next property. And you do this by buying a property that needs work so you can increase the value and then refinance. As someone with no experience, I'm wondering how to estimate the amount of money needed for repairs? Get an inspector and then bring his assessment to a contractor? Bring a contractor to the site with you?

2. Do you estimate the after-repair value by looking at comps? If a multi-family, would you compare to comps in a traditional sense (value of similar properties in area) or in a revenue-generating sense (cap rate of comps)?

3. What should be the max amount of time to spend on repairs before renting?

4. When refinancing, how do you get the new value appraised (esp if value is based on cap rate of comps)?

5. The risk is not being able to refinance because the value didn't increase as much as you projected? If so, the only negative effect is not being able to get your initial investment out?

6. Is it true that I can get up to 10 conventional loans at a time (and my husband can also get 10) before I have to start looking for alternate forms of financing? And as long as the properties are outside of a 50 mile radius from my home, I can get a conventional loan which only requires on avg 5-10% down?

Hope my questions aren't too obvious. Thanks in advance!!

[Andrew Postell]

@Kim Forgione I'll try to address these one at a time:

1. The main benefit to BRRRR is buying a home BELOW value. What I mean is that if you bought a home at full price/fair market value you are actually paying ABOVE market value because of closing costs. If you bought properties at full/above price it will limit how many you can buy. So buying a home in a challenged condition better mean that you are getting it at a DEEP discount. Most investors use the formula of purchase price + renovations = 70% Market Value. Many investors bring the contractor with them to the property to estimate repairs in the beggining.

2.  Yes, your value should be based on "Fair Market Value" which is derived by comps.  Also, in most situations the term "Multi-Family" is reserved for 5+ unit properties.  1-4 unit properties is one investment strategy while multi-family is different.  I mean, they are both real estate and the concept is the same but they have some very important differences.

3.  There's not really a "max" amount of time for repairs but some loans will have a 6 month time limit.  Some loans won't have that time limit though.

4.  Cap rate is usually reserved for Multi-Family properties.  Sometimes people talk about cap rate but if you are using conventional loans it won't be applicable to the loan. When receiving a conventional loan you will be required to have a new appraisal on every property.  That appraisal is based on comparable value.

5.  You should absolutely be very accurate on your comparable value.  The largest error I see most new investors make is not knowing how to evaluate comparable value.  Also, when you mention "getting your initial investment out" are you planning on buying these properties with cash or with a loan?  If you are buying with a loan...then the risk is dependent on what type of loan you are receiving.

6. Yes, you can receive 10 loans under your name and 10 under your spouses name. Not every bank will follow this rule though. So get preapproved first, and quiz your lender on what their investment property "overlays" are. And with conventional lending you will be required to have 15% down on any purchase. 15% equity will be the MINIMUM on a refinance too. Keep in mind that 15% down means you will have PMI.

Hope this helps!