Minneapolis, MN · Member since 2016 · 48 posts · 9 votes
Can someone further elaborate on the BRRRR strategy please?
This is what I know:
I pay X for down payment on a property. Then I rent it out, fix it up, etc... Then in Y amount of months I can refinance that property and pull my X down payment out to then use that X for a down payment on another property. Here's where I'm confused, in episode 169 of BP Podcast David Green talked about nearly paying off an entire mortgage then refinancing and pulling out all of that money. Maybe I heard him wrong, but maybe I just don't understand pulling money out of a mortgage or how the whole equity thing works.
Disclaimer, I am new, I have no investments, but I am thinking the BRRRR strategy is going to be my go-to... That is once I completely understand it.
Pumped to read the wise words from the many minds that stumble upon this post.
Peoria, IL · Member since 2011 · 365 posts · 182 votes
9y
Example: real numbers (rounded) for my most recent deal.
B: Buy for 50k R: Rehab for 25k R: Rent for $1,200/month R: Refinance. (must wait 6-12 months) Appraised at 110k. At 70%LTV I got a check for around 77k at closing. R: Repeat
Enough to pay off the 50k and 25k in order to repeat. Rent and refinance R's can switch places depending on your rehab speed. Strategy needs to have a good deal and equity boosting rehab. Works best with cash, private money, line of credit (on another property) etc for initial buy/rehab, but can be done with bank (especially commercial) financing for the initial purchase.
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
9y
@Bryant Amundson, I haven't heard that podcast, but "paying off an entire mortgage then refinancing" is NOT necessary if you're trying to re-invest as quickly as possible.
The BEST way of being able to re-fi as soon as the Bank's seasoning requirements are fulfilled (usually 6 months) is to buy at such a discount in the first place that your required 25-30%+* equity needed (on top of your Deposit's equity) is ALREADY in place on day one (or at the very least, WILL be value-added on top of your rehab cost).
eg. To appraise at $100k ARV, your all-in cost should have been less than $70-75k*!
Nothing about having to pay ANY % of that mortgage back before applying for a Re-Fi.
* Some Lenders re-fi 75% of their Appraisal, but others just 70%. Keep warm. Cheers...
B for buy: You're looking to purchase a property at a price that adheres to the 'flip formula': ARV*0.7-rehab costs. You want to buy using hard/private money because that will give you the advantage of fast closing and construction costs. Depending on the lender, you may buy a property with even 10% of purchase+rehab.
R for rehab: You want to rehab a property to the market standard in order to get the highest appraisal possible, and of course to have an attractive rental that would rent easily. Once the rehab is done you can add that 30% equity to your net worth.
R for Rent: Set the rent price so that it will be reasonable enough to attract quality tenants, but to cover the mortgage and expenses.
R for Refinance: You want to pay down the 1st loan and have a lower rate-longer term mortgage instead, so you do a cash-out refinance. That's when an appraiser comes to appraise the property and the bank will keep 25-30% equity (down payment of sort) and pay you 70-75%.
Since you stated you're just beginning, I suggest this: First focus on finding opportunities, forming a team and understanding the basics of a rehab project on all its aspects. After you have everything lined up you buy the first property, do the rehab, and when it's getting close to the finish you can then decide whether you want to sell it or refi and rent. The beauty of this strategy is that you can keep all options open.
Minneapolis, MN · Member since 2016 · 48 posts · 9 votes
9y
@Assaf Furman thanks. That is a great elaboration, and yeah I need to build a team before anything because their is no way I can rehab a house... Unless it's made out of gingerbread... Also thank you @Brent Coombs. Your guys' insight is very helpful.
Peoria, IL · Member since 2011 · 365 posts · 182 votes
9y
Example: real numbers (rounded) for my most recent deal.
B: Buy for 50k R: Rehab for 25k R: Rent for $1,200/month R: Refinance. (must wait 6-12 months) Appraised at 110k. At 70%LTV I got a check for around 77k at closing. R: Repeat
Enough to pay off the 50k and 25k in order to repeat. Rent and refinance R's can switch places depending on your rehab speed. Strategy needs to have a good deal and equity boosting rehab. Works best with cash, private money, line of credit (on another property) etc for initial buy/rehab, but can be done with bank (especially commercial) financing for the initial purchase.