Questions about the BRRR strategy

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Questions about the BRRR strategy

Alexander Fernandez
Member since 2018 · 5 posts · 1 vote

I put my feet to the fire and bought my first property.. Now I'm hungry for more. but I don't have the capital that I used to have. So I'm looking into growing my portfolio with single family / multifamily homes ranging in the 40-60k range. Ive read a lot about the BRRR strategy which involves gettting a house under market value with some cosmetic issues.. remodeling it and then taking out a cash out refi loan assuming you will get a good margin for the new value of the house after remodeling. now with this money, on to your next house!! It seems like a great plan but I have some questions!!

1. most banks/ credit unions are telling me I have to wait a minimum of 6 months after closing before I can get a cash out refi.. They say its a federal standard.. Is this true? is there any way around this?? I mean I want to get the cash back out as soon as Im done remodeling and move on to the next house.

2. Wouldn't A HELOC also work for this strategy? if so.. which would be better? and what really is the difference?

3. Ok so with this strategy lets say I get a house for 100k sink 20k on down deposit and 10k in renovations and now 2 months later its worth 150K. I get a cash out refi for 135K. So now clearly my monthly payments will be higher now that Ive gone from a 100k mortage to a 135K mortgage. and if I do HELOC it will just be another bill to pay aswell.. This obviously has to be taken into account when doing this strategy right? I mean thats why they say find a house that generates 2% purchase price... Or is it 2% the refinance price? which would make more sense?

cheers guys!!!

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  • Kerry BairdPro Member
    Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
    7y

    You have a good handle on the way of things.  

    Yes, (1) you have to wait for six months to refinance to refinance.  The primary way around this is to buy with cash and do a “delayed finance” transaction, which is done under the 6 month mark.  

    (2) A HELOC is more like a credit card that is secured by the property, in that we can take a draw and pay it back and then take another draw, and pay it back. The one I am currently working on will then become a fixed 30 yr mortgage, and stop the draws/repayments. It can come in an interest-only variety or an amortizing variety (principal and interest). With a conventional amortizing mortgage, we pay principal and interest each month, with less principal up front and lots more interest. This switches around and later payments are more principal and less interest. Some lenders will do a HELOC in first position (recorded as the only mortgage) I've been told. I haven't tried or used one in that manner.

    (3) If you were to use hard money first, and then refinance into a conventional mortgage, your payments would be high initially, and then reduce.  (A) You could also buy a “lipstick” rehab, which would not require so much work, and start the deal off with a conventional mortgage. (B)  You could use a construction type of conventional mortgage and do the renovations with draws, and using a GC to do the work.  (C) You could find an owner carry situation where you pay the seller and they act as the bank for you, and you have ownership....we’ve done a number of these deals.  (D) You could look to generate more cash flow from a small plex unit, where you occupy one unit and rent the others out, and improve over time.  

    Really, you have the jist of it.  Set goals to go out and view houses, even open houses.  Ask property managers what areas are in demand for rentals, and pay attention to the rents that are being paid.  Watch your credit, talk to a lender...all those prepartory things.

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  • Alexander Fernandez
    OP
    Member since 2018 · 5 posts · 1 vote
    7y

    thank you! that was very insightful advice!

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