BRRRR without rehabbing/refinancing?

Question

There seem to be some cash flowing rental properties in my area that could be bought as is and start renting out for profit without much if any rehab. Maybe I need to learn more, but this seems to conflict with the BRRRR method. I want to eventually have 10+ properties but how do I get there without the "rehab" and "refinance" part of the BRRRR?

Kenneth Anderson · Answer

@James Marshall

@Jared McCullough

Thanks everyone. I’m going to try and pull all this information together and summarize. Chime in if you disagree.

The beauty of the BRRRR method is that it’s a repeatable process where you would never (in theory) need more cash than the initial cash needed to buy/rehab the first property. The backbone of the BRRRR method is the rehab part where you force appreciation on the property, and the refinance part which makes it possible to pull out all (or most, or sometimes even more) of the equity you had invested. You now have a cash flowing property and none of your original cash invested in the property.

To simplify that even more, I’d say the most important part is that the value of the property is greater than the cost (ideally by at least 20-25%). This will make refinancing a feasible investment strategy. Then, it’s just the method you choose to create that cost vs. value difference. The main ways I see at doing that are: buying at a deep discount, rehabbing, or holding the property long enough for it to appreciate in value.

Does that sound right?

Jim D. · Answer

Yes, that scenario would work as you described.

Only problem is that your odds of buying a property at 50% of current value that needs no work, while bidding against other investors, are about the same as me scoring a date with Jodie Foster this Friday night.

Jared McCullough · Answer

This does not necessarily conflict with the BRRRR method depending on the situation. The "Rehab" part is usually implied due to the price point at which it is bought at compared to the value of the property after repair.  This does not mean that if you can't get a good deal on a house that needs minimal to no repair that you still can't use the model. Realistically it is basically just trying to be "all in" to a house cheap enough that the appraisal and refinance (i.e. the new mortgage) will get your money back.

For example the house that I just purchased:

Purchase Price: $24,000

Repair: $1,000 (Carpets/1 window) I don't even call this repair in my world this is just standard prep for new renter

All In: $25,000

Estimated Appraised Value: $50,000 (This is uber conservative on the low end expecting more like $65,000)

Cash Out LTV: .75%

Cash Out Refinance Payment: $37500

Loan Processing Fees: $1,000

Walk Away Cash: $36,500

Obviously people are doing this on a much larger scale but this was just an example of how the model can be on a property that does not need much rehab. The key here is you need to get it at a price point that works which requires doing some research and math.

I was a little confused about your thought of doing it without "Refinancing" at that point you have lost the BRRRR method in that your "monies" are stuck in equity in the house which is a 180 from what the whole BRRRR Method is intended for.

Jared

Jim D. · Answer

You don't.

Jared McCullough · Answer

James,

Although I am fairly new to this it is my understanding that your Cash Out Refinance Value will be based on a certain LTV based upon the assessed/appraised value of the house.

If this is correct that what your suggesting is false. Buying a house that needs "significant" rehab is not the only method for buying a house well under market value which is basically what the model is suggesting is that your "all in" is low enough that you can pull money back out through financing at a comparable market value.

Example:

I buy a house at foreclosure for $50,000 cash that needs ZERO WORK.  The house would appraise for $100,000 based on comps/market. I find a lender willing to do 75% LTV. They send for an appraisal it comes back at $100,000. They approve a loan at $75,000. I pay myself back my $50,000 cash. I have just netted $25,000 operational cash without doing any Rehab. I am a little confused at why your implying that Rehab is required unless I am naive to something (i.e. which is quite possibly true as I stated originally I am new to this).

James Wise · Answer

You just need to keep stacking up cash for those 25% down payments. BRRRR is a whole different business model. What you need to do is use your income producing skills as much as possible. Looks like you are an accountant, do more accounting work. Work overtime, get a 2nd job, take on 1099 work. Hell drive Uber if you need to. Whatever you have to do to get 25% down you should do as you'll essentially be quadrupling your money every time you buy a rental with a 30 year mortgage and hold it long enough for the tenants to pay off the bank.

Geoff Garber · Answer

@Kenneth Anderson

I’m interested in this as well.  My plan is to acquire multiple turnkey SFR with tenants with 25% down on each.

Example:

PP: $90k

Current rent: $1200

All-in: $27k (including closing)

Is there an opportunity to refi before 5 years?  5 years being when I would make my money back either way.

Thanks

Kenneth Anderson · Answer

@Jared McCullough thanks

I guess my confusion is how do you pull your equity out by refinancing if you haven’t increased the value of the house through rehab?

Nicholas Covington · Answer

@Kenneth Anderson we call these “turnkey” rental properties. The same loans that people use for the refinance part can be used for purchasing a home as well. These long term loans will require 20-25% down and function the same way.

Kenneth Garrett · Answer

@Kenneth Anderson

If you have the down payment 20-25% you can do a traditional purchase.  It’s not the BRRRR, but if you don’t need the rehab then go ahead if the numbers work.  The concept of the BRRRR is to buy distressed properties and the rehab forces the equity.  This requires the refinance portion to get your money out or wherever the source of your money is.

Good Luck.

BRRRR without rehabbing/refinancing?

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