Refinance after BRRR method?

Question

I haven't quite got things figured out enough to buy my first rental property. So far the department I have the least confidence in is the finance side. IF I get a hard money loan to get me & my wife started into the rental business and it's time to refinance to get a lower interest rate and pay off the hard money loan before the deadline. What direction do you go from there? If I want to keep my personal credit out of this new business venture, what options do I have? From all my reading there is a limit to how many homes you can buy on personal credit before your debt to income is tapped out. If I want to have 200 rental homes one day, I'm sure ill need a different type of loan to achieve this then a conventional mortgage tied to my personal credit?

I realize this might not be as important when doing the first deal, but I definitely don't want to get started by heading down a path immediately out of the gate.

Albert Bui · Answer

That means either your rent to value ratios (RV ratio) are not high enough in your specific market or you're not buying the "property right," or getting a good enough deal.

As an example, in seattle core market even if you get a deal at 60-70% of ARV you will still barely cash flow and or will lose money if you try to refinance and recoop all your "costs," back because the rent to value ratio  is too low here. A 2 bed room condo deal at 300,000 might sound great when its ARV is valued at around 475-550k along with the 300-450 monthly HOA's, property taxes, and condo insurance.  Even if you could find this condo for 300,000 (55-63% of ARV) and put in 35k to rehab it you will break even/lose money since it could probably only rent for 1900-2400 at most.

If you were to refinance back 335,000 @5.00% condo cash out rate your payment would be $ 1,798.35 + 425 HOA + 345 property tax + 45 condo insurance = $ 2,613.35 payment. This is with out property mgmt, repairs, vacancy, rent loss, or capx,etc.

Each market is unique in its RV ratios. How is your market typically for SFR/condo 1 unit rents?

Albert Bui · Answer

Lee what Brent means is that 143%  ( 1.00 / .70 = ~ 1.4286)  rule is that if you follow this you'll be at 70% of the ARV or after repair value so us lenders like myself will be happy to cash out refinance and give you back all your costs (acquisition/down/rehab/etc) and if you're lucky you might even get more than your "costs," back assuming the property appraises high enough.

This is a conservative way to gauge the cash out but in most cases you can cash out to 75% after 6 months or 1.00 / .75 = 133% of the "cost." This in essence means you could go with a lower appraisal to recoop your costs.  I like to be conservative so I'd recommend using the 143% rule that Brent mentions, worst case you over estimate your appraisal value you can still get your costs back even if your new value is only 133% of your costs instead of 143%.

The secret to the actual BRRR strategy involves buying the property right and assessing the ARV accurately given the current momentum in your specific market.

Brent Coombs · Answer

@Lee Haenschen, you wrote: "After repaying the credit card for the renovations I wouldn't have enough money for 20% down on the next 100K house".

Exactly! Which is why you need to buy under market, ALWAYS! Refer my "143% Rule" above (Lenders typically only allow borrowing up to 70%* appraisal upon refi, not 80%). Cheers...

* eg. it cost $100k; it appraises at $143k. Bank lends 70% (= $100k). ie. ALL your deposit back!

Bryan Drury · Answer

@Lee Haenschen,This is the strategy we use and it is very common among investors.We have a HELOC against our personal home since we have quite a bit of equity in the home. We use the HELOC to purchase and renovate the buy and hold rental property.We do make interest payments plus 1/360 of the a principal payment monthly towards the HELOC.After renovation and placing a tenant we go to our local community bank and get a long term loan that pays back our purchase plus renovation cost on the HELOC.And if we bought the property at a big enough discount and stayed on budget then sometimes we make money on the cash out refinance loan.Its not really profit because that money comes from the long term loan that replaced the HELOC,And yes the interest cost does affect cash flow to answer your question. Hope this helps, good luck

Albert Bui · Answer

I was on board with the rule since I use the same rule myself for min deal criteria is to create equity that is 33-43% over cost basis (acquisition + rehab) or better.

Nice Brent!

Brent Coombs · Answer

I didn't realize you'd asked that question, until @Albert Bui answered it (very well) for me above.

It's a Rule I invented here on BP (because BP loves its "Percentages Rules") which rephrases the "70% Rule" from the point of view of the appraisal, AFTER repair. As I wrote earlier:-

"eg. it cost $100k; it appraises at $143k. Bank lends 70% (= $100k). ie. ALL your deposit back!"

That same 143% (ie. $143k = 143% of $100k) RATIO can apply regardless of the ACTUAL cost.

Of course, if a Lender will Lend 75% instead of 70% of its appraisal, then it's my: "134% Rule"!

Lee Haenschen · Answer

Still holding onto this dead weight question for the last year. Me nor my wife has made the jump to get started because we just can't get over a few humps. Sad that we've let more then a year pass by since we started taking interest in this new opportunity.

If we keep doing the BRRR method on each house we virtually erase ANY cash flow from the rental. We need cash flow just like anyone else, this isn't just for the future but to  live off as a second form of income right here right now.

Lee Haenschen · Answer

could you elaborate on your 143% rule?.

Lee Haenschen · Answer

Thanks for clearing that up for me Brent

Lee Haenschen · Answer

How much money are some of you getting out of your cash out refi as an example?

If I buy a house for 100K and put 20% down. With another 10K going into renovations of a credit card.

After a year of seasoning the house is worth $125,000 & I refinance and take out the equity. After repaying the credit card for the renovations I wouldn't have enough money for 20% down on the next 100K house.

Refinance after BRRR method?

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