Conventional Loan 25% down or attempt to spread Funds Out

[Account Closed]

I'm new to REI. Many of the podcasts and much advice says to get started and not to sit on the sidelines forever. I've made contact with a loan officer. I have very good credit and could get together a down payment and closing costs to buy at least something in the 150k range (so maybe 35- 40k). My question is, being new, is this a good route to go? Would I be better trying to learn strategies to see if I can spread my 35-40k out to acquire multiple deals? If so, anyone have recommended strategies that would work for a newbie?

I want to get moving, but I do have some reservations. My concern is that if go conventional, and I don't buy a stellar deal on my first buy, I'll have sunk all my capital, and won't be in a position to refi for 1-2+ years. 

Any input is appreciated.

[Dan H.]

Originally posted by @Account Closed:

Grant, thanks for your input. I do like the BRRRR strategy, especially since it seems the most likely way to make sure it's a deal. That said, another forum post I'd considered is how the cash out appraisal works. My only experience so far is with the purchase of my own sfh, and so what I saw in that world of conventional loans, is that the appraisal "magically" came back at exactly what we paid, even though we got a great deal. My point or question I guess, is how does it look differently in BRRRR investing so that you can get an appraisal that shows your equity and allows you to pull that out in less than 1-2 years?

I have done quite a few BRRR in San Diego county. I agree with the poster, know rehab costs and ARV but add in San Diego the refi appraisals are typically lower than appraisal for purchase. In addition, I agree with your assessment that appraisals at purchase typically come in near the purchase price even if the purchase is significantly below comp value. The appraiser will use the comps that best justify the number that they desire to achieve. For refinances this means they throw out higher comps and use lower comps. It should not be this way but as indicated I have done this a few times and it is what I see.

I consider myself one of the experts for duplex to quad in my market.  I know the comps better than the appraiser does because I saw each comp when they were listed.  I know how they each compare.  It is part of playing the game to realize the refi comps will come in at the low range.

Then there is the LTV that comes into play. If I can refi at 70% LTV it will be difficult to get back all the invested money.

Here is a real example from my most recent BRRRR. It had a real poor appraisal. I appealed the appraisal but the appraiser disappeared (literally gone and according to the lender not able to be contacted) so the appeal never occurred. Purchased $390K. I had purchased value at $425K to $435K but purchase appraisal came in at $404K (comps will try to justify purchase cost). Purchased 80% LTV. Rehabbed at a cost of ~$45K. In for ~125K not including all closing costs. Still owe $312K (not including any principle pay down in holding period which probably cancels out the closing costs that I did not fully include).

Refinanced with a value that I placed at $600 to $610K but the refinance came in at $544K (this was low even for a refi). Refinance was at 70% LTV so $381K. Pay off the $312K leaves $69K. In this case I did not even recoup enough to get out my full down. Down $78k - $69K from refi = $9K still in plus the $45K of rehab costs.

This example had a really bad appraisal but with the more normal just bad refi appraisal I typically get all of my down back and a subset of my rehab costs but I have yet to recover all of my down and all of my rehab costs.

Note if the appraisal had come in at my ARV ($600K) we have 70% of $600K = $420K. Pay off loan ($420K - $312K =$108K) and the initial down ($108K - $78K = $30K) and there is still not enough to cover the full rehab costs ($30k < $45K).

In summary, It is very challenging to recover all costs via the BRRRR (at least in San Diego). As indicated I have done this a few times and have not yet been able to recover all of the costs. However I think most people would be happy to have a $600K RE with $180K equity for a cost of $15K. So I am not trying to discourage the BRRRR but instead trying to lower the expectations a little bit (at least in San Diego).

Good luck