How is this strategy for B&H's

Question

After much thought I think I finally have my strategy locked down (maybe not as I discovered as I wrote this all out). A little backstory, I bought a condo at auction in cash a year ago I rehabbed it and now rent it. I want to continue this process and acquire more B&H's. I like the B&H strategy for long term wealth and passive income.

So here's the breakdown of my strategy, please tell me what you think.

I have a HELOC currently pending approval, when I get the funds I will research my next investment and purchase it with the HELOC funds if I find the right deal.

I will get the unit ready and rent it out. I will then get a cash out refi on that unit if/when permissible to pay back my HELOC and then research and hopefully purchase another rental with the funds that I just paid back into my HELOC account from the cash out refi. Repeat process...

Essentially, I should be able to use the HELOC funds as my starter and then do a cash out refi on each unit and just keep working out of the HELOC as revolving credit as needed.

The way I see it, if I did a few of these a year I would basically be making only a few HELOC payments a year when I'm using those funds, when I pay back the HELOC with cash out refi funds then I'll be making payments on the cash out refi. The problem is, obviously, on each rental I get I will have to do a cash out refi to pay back the HELOC. So the coffers would be full from the cash outs but I'd have to make payments on each one. The units will be worth more because A. I bought them at a good price and B. I renovated them but I'm not sure if the math is going to add up.

Perhaps I need to get more into the analysis calculators but it would appear that with the payments on the cash outs compared to what I would be bringing in from a tenant would the cash flow would be slim to none. Now after writing this all out my strategy doesn't sound so great now haha. If anyone cares to chime in on this I beg you please!! I might have to change my strategy back to F&F and pickup B&H's on occasion when the deal is just right or I have accumulated enough cash as to where I can get a B&H and pay in full. In the meantime I'll be crunching numbers, looking at the analysis tools and possibly rethinking my strategy.

The other thing is, again I do already have my first condo and I own it in full, maybe there's a way to include this in my strategy as far as cash out refi on it or selling it. If sold it I would get back roughly $150k of which I put $120k into it. I however, would like to keep this unit in my portfolio as it is if I can.

If anyone responds, I thank you in advance,

Jason

Jason Young · Answer

@John Leavelle and @Shannon SladeThanks again guys for you help!!!!!!!!!!!!!

Shannon Slade · Answer

Sorry been out of town.Do not forget about the principle reduction and appreciation you will see over time, that is unrealized income. If you are worried about a lot of work, money and risk then this might not be for you. Run the cash on cash numbers and see if you can get that putting your money in mutual funds consistently. Been doing this for quiet a few years now and we do not spend a lot of time in the biz each month. Give your strategy a couple of years to see if this is the route you want to take for financial freedom and if it doesn't work for you sell out and throw that money somewhere else. Good Luck and hope to see you around on the site

John Leavelle · Answer

@Jason YoungIn the future it would help us help you if you would break all the income, expenses and mortgage into individual categories so we understand what has been included and what has not. Otherwise, it's is a futile exercise and doesn't help you in the end. And that's what the BP community is here for. Help each other succeed.

Jason Young · Answer

Thank you all for your responses. @John LeavelleThis is actually a test report based on the condo that I already own in full so I knew I had good numbers. I just ran the tool against it as if it were a BRRRR and not a B&H like i currently have it.Yeah I did the report a little differently, the $1k for rent is after all of my expenses figured in. I had already done the math previously down to that number so I just put that in and didn't put in the rest of the expenses because I didn't know what they were individually off hand, but I do know that $1k is what I bring in after HOA, taxes and insurance. That's why the rental income is a little low. The true rental income is $1300. There are some other expenses I do need to include though like the HELOC fees and what not. @Shannon Slade You really think $200 is worth it, just seems like a lot of work, money and risk for that? See above about the property taxes. I already had that figured in on the rent, that's why the rent number is a little low too. My true property taxes are about $130/month, HOA $90 and Insurance $80. Thanks again guys!!

Shannon Slade · Answer

I know some folks that use this strategy, cash out refy or HELOC to make the next purchase. Rinse and Repeat!!! $200 hundred a door is decent with leverage. $0.08 for property taxes though??

John Leavelle · Answer

Howdy @Jason YoungYour plan is sound for the BRRRR strategy. Using a HELOC is a excellent way to do it. However, your analysis/calculations need work. You are showing an ARV of $160,000. The Refinance loan will be 70 - 80% LTV. Typically it is 75%. That would give you a loan of $120,000. When completing a BRRRR strategy it is best to try and keep your all-in costs (purchase price, Rehab costs, Closing and Holding costs) at or below 70% of ARV. That's $112,000. The reason is it gives you some buffer just in case your Rehab costs are more than expected or the Refi appraisal is lower than expected.You state all-in costs are $126,800. I don't see any Holding costs. The HELOC does cost money to use. You need to account for it in the form of minimum payments per month until you Refinance the property. You also will have other Holding costs during the Rehab (such as utilities and insurance) that need to be accounted for. I assume you are using the HELOC for the entire $126,800. Therefore, you will be paying for 2 loans at the same time after the Refinancing. If you can get a 75% LTV ($120,000) you will still owe $6,800 plus the additional Holding costs I mentioned to your HELOC. You will need to include that in your Cash Flow analysis.As far as your Cash Flow analysis goes it doesn't appear you are including all the typical operating expenses that you would have. Are there any HOA fees, tax and insurance, and other miscellaneous expenses (Legal, accounting, pest control, lawn care/snow removal).The Rental income seems low for the property value. Is that common?You also might think about leveraging your HELOC better by using a Hard Money/Private Money Lender to fund most of the deal. That way you can invest in multiple properties, closer together, if you want.

Jason Young · Answer

I did a BRRRR report here...https://www.biggerpockets.com/calculators/shared/7...If anyone cares to peak at it, tell me what you think.It looks like I would cash flow a little over $200 a month, would that be worth it? I know the idea is to rinse and repeat but that's a lot of time money and risk involved for only $200/month.