Does BRRRR Work When Not a Cash Purchase?

Question

I'm in contract on an SFR and have hit a snag with my projected BRRRR strategy. My question is, does BRRRR work if the initial purchase is with a standard 20% down investment loan? It seems to me that much of my cash flow is eaten up when I refinance at the higher value. I get a lump sum of cash short term (basically everything I put in) but cannabalize my cash flow long term. Is this right or are my numbers off? Am I calculating the refinance numbers correctly? My capex is 10% gross rent; repairs and vacancy are both 5% gross rent.

Here's my projected numbers on the initial purchase:

Purchase Price: 105,000 [ARV = 150,000]

Down Payment: 21,000

Closing: 4,000

Repairs: 7,000

[32,000 out of pocket]

Rent: 1,200

Mortgages, Taxes, Insurance: 839.40

Capex, repairs, vacancy: 228.00

Cash Flow: 132.60

Numbers AFTER Refinance:

ARV: $150,000

$150,000 * 20% = 30,000

$30000 (new down payment for ARV) - $21000 (previous equity from original down payment) = $9000

I've forced $45000 in value and have to leave $9000 for the new 80/20 LTV ratio, plus another $4000 for closing costs, $13000 total. $45,000-13,000 = $32000 cash out.

Projections for post-refinance:

Purchase Price: 150,000

Down Payment: 30,000

Closing: 4,000

Repairs: 7,000

Rent: 1,400

Mortgages, Taxes, Insurance: 1072.34

Capex, repairs, vacancy: 266

Cash Flow: 58.16

Matt K. · Answer

Because bad luck happens.... a very realistic scenario could be: Sewer lateral on old house... needs cleaning 500 bucks on month. Not terrible, but if you only cash flowing 58 a month (granted you have no personal money in) that's going to eat a lot. Now let's say the cleaning doesn't go as planned and the 2 months later you'd need a new lateral. Let's assume for easy math you get a deal of 5k for the lateral.... Now where does that money come from? A lateral isn't something typically covered in a remodel and isn't something you can easily actively monitor. Now what happens if you do the 5k for that and then your tenant decides they want to move at the end of your lease. Now let's say this all happened month 11 of a 12 mo lease. You got 1 more month of payments then you have turnover which costs money. You could easily not see another rent check for a few months and incur expenses during turn over all while you had just paid 5k 2 months prior. You have no equity in the house (since you took it all out with the refi) you probably don't have that much in your reserves with just 1 yr of ownership and depending on the time of year it could take a while to rent. You might have zero of your own dollars into this but it's going to take money to get the ball rolling again.

Matt K. · Answer

In theory your capex "could" be low/non existent depending on your plans.... and if you get most of "your" money out of the deal and are still making money off the banks money to some that's seen as more valuable than more monthly cashflow but at the expense of your money.

Josh Engelhart · Answer

It can be done. It takes a special property and deal.

The biggest concerns are whether or not you can get traditional financing to begin with. It can need touch ups and still be eligible for conventional financing, but anything serious will cause appraisal issues.  It's tough to find something so undervalued that needs minimal enough work to pull out all of your cash. The other stinger is paying closing costs twice. Once on the purchase and again on the refinance. I recommend opting for a higher rate on the initial loan to get the lender to cover your closing costs.

If you can find something under priced but not so damaged you can't get a conventional loan you could potentially BRRR all of your cash out and have a "free house" that still produces cash flow.

Brent Coombs · Answer

@Matt K., that's fine. I've already agreed that "you need to have the income/capital to service the debts during vacancy and or repairs". That should be a no-brainer, whether you're highly leveraged - or NOT!

Matt K. · Answer

You do realize my entire point of this was that if you're attempting to leverage yourself as far as you can go.... you better have the cashflow to support it WHEN something goes wrong, not if. The odds of something eating up ALL of your cashflow and reserves. We're talking 100-150k houses... not some brand new custom built home.

Brent Coombs · Answer

@Matt K., I didn't say Rome was built in a day. Sure, it takes time, and seasoning. And yes, after a few SFRs (while you ALSO continue saving), you will be better placed to bid on multis instead, and of course, eventually end up with a "commercial or portfolio loan, which both are much different than a 30 yr note". (But so what?)

And yes, your attributed "equity" will be "worthless" at that stage - but again, so what? You've GOT your money back!

Matt K. · Answer

Please show me a how you'll get that kind of financing....

If you have enough money for 100 doors why you messing with SFH (which is what we're talking about right). That's apartment level stuff...

Plus I'd love to know how you're getting around season requirements without big upfront capital, because if you can't do that it's either sky high rates or 6-12 mo seasoning.

Plus you can't go over 10 mortgages...unless it was commerical or portfolio loan, which both are much different than a 30 yr note.

I fail to see how 100 doors is realistic on a brrr strategy.

And the equity you mentioned... Worthless unless you're selling because you're maxed on LTV, again if you know a way around 70-80 I'd love to know.

Brent Coombs · Answer

@Matt K., it's true that you need to "have the income/capital to service the debts during vacancy and or repairs".

And yes, it's true that sometimes, "bad luck happens".

But, it's all about your AVERAGE return over time, over ALL of your Investments!

So once you have say 100 properties under your belt, each generating $58/m (on average), for ZERO of your own dollars left in each deal, you will be able to handle the low odds of your worst case scenarios!

And by the way, even though you'd have none of your own dollars invested in each deal, you DO still have 25%* equity!

* That is, according to your Lender's appraisal - which is the only appraisal that matters...

Mike Dymski · Answer

Many times, a successful rehab makes the post-rehab rental figures look worse.  That happens even more frequently with housing at elevated prices now.  Some buy-and-hold investors are flipping instead...and some don't even bother with the rehab and flip it as-is for not much difference in profit.  If you can find flips like this one, I recommend making hay while the sun shines and only keep the ones that pencil out well post-rehab or go back to buy and hold when the market opportunity changes.  Nice work on finding this property.

Does BRRRR Work When Not a Cash Purchase?

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