Thinking through the logistics of BRRRR

Rehabbing & House Flipping
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Thinking through the logistics of BRRRR

Pat Dansdill
Asheville, NC · Member since 2016 · 36 posts · 23 votes

Hello all,

I would like to use the BRRRR strategy on a property, but don't fully understand the details-any help is appreciated!

1-Am I wrong in assuming you can buy a physically distressed property with only the down payment in cash, and then finance the rest with a lender?

2-Following the above scenario: If you are able to finance the remaining amount with a lender, and then refinance the property after you rehab/rent it out, there lies the possibility of losing on interest points, right?

For example-if I bought a property today, with a down payment, and financed the rest with a 5% interest rate, then refinanced in 6 months (after I rehabbed, rented it out, and it was appraised for a higher amount) when the interest has been potentially raised to 5.25%, I lose out on a lot of money with the higher interest rates...correct?

I'm not sure if there's more I need to learn, or if that is simply part of what happens in a BRRRR deal, and it's better than the alternative of doing nothing.

Thanks,
Pat Dansdill

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Jason Munger
Rental Property Investor · Lansing, MI · Member since 2017 · 58 posts · 18 votes
7y

The interest rate is always a gamble.  It could go down too.  The purpose of the refinance is to get your cash out of the deal to move onto the next one.

Let's use your example. The distressed property is $100k and you have $20k in cash and finance the $80k. With 20% down you aren't paying PMI (good!).

Then after you fix up the property it's worth $150k. You could refinance the house and get a $100k mortgage, pay off the original loan, get your $20k down payment back and your repair costs and STILL have have a loan for less than 80% of the property value so you aren't paying PMI. You have free cash to go make another deal.

I have over simplified things but you get the idea.  Even if the interest rate did go up to 5.25%, I would more than make up for it by being able to buy another property, versus only buying one.  In theory, as long as you make your numbers work and buy right, you can continue this process indefinitely or until a bank won't give you another loan.  But cash on hand won't be the issue.

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  • Jason Munger
    Rental Property Investor · Lansing, MI · Member since 2017 · 58 posts · 18 votes
    7y

    The interest rate is always a gamble.  It could go down too.  The purpose of the refinance is to get your cash out of the deal to move onto the next one.

    Let's use your example. The distressed property is $100k and you have $20k in cash and finance the $80k. With 20% down you aren't paying PMI (good!).

    Then after you fix up the property it's worth $150k. You could refinance the house and get a $100k mortgage, pay off the original loan, get your $20k down payment back and your repair costs and STILL have have a loan for less than 80% of the property value so you aren't paying PMI. You have free cash to go make another deal.

    I have over simplified things but you get the idea.  Even if the interest rate did go up to 5.25%, I would more than make up for it by being able to buy another property, versus only buying one.  In theory, as long as you make your numbers work and buy right, you can continue this process indefinitely or until a bank won't give you another loan.  But cash on hand won't be the issue.

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  • Jason D.
    Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
    7y

    @Pat Dansdill if that was the scenario, yes, you would pay slightly more interest. The thing is that rarely will you find a lender that will loan on a rehab property for 5%. What most people do is get a short term, interest only loan for the purchase and rehab, through a hard money lender or private lender. These loans are typically 8%-15% interest. Conventional banks wont lend on these type of properties so low interest very hard to find, unless you have a private lender willing to lend that cheaply.

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  • Pat Dansdill
    OP
    Asheville, NC · Member since 2016 · 36 posts · 23 votes
    7y

    @Jason Munger @Jason D.

    Thanks!

    That's the explanation I needed to verify I was thinking through the BRRRR process correctly. Interests rates can change, but the ultimate goal is to pull money out and repeat the process, thanks for also confirming that I could pay slightly more in interest. Actually, I am first hoping to buy a live in flip, using an FHA loan (which is where the 5% came from, incidentally), and eventually use the BRRRR strategy on additional properties after that, of course with a higher down payment than what I'm aiming for with the live in flip.

    I appreciate the help!

    Thanks,

    Pat Dansdill 

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  • Matthew PorcaroBusiness Member
    Lender · Long Island, NY · Member since 2016 · 456 posts · 336 votes
    7y
    Originally posted by @Pat Dansdill:

    @Jason Munger @Jason D.

    Thanks!

    That's the explanation I needed to verify I was thinking through the BRRRR process correctly. Interests rates can change, but the ultimate goal is to pull money out and repeat the process, thanks for also confirming that I could pay slightly more in interest. Actually, I am first hoping to buy a live in flip, using an FHA loan (which is where the 5% came from, incidentally), and eventually use the BRRRR strategy on additional properties after that, of course with a higher down payment than what I'm aiming for with the live in flip.

    I appreciate the help!

    Thanks,

    Pat Dansdill 

    Pat - you can do the same with your live in flip if you use an FHA 203k. Essentially, you're adding a rehab to a distressed property (ideally, a 2-4 unit so you never have to pay the mortgage) and after the rehab, you can refinance out and pull your money back out and use that equity to get yourself into your next BRRRR.

    The 203k Way
    WebsiteView Page
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  • Pat Dansdill
    OP
    Asheville, NC · Member since 2016 · 36 posts · 23 votes
    7y

    Matthew-

    Thanks for the insight, that's exactly my goal! However my immediate area has very few multi-units, so I will most likely choose a SFH. Thinking back, I didn't realize that I could pull money out with a refinance, and was instead planning on a HELOC (which I now see both have pros/cons). I'll have to do some more research to figure out which would be best for me.

    My next question is: If my end goal is to sell this live-in flip property in 2-4 years (to gain exemption from capital gains taxes), does either refinancing the house or taking out a HELOC make that more complicated to do?

    Thanks,
    Pat

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  • Tim Vitale
    Investor · Wilmington, NC · Member since 2019 · 38 posts · 15 votes
    7y

    Jason - I have questions around the private lending portion of what you said. I have access to a private lender but not sure how to approach them about this interest only loan. For my understanding (as well as the pitch), I would basically ask for X amount of dollars with say 10% interest. Once the BRRRR is complete, I would refinance at the ARV and pay back my original private lender money. Is the 10% compounded or it simply, if you lend me 100k for 6 months (seasoning period), I will repay you $110k in 6 months?

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  • Account Closed
    CPA / Lender · Chicago, IL · Member since 2018 · 11 posts · 5 votes
    7y

    Timothy - in a typical deal (Fannie let's say - 30 year term) they take the loan amount and compound over 30 years. So they take your loan amount and divide 5% into 12 payments per year you accrue (.416% per month). Each month the loan amount is compounded. So 1.00416 * loan amount monthly, with interest added on to that amount, and each month the balance is bigger (hence paying interest on your interest). They take the balance after 360 months and divide that by 360 so that each monthly payment is equal. However as opposed to interest only deals, you are paying down your principal balance over time. 

    For interest only short term deals, where you pay interest monthly for instance, you are paying the full interest each month but not principal. A bit confusing but that is how to think about it. Not paying interest on your interest however your loan amount is also not going down. For your example, you are not paying 110 in 6 months, you are paying 105 since only half the year. 

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  • Jim Vanhorn
    Investor · Roebling, NJ · Member since 2016 · 55 posts · 39 votes
    7y

    @Pat Dansdill Assuming the price is low enough. buy the home with a personal loan. you will pay less interest and no points. you can then cash out to pay back the personal loan or funnel that back into another deal. i have done this twice.

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