BRRR Exit Strategy... What would you do?

Question

Hi All,

First time BRRRer and at a point where we are finishing a rehab and trying to figuring the exit strategy. I know, we were suppose to know this at the beginning but just want to take action.

The house… is where I grew up. Both parents passed and the house was “Act of Donation” to me. The house is/was in bad shape and at the time of figuring out the estate with my 2 sisters the value was about $75k. We, wife and I, decided to buy out my sisters and rehab the house with our own money. Forward 9 months we are just about finished the rehab. Rehab costs are going to be about $60k(little more than expected) including new roof, exterior, interior, etc…

The house is located in south Louisiana. Estimated ARV is about $225k-$250K and market at this time is strong according to local realtors. Rent for this house could be about $1.7k to $2k.

Situation… We got into BRRR for passive income and for the first house, this was, I guess, is a good start. We used our own money for all rehab and holding costs. We are estimating to complete the project in about 3-4 weeks. But we are also getting very short on money but will have just enough but we need to get our rehab money back out ASAP.

We current do not have income(W2) since we left careers to attempt REI.

I see 2 exit options:

1 - Quick exit back to financial black, out right sell the house. But this will not give us the passive income we initial wanted to do.

2 - Rent it and somehow get our rehab cost back out. Challenges will be the time from time of rental to able to get a mortgage. Or maybe I can’t get a mortgage and have to get a cash out refinance since I already own it. Either way I believe there will be a long (or too long for us) seasoning period.

So I am looking to experts for help with this discussion or maybe there is an option I am not aware of.

Any advise is appreciated.

Nick Belsky · Answer

@John DanielsAre you living in the subject property? If no, you can do a DSCR cash out and your personal income doesn't matter. You don't need to be employed either.As long as you meet creditworthiness requirements and the property is deemed to cash flow adequately, you can cash out and reimburse yourselves and possible maintain a small passive income from the property. Quick math on the numbers you've given, at 75%LTV cash out and if the rent is at $1700, it should cash flow. Taxes and insurance shouldn't be too high in LA to bring the DSCR too low.Cheers!

Greg Scott · Answer

Your best option is to get your job back. With a W2 you can then get a mortgage.One house was never going to retire you or give you enough to eat. Keep working until you have built more passive income.

Timothy Hero · Answer

If it cash flows well, cash-out the equity, buy another property. Grow the empire.

Timothy Hero · Answer

He can get a mortgage without a W2. The private mortgage sector doesn't care about W2's.

Nick Belsky · Answer

@John DanielsI don't think the graph will be linear. There are many factors that move monthly, yearly. If you consider depreciation, appreciation, rent increases, sliding maintenance costs, etc... it can be a moving goal post. At the end of the day, you have to determine your metrics and KPIs. You decide what is making you win and where you aren't based on your metrics. I work with a very wide variety of investors and all have their own take on metrics. In a simplified way, if you come out ahead at the end of each month, quarter, or year, then you are winning. If not, then you aren't.Cheers!

John Daniels · Answer

Hi All, Thanks for all the GREAT feedback. I will do more research on DSCR loans. I originally did not mention this but I do plan on going back to W2 career after this little educating sabbatical. I like the property loan to be based on business qualification and not personal since there will be more. One thing I need clarification on in the BRRRR method is the refinancing part. If I get cash out of the house to cover the rehab cost, $60k, then this would cash flow nicely. But if I get the full available cash out of the house, say 75% LTV then this increase my mortgage payment which reduces my cash flow on the house. So here is my question but it is difficult to ask. If you reference the chart it shows a co-planar relationship between cash out loan and the payment and profit. Is there like a sweat spot or financial balance to which the cash out loan amount? In the BRRRR process what do most people do? 75% LTV or just enough to get and rehab another house?

Ryan Howell · Answer

You should be able to rent it out and immediately do a cash-out refinance with a no-doc/DSCR loan. I wouldn't sell based on the numbers, but it would also depend on the area and property. If it is a solid property in a good area, I would hold onto it. It sounds like you could refi for ~$168k at 75% LTV if it appraises at $225k. That would basically be a solid BRRRR and you'd meet the 1% rule which means it would probably cash flow decently and you could still have some cash for reserves.

Caleb Brown · Answer

I'd get a W-2 job. REI is a slow start and is hard. Relying only on it will be a tough road. Use the W-2 income to live. Use the money you made from this to invest. I would hold and BRRR this one. Seems like a nice deal with long term growth. Find another BRRR and rinse and repeat the process

Steven Goldman · Answer

Hi John, so the project is a success because you learned two very important lesson. Always plan your exit strategy before you acquire the property. Second, your rehab will always cost you at least 5 percent more than you have budgeted. On to a more important subject. How are you going to exit on this property? Well if you have 6 months reserve including 401ks or IRAs etc., than you should be able to refinance this property to 75 or 80 percent of the appraised value with a D.S.C.R. loan. You also need reasonable credit. (700 plus.) and a one year lease in place with security deposit with proof of first months payment. Your other alternative is to flip it and move onto the next deal with the profits. Have you read Rich Dad poor Dad by Kiyosaki. He advises never to quit your income producing jobs. Rather use them to make money to invest and carry real estate. (If that is going to be your business.) Your job is not your business. When you have sufficient mailbox checks to continue your business and pay your bills than you can think about quitting your job. In the meantime live frugally until you have established enough cash flow to prosper without working a job. Good luck.