FIRST TIME BRRR QUESTION

[Tamera Muniz]

First time investor here with a possible BRRR in Northern Colorado that I am analyzing but am not sure I am running my numbers correctly. Looking to purchase the property for $230K and will need mostly cosmetic rehab (flooring, paint, etc.) - my guess is $15k at most in renovations but I'm new to that part. According to comps in the area, I've determined that $300K is a conservative ARV ... for funding my lender has suggested using my HELOC (principal and interest payment so high) for the down payment and then a DSCR loan for the rest.

Does any of this make sense? I have a lot of information but not sure how to sort it out to make sense, especially the financing. Can anyone please help? I'm overwhelmed

[Andrew Postell]

@Tamera Muniz we need to address this.  You should NOT go this route....not because of the property, but because of the lender.  

This is a classic BRRRR property (assuming your numbers are correct). So if I have a home that is worth $300,000, then I'm going to multiply that value by 75%. Why 75%? Because that's what a HARD MONEY LENDER (HML) will lend me. So here's why this is important:

If a HML will lend me 75% of the ARV, then the math is $300k x 75% = $225,000. I need $230k to purchase. The difference is $5,000 <-- That's my out of pocket costs. Don't forget about closing costs though....let's assume those are $12,000 (don't hold me to it, but just use it as an example). So $12,000 + $5,000 = $17,000. I still have to Refinance though (that's the 3rd "R" in the BRRRR)....so let's add another $12,000 to this since I have to pay closing costs again to Refinance. OUR TOTAL OUT OF POCKET IS $29,000

If the DSCR lender requires 20% down of my purchase price, $230,000 x 20% = $46,000. Plus my closing costs of $12,000 = $58,000. If they require 25% down, then it's even higher. I don't have to refinance gain though, so at a minimum OUR TOTAL OUT OF POCKET IS $58,000.

So which is better for you? Coming out of pocket $29,000 or $58,000? That's why you need a different lender. And no, I'm not a hard money lender. This is me being a 20+ year investor who didn't get this concept early on in my career...and now I do. Hopefully that math helps highlight the reasoning why we use HML to BUY with the BRRRR method.

Feel free to ask anything else additional if you need.  Thanks!