First Time BRRR in - Concerned about Margins

[Grace Marie Weger]

Hello!

I just bought my second home, a complete fixer upper that I plan to use the BRRR strategy on. I recently discovered that most cash-out refinance programs require that you maintain 20% equity in the home, which makes me concerned about my margins

Here are my figures:

Purchase price $380k. I was able to do the 3-2-1 buy down program so my mortgage the first year is 5% (2,300), 2nd year 6% (around $2,500) and 3rd year 7% ($2,700 monthly....if rates don't go down by then, which I assume they will). Comparable rentals are between $2,700- $3,000

Renovation is $30,000. I am a contractor and will be doing the work myself over the course of year (or longer, depending on the market) while I live in the home

The market in Bend, while slightly cooling off, is high. Comps in my area are currently around $450k. Working in the building industry, I know that supply is slowing down due to interest rates and slowed buying--which is exacerbating the underproduction issue. I wouldn't be surprised to see median housing prices reaching or exceeding 2021 levels which were $800,000.

I expect to have between $40,000 - $80,000 equity when I finish renovations, and if I can appraise at the right time. Is this margin enough for a successful BRRR?

Thanks in advance for your expertise!

Oh, and more info on my "portfolio"... I own another home that I pay $1,600/month  (2.9% mortgage rate) and bought for $317k. It is now worth over $400k but I did not refinance due to high rates. I am renting it out for $2,400/month. Maybe I should cash-out refinance that house when the rates go down? Does having that asset allow me to take out more equity in the renovated house?

[Nathan A.]

If the comps are around $450K and you need to leave 20% in the deal, the maximum you could cash out would be $360K, which obviously wouldn't cover $380K of purchase plus $30K of renovation, plus costs you haven't mentioned like the holding costs and closing costs. So yes, you should be concerned about your margin.

That said, you're still forcing appreciation by doing this deal, plus it's providing you a place to live over the next year. Can you loosen your definition of "successful" to be getting some of your money back, even if not all of your money back?

Do what you can to get it to appraise at the high end, and another thing to consider is you could always sell it as a flip if you really need the seed capital back.