Is BRRRR really and equitable strategy in todays market?

Question

Hello BP Buddies,

I know the common answer to the question would be, "well, it depends...", but I am truly curious. No need for snarky remarks, just trying to create a think tank here. As an investor, if you purchase a home using hard money where the rates are extremely high already and you rehab the property, how do you manage the refinance portion? With the recent changes in lending rules, it's almost impossible to get out what you put into the property. You can't Cash-out refinance until a year later now. Getting an investment HELOC (depending on location) is practically non-existent. So with that being stated, what strategies are you using to get your money out to pay those debts? How are you getting the full value out of the house until you are able to cash-out refinance 12 months down the line? Where is the upside to get you into the next property?

I know we have to adapt to changes so I'd love to hear what you all are doing?

Michael Dumler · Answer

@Wilson Manigat, others may disagree, but from my perspective BRRRR deals can only be executed correctly if the property is initially acquired for below-market value. Unfortunately, even with interest rates on the rise, many areas are still experiencing a strong seller's market. Homeowners who have substantial equity in their property know/understand they can sell on-market at full value, even if the home is a bit distressed. Completing a BRRRR where an investor can pull 100% of their capital back out of the deal is non-existent/impractical with current market conditions. Not to mention, some markets are starting to see a decline in home prices, therefore, refinancing becomes even more difficult on the back end. Needless to say, it's a weird time in the market right now and not many know which investment strategy is best to deploy at the moment. As mentioned time and again by experienced investors, if you're trying to BRRRR, you certainly need another exit strategy if plan A fails.

Eliott Elias · Answer

The issue does not come with recouping your money on the refi, the issue is nothing will cash flow after. This strategy is subpar, I have used it and I would have much rather sold the property and used the profits to buy bigger deals.

Wilson Manigat · Answer

@Jonathan Taylor, you are correct and thank you for the clarification. With the DSCR loan, I've yet to run into a lender that provides enough to cover total loan (purchase + rehab). Not saying they don't exists, but my experience as of late has been that DSCR loans cover a percentage of LTV rather than ARV. Example is if you purchased a home 300k, regardless of rehab, you're getting 70-75% (or less) of the 300k. Not ARV which could essentially cover the entire note. Is that not the case for your company?

Wilson Manigat · Answer

@Luka Milicevic You are right. It is definitely a situation in which it isn’t really favorable. Glad to hear you found terms. I am still just trying to break even here myself by finding a lender that will cover the combined loan (purchase and rehab) it is practically impossible. I’m hoping something comes through soon because, as you’ve stated, those interest rates are a killer. Thanks for the thorough response!

Luka Milicevic · Answer

@Wilson Manigat

It is, without a doubt, more difficult than it was just a few years ago. Substantially more difficult, but it is still possible.

My most recent purchase was using a first position heloc that I had open. I was at the time at 7% interest and no points to use the loan. That is dirt cheap financing. A HML would have been 2 pts and around 10-12% interest. That would have completely changed the dynamic of the deal.

For the refinance portion, I ran into tons of issues. My go-to lender for the past 5 years pulled the plug on my refi 2 weeks in. Said they were not doing anymore investor loans for the forseable future. I had no real back up lender at the time. I started to call every lender I could and I was running into a combination of really high interest rates, really high closing costs, terrible LTVs and amortization periods.

The LTV was the biggest issue. No lender wanted to do a cash out above 60% of appraised value.

I finally found a lender that met all my metrics. 80% LTV, 6.25% interest, $1500 funding fee.

There was no seasoning on the loan either. Cashed out in 30 days after application.

Now, on the flip side...I am not cash flowing on this property. I am at break even at the moment. This is with me completely in it for 75% of appraised value. If I paid market value I'd be seriously negative cash flowing.

Back track 5 years ago. I bought a quadplex with hard money, renovated it quickly, cashed out 100% of the HML and the bank gave me $8600 at closing on top of the cash out! PLUS the property cash flowed nicely each month.

Finding that deal in today's market (in my local market) is not actually possible. Sure, someone can find it but it's not very realistic anymore.

What I have done to compensate for the change in market conditions - I will not use a HML to fund the initial purchase. Reason being I worry about being able to cash out the loan. If I don't have access to the funds on my own, I won't do the deal. I have accepted that I will either break even each month, possible even lose some. I am in some cases okay with that and accept that it's the high rate environment we are in right now.

It's a different market. It's getting harder to find deals, but we will look back 10 years from now and say "I wish I bought more in 2023"

Jonathan Taylor · Answer

@Wilson Manigat a few specifics to clarify. A DSCR loan shouldn't lend on ARV becuase this type of loan is the exit financing for value add plays. All repairs/value adds should be completed at this financing stage so a refinance based on new appraised value is the better option.

For your scenario of 300K purchase, if you are using a DSCR loan to purchase, it will be based on appraised value. If you are relying on an ARV for a  purchase, then a fix and flip is a better loan product since ARV is included in the loan metrics.

Wilson Manigat · Answer

You're right! As an investor I've normally been one to just do fix and flips. Considering how the market is correcting and not many people are buying as they were before, buying and holding seemed like the better strategy. However, as you stated, BRRRR seems to be subpar at best. So I am trying to figure how does an individual manage in general. Even with trying to sell off a property, it doesn't seem like you're going to get top dollar for it so it seems like you'd be stuck any way you try.

Jonathan Taylor · Answer

@Wilson Manigat I understand your frustration. It is tough out there. A few things to clarify in your post that may help.

The cash out seasoning period is 12 months for conventional loans. Business purpose aka DSCR loans are 3-6 months so repaying the hard money note can happen sooner, depending on the reno timeline.

Second, there are lenders and brokers, like myself, who offer fix and flip specific financing allowing you to leverage you cash. Most are offering 70-75% with some offering up to 85% of the purchase and 100% of renovation with the total loan limited to no more than 70% ARV. These ratios vary by institution so use the above as a guideline.

How does that help you? With these financing options, deals can become clearer if they can cash flow or not. Most of the deals I am originating right now, the clients are leaving some cash in the deal. That is a market condition unfortunately but markets are cyclical. What we are experiencing now wont last forever.

Hope that helps.

Is BRRRR really and equitable strategy in todays market?

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