Deeper explanation of my BRRRR project
Portland, OR · Member since 2023 · 10 posts · 3 votes
I found a property that I am really considering purchasing. It would be a 500k purchase, 100k rehab and 700k ARV. I would then turn it into a rental.
1- First off, I am having a hard time wrapping my head around the fact that refinancing out of the loan amount would make my mortgage higher. What is the point of refinancing out to a higher amount for a higher mortgage if original purchase price has a lower mortgage? (plus higher property taxes due to the new assessed amount)
2- I don't have cash for the rehab yet, so any advice on going about sourcing the 100k? or should I ask for a 600k loan and lay out my plan to my mortgage broker?
@Noah Bussanich I'm glad you are at least seeing what the challenges are to a BRRRR transaction. I want to say what we "normally" do on successful BRRRR properties and maybe some of these things will help.
Acquisition - Usually, we execute a BRRRR Method property with some type of temporary, acquisition loan. In these scenarios we are wanting to receive 75% of the ARV on that loan product. Why 75%? Because then it makes our out of pocket lower. Now, we still have to buy right...but more on that in a moment.
Math - When we purchase with 75% of ARV that means when we go to refinance at 80% of ARV...we aren't getting any cash back. So, even in your example above, 80% of $700k = $560,000. That means you would be coming out of pocket $55,000 in that property. Now, that's not bad...except, who the heck has $55,000 just laying around? I mean, you would also need reserves when you went to refinance so you would need even MORE money to execute on that deal. Who's got that much money? None of us do.
We make money when we BUY - In theory, we should only be offering $425,000 on that property. Why $425k? Because our acquisition money will lend us 75% of the ARV, which = $525,000. Then we subtract out the rehab of $100,000 = $425,000. Even in that scenario, you are still coming out of pocket $30,000. Why $30k? Because of closing costs and holding costs.
Now, you might be saying "Andrew, this sounds crazy. With these numbers I wouldn't be able to buy very many properties!"...and you would be correct. I usually make about 100 offers per year to do two...maybe three if I'm lucky. It's not your fault someone is asking too much. You can only offer what you can offer. We still have to be profitable when we do this. This is why we also don't buy properties on the MLS either. MLS properties, by default, are at the highest price possible. I can't make that work.
*WHEW* I hope that wasn't too much information. It may have even been too little information...but hopefully it gets you thinking about more things. Feel free to ask anything additional. Certainly here to help. Thanks!
I found a property that I am really considering purchasing. It would be a 500k purchase, 100k rehab and 700k ARV. I would then turn it into a rental.
1- First off, I am having a hard time wrapping my head around the fact that refinancing out of the loan amount would make my mortgage higher. What is the point of refinancing out to a higher amount for a higher mortgage if original purchase price has a lower mortgage? (plus higher property taxes due to the new assessed amount)
2- I don't have cash for the rehab yet, so any advice on going about sourcing the 100k? or should I ask for a 600k loan and lay out my plan to my mortgage broker?
As someone else pointed out, the goal of a refinance after renovating a property is to get out your down payment as well as some extra due to the increase in assessed value. You can then use this money to continue expanding your business.
There are a number of ways that you can use financing to cover your construction costs for renovation, but it's important to weight the pros and cons of each. Before I address those, I want to point out something that caught my eye in your post. Asking a bank for a 600k loan on a 500k house with 100k in rehab means you're looking for 0% down?
If this property needs enough rehab work, many banks won't consider lending on it to begin with. You having no skin in the game would make them additionally wary. For DSCR products and private/hard money, they're going to want a much higher LTV, especially if this is your first deal.
Before you go looking further into options, do note that using bank financing like a 203k to cover construction costs comes with a lot of extra paperwork. They require forms from the general contractor of the project before releasing any funds. Initiation of these loans can also take a bit longer than normal, which could hurt your chances of closing if the seller grows impatient. In such a hot market, expediency is such a valuable commodity, and being able to close promptly will greatly increase your reputation for future dealings in your market.
Good luck.
As someone else pointed out, the goal of a refinance after renovating a property is to get out your down payment as well as some extra due to the increase in assessed value. You can then use this money to continue expanding your business.
There are a number of ways that you can use financing to cover your construction costs for renovation, but it's important to weight the pros and cons of each. Before I address those, I want to point out something that caught my eye in your post. Asking a bank for a 600k loan on a 500k house with 100k in rehab means you're looking for 0% down?
If this property needs enough rehab work, many banks won't consider lending on it to begin with. You having no skin in the game would make them additionally wary. For DSCR products and private/hard money, they're going to want a much higher LTV, especially if this is your first deal.
Before you go looking further into options, do note that using bank financing like a 203k to cover construction costs comes with a lot of extra paperwork. They require forms from the general contractor of the project before releasing any funds. Initiation of these loans can also take a bit longer than normal, which could hurt your chances of closing if the seller grows impatient. In such a hot market, expediency is such a valuable commodity, and being able to close promptly will greatly increase your reputation for future dealings in your market.
Good luck.
Hello! Thanks so much for the information. I would be doing 10-20% down on this property!
@Noah Bussanich I'm glad you are at least seeing what the challenges are to a BRRRR transaction. I want to say what we "normally" do on successful BRRRR properties and maybe some of these things will help.
Acquisition - Usually, we execute a BRRRR Method property with some type of temporary, acquisition loan. In these scenarios we are wanting to receive 75% of the ARV on that loan product. Why 75%? Because then it makes our out of pocket lower. Now, we still have to buy right...but more on that in a moment.
Math - When we purchase with 75% of ARV that means when we go to refinance at 80% of ARV...we aren't getting any cash back. So, even in your example above, 80% of $700k = $560,000. That means you would be coming out of pocket $55,000 in that property. Now, that's not bad...except, who the heck has $55,000 just laying around? I mean, you would also need reserves when you went to refinance so you would need even MORE money to execute on that deal. Who's got that much money? None of us do.
We make money when we BUY - In theory, we should only be offering $425,000 on that property. Why $425k? Because our acquisition money will lend us 75% of the ARV, which = $525,000. Then we subtract out the rehab of $100,000 = $425,000. Even in that scenario, you are still coming out of pocket $30,000. Why $30k? Because of closing costs and holding costs.
Now, you might be saying "Andrew, this sounds crazy. With these numbers I wouldn't be able to buy very many properties!"...and you would be correct. I usually make about 100 offers per year to do two...maybe three if I'm lucky. It's not your fault someone is asking too much. You can only offer what you can offer. We still have to be profitable when we do this. This is why we also don't buy properties on the MLS either. MLS properties, by default, are at the highest price possible. I can't make that work.
*WHEW* I hope that wasn't too much information. It may have even been too little information...but hopefully it gets you thinking about more things. Feel free to ask anything additional. Certainly here to help. Thanks!
The loan balance becomes higher because lender is including closing costs and escrows into the loan amount . If bring closing costs to the table then the balance will stay the same . Can take a hard money loan option no income no doc at 30% down on the purchase getting the 100% of construction