How to make the BRRRR module work in Westchester

[Nicholas Lioi]

Hello - 

My question is for season investors that do business in Westchester County or upstate NY. How can you use the BRRRR method when don't have 5-600k to buy a single or multi-family all cash in these areas? If go the trad financing route and put 20-25% down on the 1st property, then rehab it to increase the ARV, how will you have enough cash to then buy 2nd property? Even if you do a cash out refi, you still need to pay off the initial loan, and then will not have enough money to pay all cash on the next and so on when prices are at a high premium. What am I missing or not understanding? Thanks!

Best,

Nick

[Kyle Spearin]

@Nicholas Lioi each location has certain strengths and weaknesses. BRRRR is typically easier to employ at lower price points or if you're able to get an insanely good discount on purchasing a property. From what I know about Westchester County in NY, it's quite expensive.

I think you need to determine whether you care more about strategy or location because it sounds like you're trying to fit a square peg in a round hole. Not every area is meant for BRRRR, but there are probably other strategies that work great in those markets. The inverse is also true in many places.

[Joe Jor]

As a Westchester resident, I can confirm what Kyle stated, it is very expensive.

The short answer is you can use hard money to borrow the 500 - 600k.  This is essentially a cash offer; it doesn't have to be your cash.  A private loan or rich uncle is another example.

The alternative with a mortgage is that you have to BRRRR sequentially, not in parallel.  You'd need to ensure your ARV is 20-25% higher to get your original cash back out while meeting the refi equity requirement.  (this description excludes other variables such as inflation, mortgage rate drift, etc.  - Be sure to factor in transactional fees and costs you may incur during the process).

Creative financing, conceptually, could be another alternative.

Joe

[Nicholas Lioi]

thanks @Joe Jor and @Kyle Spearin

But Joe, even if I use hard money or private lender doesn't that leave me in same predicament as using trad financing? I still need to pay the inital loan back to pay cash on next one.  I think I'll have to go with trad financing on first one.  rehab / rent it out and then save again for down payment on next property.  will take me longer to build my portfolio but at least it's a start.  or maybe I can pull money out of first property to use as down payment on next one. but then I still can't technically pay all cash for either property unless use hard money / private lender.  

[Joe Jor]

I agree, assuming you only pull out what you put in, you will be in a similar position for property #2. I haven't used hard money, but I hear there is no holding duration requirement; some traditional loans require you to hold it for 6 months or 1 year.  Also if the property is a wreck, you may not even be able to get a traditional loan.  Also I hear with hard money, it is quick turn around with less document checks.  In NY it will take 70-90 days to get a mortgage turned around.

Fake numbers:

* Purchase: $400k

* Fees/Transaction Costs/Repairs/Holding: $200k

Assuming equity requirements are 25%, you'd need the property to appraise/sell for 800k to get your 600k back out (and return to the lender).  While your immediate position doesn't change, you now own a property with 200k of currently inaccessible equity.

Also with your first one, if you can put down 5% or equally low, occupy it, and do a live-in flip, you may not have to refi; save up for another 5%, do it again, new primary loan, etc.  Not sure all the rules around low down payments, so this may be a falsehood.

Joe

[Mohammed Rahman]

Hey @Nicholas Lioi - I can chime in here. 

Most businesses, including the real estate business, is about taking calculated risks. The method you mentioned (BRRRR) is operating on the calculated risk that the property's value will appreciate enough (after renovations) that you can pull out a comfortable amount of cash and use towards your next purchase... all while the potential rental income from the newly updated property going towards paying down your loan balance.

[Jake Baker]

@Nicholas Lioi

You will definitely want to go the hard money route for initial financing. Perhaps you can partner with someone to lower your costs and risk in this more expensive market.