Using a HELOC for a BRRRR

Joe Delgrosso · 2020-01-29T12:23:02-08:00

Hey Everyone! So I currently have 5 single family investment properties that perform nicely but I've been dancing with the idea of doing my first BRRRR. I'm reading the books and the blogs and in the meantime checking out deals to get a boots on the ground exposure to this new world. Here's a situation that popped up yesterday that got me stuck...I viewed a single family house in a good area that I could have bought for $70,000 and it needs at least $35,000 worth of work. $105,000 total in an area where similar houses are going for $140,000. I just purchased a single family rental a few months ago and I'm currently cash poor so I was going to use my $55,000 line of credit towards the this but I don't think the numbers make sense. I would need $20,000 from that line of credit to go towards the down payment/closing costs to get the property and then I'd need the remaining $35,000 for the renovation. So now I would have maxed out my HELOC and will have a larger HELOC payment on top of my other expenses for the property. Also, the whole goal behind a HELOC is to be able to pay the balance back fast so you're not paying the interest, but there's no way I'd be able to get even close to that $55,000 back with the cash out refi. Where am I going wrong and what am I not understanding? Eager to learn from experienced BRRRR folks.

John Warren

Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes

6y

@Joe Delgrosso you aren't doing anything wrong. Most deals don't give you all your money back when you refinance, and that is ok. Lets say you could do a cash out refinance, and then get 1/2 your money back. Would the property still cash flow well? What if you could get 75% of your money back?

I think a lot of investors are too stressed about getting every single penny back in the refinance. What you should really think about is do I want to own this asset long term, because that is what you will be doing if you do the BRRR method!

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Dan Gamache

Lender · Boston, MA · Member since 2019 · 417 posts · 150 votes

6y

@Joe Delgrosso You can do a fix n flip loan that would require 10% down of purchase price + rehab budget ($10,500 downpayment from example above). You would also have a 35k credit line for the repairs (works on reimbursement draws). You will pay origination fee 2.5-3.5 points and be charged interest rate 10-12% while in the loan. At 90 days of ownership, or when rehab is complete if longer than 90 days, you can refinance to 75% of the new appraised value into long term rental loan (6-12 months ownership if you want to refi w bank). Based on your #'s above the #'s work as long as rental income is enough to positively cash flow.

Your initial loan amount from above scenario would be $94,500 and you are eligible for a loan amount of 105K (75% of 140K) which would cover paying off initial loan & closing costs for refinance.

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Allen Tracy

Chatsworth, CA · Member since 2016 · 190 posts · 224 votes

6y

Looking at it in all cash terms you'd be roughly all in for $105k with after repair value of $140k. Then you're able to refinance and pull $105k cash out (75% of $140k) so you'd get your money back and now have $35k in equity in the property plus the cashflow. Sounds like an awesome deal if all the numbers do work out.

Not sure how it would work with financing the original downpayment, I'm new to this but also looking at using a HELOC, in the middle of getting approved now.

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Joe P.

Philadelphia, PA · Member since 2017 · 824 posts · 1k+ votes

6y

Hi @Joe Delgrosso good question -- same boat as you. Just put an offer today on a property that needs a ton of work but is a good BRRRR candidate.

For me the trick is to get a cash flowing property with many of the big-ticket items taken care of, bought and then "sold" via refinancing, leaving me hopefully around net-even with a cash flowing property at the end of the day.

Couple of things to keep in mind:

Not every BRRRR will be a slam dunk. If your numbers are tight to begin with, anything going wrong at any stage -- purchase, rehab, renting, refinancing -- can put a strain on the deal.
Don't do the deal if you don't have reserves and can cover holding costs.
Expect 8 months of holding costs because typically you can't refinance until 180 days post-close, and then it takes maybe a month or so to actually refinance from there start to finish.
If you can't BRRRR comfortably (e.g. leaving money in the deal or not cashing out) then it may not be a good idea until you're ready.
Most lenders will be around 70% LTV, not 75%. You may be able to refinance with higher LTV but your rates will suffer.
Using the info above, your purchase and rehab costs really shouldn't exceed 70% LTV unless you don't mind leaving cash in the deal (e.g. not being able to refinance all your money out to do the last "R" - repeat)

So in general, I don't think you're doing anything wrong. Decide where your goals are for BRRRR and then properties either will or won't meet the criteria. For a good cash flowing property, e.g. $200 a month per door or better, then you still want to be good with cash on cash, so 10% is 20k overall paid. Some people want to refinance cash back and have even better cash flow...also fine if you can find those properties. The real trick is finding the really distressed properties and fitting the rehab in. Those two numbers (purchase and rehab) should be 70% or less of ARV to make BRRRR work, in my opinion...and then everything else has to fall in line, too.

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Using a HELOC for a BRRRR

Using a HELOC for a BRRRR

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