A little advice on the BRRRR strategy?

Question

Hello Bigger Pockets community, I have a quick question. I have been educating myself through the forums and I absolutely love the BRRRR strategy. I have a question though for my specific situation.

I’m a fresh college grad, I have been working and saving, and I currently have 10k. By the end of my first year of saving I should have around 30k. I want to do the the BRRRR strategy, but from what I gathered you typically buy the house in full with cash. I won’t have that much, so my next option would be hard lending. However I don’t know how comfortable I would be with someone else’s money on my first investment (understandably right?).

So my next thought was just use that as a down payment on my first property (Preferably a MFH)  and keep saving, and repeating until I feel comfortable using hard money?

What would you recommend to someone like me in my situation?

thanks for taking the time to read my post!

Tyrone Osilesi · Answer

Honestly, if I were in your shoes I'd do a house hack. You'll get your feet wet in REI, you'll get a more favorable rate, and you'll learn a ton quickly. Good luck.

Stephanie P. · Answer

No worries.  New and learning is good.

There are different types of mortgage money, different sources of mortgage money and different ways mortgage money is amortized or calculated.

There is regular Fannie Mae/Freddie Mac money.  Those are GSE's or "Government Sponsored Enterprises".  They are the backers of the majority of mortgage money in the US.  They have very specific rules and guidelines and as long as you and your property work within those guidelines, you will get a very favorable interest rate and terms.  Usually this money is fully amortized meaning the loan will be paid off over a period of time with regular payments.  Your standard 30 year fixed, 15 year fixed etc...  This money comes from banks, lenders and mortgage brokers.

When you or your property don't work within those parameters, then you work with a different type of mortgage money called portfolio money.  It's called portfolio because the guidelines are created by the lender (or whomever they're eventually going to sell it to) and they may hold that mortgage after it's originated in their "portfolio".  That money generally doesn't come from a bank although some local banks do have loans they keep in house and they will make up their own rules, but they usually come from mortgage brokers who have access to a wide variety of wholesale, portfolio lenders.  That money is also amortized, but sometimes the maximum length of the loan is 20 or 25 years, but sometimes 30 year loans are available.

If you're just trying to acquire a property, fix it up and then sell it quickly, it's a fix and flip.  That's "hard money".  It's named that because much of the emphasis on whether the loan gets done or not is on the hard asset or the property, not necessarily the guarantor or borrower.  Some people think it's hard money because the terms are hard or harsh, but that's not necessarily the genesis of the term.  These loans are not fully amortized, but the payments are calculated with "simple interest".  Example; $100,000 loan at 10% interest. The payment would be calculated like this:  100,000 (loan amount) x .10 (interest rate() /12 (the term of the loan is 12 months) = 833.33.  It's an interest only payment.  When the loan is paid off, the principal of $100,000 still remains to be paid.

BRRRR has emerged as a viable strategy for purchasing properties that need renovation at a discount, renovating them and then either keeping them and making money on the cash flow or selling them and making money on the difference between the new appraised value which hopefully is the sales price and the old purchase price/renovation amount and extremely important, the carrying costs.

Ultimately, it's a math problem to see if you will even acquire the property and hopefully nothing goes south that you didn't anticipate.

Assembling your team of professionals to help you be a success at this is crucial.  You have to have a contractor you can trust, a property inspector that can go over the property with a fine tooth comb if you're not familiar with all of the aspects of buying a used home, a lender/broker that has the products and a property manager if you're not experienced or if you have a real job.  Everyone plays a crucial role in your success.

Hope that clarifies

Stephanie

Quincey Stance · Answer

Sorry! I didn’t quite fully understand you ..... I think I’m with you when you mean flip it, pretty much just hard money my very first property, rehab it and just sell it for a gain and then use that money for all my future BRRRR?

Where I got kinda lost was hard money it and then long term portfolio money.. what exactly do you mean by that?

Thanks for the reply, I’m still learning!!(:

Stephanie P. · Answer

@Quincey Stance

Hard money for the purchase and then either long term portfolio money or flip it.

Really depends on the market you're in though.

A little advice on the BRRRR strategy?

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