Investor · Chicago, IL · Member since 2019 · 62 posts · 27 votes
I’m new to investing, and currently involved in my first deal (a house flip where I’m just a partial investor).
My current plan is to begin House Hacking after this deal by using an FHA loan for my down payment. (Don't have much capital now, still a college student!)
However, I want to start using BRRRR as my main strategy moving forward from that point. My current understanding of BRRRR is that it works best if you can pay for the house in full, whether that be with cash or private/hard money.
My question is, is there a feasible way to use the BRRRR strategy with a loan? It seems like it wouldn't work because you already have a loan, so refinancing for a different loan wouldn't necessarily put you in a better position.
Any input is helpful, I’m pretty clueless when it comes to loans and refinancing!
Investor · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
6y
@Zak Marinko BRRRR is tough without capital. But there aren't similar solutions. House hacking is an option that gets more capital into your pocket for the next investment. Many people do well with upgrading your home every 2 years, with a new FHA loan, while renting the prior one.
Investor · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
6y
@Zak Marinko BRRRR is tough without capital. But there aren't similar solutions. House hacking is an option that gets more capital into your pocket for the next investment. Many people do well with upgrading your home every 2 years, with a new FHA loan, while renting the prior one.
Investor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes
6y
@Zak Marinko If you are paying for the property with hard or private money, you are using a loan. When you have rehabbed the property, you will just refinance out that loan into a loan that has a longer amortization schedule and ideally fixed rate terms. Essentially in locking in your future payments with today's dollars (this is an inflation hedge). Using leverage will impact your cashflows, however, you are using other people's money to build your wealth. That is the main reason.
Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
6y
@Zak Marinko the BRRRR method can be implemented with nearly any capital source. Ultimately you are combining two strategies: flipping and long term hold, with a refi in the middle.
For the flip piece: if you can buy, renovate and create enough value, you will be fine. The challenge is finding properties where your (purchase + rehab) < 70% ARV. With a flip, you sell and gain access to 100% of the value. Your exit strategy of the "flip" is the refi, not a sale.
The long term hold piece: You need to know your market rents and expenses, including current and/or projected loan payments. With this you are confirming that you will still be cash flow positive in the long term. Don't forget reserves for capex, vacancy, leasing commissions, and turn over. Even if you do a full gut rehab, your appliances only have about a 15 year life, roof 25, etc.
The refi in the middle: There is some risk here. Since you won't have an arm's length transaction, and appraisal will likely come back conservative (read lower than you think). Most banks in my experience want 12 months seasoning. Some will do 6, but they are fewer and further between these days. If you want to refi prior to seasoning, the bank will lend based on actual cost, not value. Depending on loan product, there might be a DSCR requirement as well. Finally, I would also make sure any ARV is conservative. Since there is no arm's length transaction happening, most appraisers will come back with values lower (but within reason) of where you think it should be.
If you feel confident with the traditional buy and hold play/turnkey option, and you understand how flips work, the only thing left is the refi in between.
Investor · Chicago, IL · Member since 2019 · 62 posts · 27 votes
6y
@Mike McCarthy I agree that BRRRR is very hard without capital. I'm hoping that I can make/save enough in a couple years through househacking to get started. Or working on establishing a good relationship with hard money lenders. I did not know you can do FHA loan multiple times though, I thought it was just a first-time buyer perk. Thank you for that!
Investor · Chicago, IL · Member since 2019 · 62 posts · 27 votes
6y
@Whitney Hutten Thank you for your reply, the hyperlink definitions were extremely helpful! Did not know bigger pockets had that feature.
I think I have a good understanding of how the strategy would be applied with private or hard money. However, I'm still curious if it would be possible with an FHA loan. I'm going to make up a hypothetical scenario to see if my understand is correct.
I purchase a property for $100,000 with 5% down payment FHA. Now I renovate it with $10,000 to have my total money in be approx. $20,000 (including extra costs, let's assume I partially house hack as well to get mortgage down). If the ARV is now $150,000 and I get 75% ARV back from refinancing, the bank will give me $112,500. I pay off the remaining 90k loan (assuming that's how much is left) and now have $22.5k cash along with a (hopefully!) cash flowing rental.
Does it seem like I’m missing anything there? Because if not, I think I like that strategy a lot!
Investor · Chicago, IL · Member since 2019 · 62 posts · 27 votes
6y
@Evan Polaski Explaining the BRRRR strategy as a combination of flipping and buying/holding with a refi in the middle is a much less complicated way to think about it, thank you for that!
The challenge definitely seems to be finding a purchase price + rehab that is less than 70% ARV. Also, the extended timeline of 12 months could potentially be difficult. However, if the original loan isn't hard money, then you could actually be cash flowing more in that period! (As long as I'm understanding things correctly)
Thanks for all the info about long term expenses. That is something I need to increase my knowledge on, because if I were to analyze a deal right now I would not know how to estimate those.
Investor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes
6y
@Zak Marinko. The issue will be that you have to live in the home during the rehab up to 1 year after purchase with a FHA loan. Talk to a lender to make sure your theory works before closing with the FHA loan.