Starting out with my first brrrr rental

BRRRR - Buy, Rehab, Rent, Refinance, Repeat
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Starting out with my first brrrr rental

Jared Hockensmith
Rental Property Investor · Tampa, FL · Member since 2019 · 20 posts · 8 votes

Hello everyone! So my goal for 2021 is to get my first investment property and I'm looking to use the brrrr strategy to start out. I'm a student still in school, I work full-time but it's 1099 income, not W2. (And house-hacking is unfortunately out of the option, already married and not looking to go that route) My credit score is solid, not amazing though (680-720 range). Since I don't have a lot of money saved up, my plan is to find a partner who can fund a down payment for an HML. Then, of course, I will get the refinance loan, and pay the HML off and the partner's DP with interest. Couple questions I still have: First, if I don't qualify by myself for the refinance loan, can someone co-sign on that? If so, does it have to be immediate family? Also, if I can get approved for the refinance, whether with a co-sign or not, will that affect my ability to get a mortgage on a personal residence SFH a couple years down the road? What might you do in my situation? Thanks and any and all advice/criticism is welcomed and appreciated.

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John Gunderson
Investor · Madison, WI · Member since 2013 · 18 posts · 5 votes
5y

OP

I have done a handful of house hacks and 15+ BRRR deals. I love the idea. I was never able to pull off a 100% OPM BRRR, perhaps I lacked the creativity. A few potential snags I see you'll want to have a plan for:

1. Rehab Cost - It can be very difficult to hit rehab budgets on the first one... you get better at it over time but with 100% leverage there isn't a lot of room for error. There is a chance you have to pay cash to get the refi done even if you're right about the ARV.

2. Seasoning - bank policies can differ on this but beware of the equity being trapped for up to a year. This has happened to me. Sometimes the lender agrees only to learn more about the details of their own bank underwriting policy later and offer far less than you need. Or require invoice back-up for capex. Can’t stress enough how important it is to line this piece up and make sure the lender understands the plan.

3. Timeline - time between when you close and when you collect rent is a variable you need to have OCD around in your scenario. As you cost out this deal be realistic of the soft costs created by time.

I would recommend having some contingency $ stashed even if you coordinate this all with OPM.

The cool part is that as long as you get it done and you’re reasonably close on your projections you’ll end up with a rental property!

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  • Michael Mackney
    New to Real Estate · Long Island · Member since 2021 · 55 posts · 19 votes
    5y

    Starting out also with a big interest in BRRRR. All great questions that I would love to know as well.

    1Reply
  • Stephen Brown
    Real Estate Broker · Huntsville, AL · Member since 2019 · 1k+ posts · 872 votes
    5y

    Great question, following this post!

    0Reply
  • Dillon Cook
    Realtor · Greater Tampa Bay · Member since 2014 · 219 posts · 130 votes
    5y

    I have my guesses, but I'm not an expert. I would set up an appointment to speak with a local mortgage officer. I decided to get the personal residence lined up first and sling shot into a different SFH in 3-5 years with a cash out refi and rent this one out. Or just save up 20% down in 3-5 years. The benefit of buying a house to live in first is being able to put just down 3-5% and start building equity the day you close and not needing a partner right away.

    1Reply
  • Brady Ingledue
    Rental Property Investor · Gilbert, AZ · Member since 2021 · 7 posts · 4 votes
    5y

    @Jared Hockensmith

    Also a newbie to BRRRR, great question!

    0Reply
  • Jared Hockensmith
    OP
    Rental Property Investor · Tampa, FL · Member since 2019 · 20 posts · 8 votes
    5y

    @Dillon Cook thanks for the advice! My wife and I are currently saving up for a down payment on a personal residence, but I was thinking if there was a way I could get my first investment property, using OPM, while we save up and finish school. That’s why I’m open to working with a partner to just loan the money for a down payment plus some other costs associated with hard money loan. But you are right, I plan to start calling and meeting with some local loan officers soon to get more info.

    0Reply
  • Alex BekezaBusiness Member
    Lender · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
    5y

    @Jared Hockensmith You could look into commercial loan programs for 1-4 units which have zero DTI requirements and are based entirely on subject property cash flow (DSCR) and FICO. Rates will be a tad higher (4s and 5s) but you can still cash out as high as 75% LTV into a 30 year fixed term and if desired, you can use a LLC as well. (not required).

    [email protected]818-606-8823
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    WebsiteView Page
    0Reply
  • Brian Hoffman
    Realtor · Cincinnati, OH · Member since 2020 · 3 posts · 2 votes
    5y

    Have you considered buying a multi-family property as your owner-occupied primary residence now? You may be eligible for better terms that way then you can buy a SFR in a couple of years and rent all units on the MF.

    1Reply
  • Michael Glist
    Lender · Denver, CO · Member since 2017 · 348 posts · 143 votes
    5y

    So your scenario is doable and not to overly complicated. You can use OPM to help you acquire a property to fix up and then refi and rent out. \

    The things you will want to check and then double check are:

    If the HML you are using allows you to use OPM as a down payment. Some will and some will not and some that will will want information on them as well due to you having no skin in the game they want to make sure that they know where the money is coming from and possibly have them as a guarantor as well on the loan.

    Make sure that you know the requirements to refinance. You want to make sure you knw the seasoning period the lender requires before you can refinance (if any) as well as what their maximum LTV and cash out amount is. Also ask them about different property types. Some lenders will allow 75% LTV on a cash out refinance for a single family home but only allow 70% LTV on a cash out refinance for a 2-4 unit.

    Knowing these things will help make sure that not only can you accomplish what you are wanting to but that the process goes smoother and that you can get everyone paid back and not have to worry about coming up with cash out of pocket in order to pay off your private lender. 

    0Reply
  • Jared Hockensmith
    OP
    Rental Property Investor · Tampa, FL · Member since 2019 · 20 posts · 8 votes
    5y

    @Brian Hoffman yes we are strongly considering that option now. We are currently in a lease, but afterwards would look into purchasing a duplex to house-hack. Still would love to see if I can brrrr a SFH in the meantime.

    0Reply
  • Jared Hockensmith
    OP
    Rental Property Investor · Tampa, FL · Member since 2019 · 20 posts · 8 votes
    5y

    @Michael Glist thanks! Will keep all of that in mind when talking to any lenders.

    0Reply
  • Jared Hockensmith
    OP
    Rental Property Investor · Tampa, FL · Member since 2019 · 20 posts · 8 votes
    5y

    @Alex Bekeza Thanks! I will have to look into that further.

    0Reply
  • Dillon Cook
    Realtor · Greater Tampa Bay · Member since 2014 · 219 posts · 130 votes
    5y

    @Jared Hockensmith

    That's awesome.

    Does this describe what you're wanting to do?

    A hard money/private lender gives you 20% down (and maybe closing and rehab costs?) to buy a property that is distressed. Fix it up to gain the 20% equity back so when you refinance, you can pull the original 20% out + interest to pay back the lender.

    Two things I would worry about in this market is if you can find a good enough deal to gain that 20% equity (always harder with your first deal) and the cash flow after you refinance. Maybe you don't get revalued where you want and have to sell as a flip. Could still be worth your time.

    0Reply
  • Dillon Cook
    Realtor · Greater Tampa Bay · Member since 2014 · 219 posts · 130 votes
    5y

    @Jared Hockensmith

    The house hack, while maybe not the most desirous of options in Tampa, does sound like your best path forward. I'm married as well, and could not get my wife to agree to that... so I understand

    0Reply
  • Jared Hockensmith
    OP
    Rental Property Investor · Tampa, FL · Member since 2019 · 20 posts · 8 votes
    5y

    @Dillon Cook Yes that’s exactly what I was thinking. And if I have to exit with a flip, that’s okay with me as well. Yeah, I actually got my wife to get onboard with the duplex house-hack. So if I’m not able to brrrr anything for whatever reason, that’s how we plan to start.

    1Reply
  • Tracy Opoku
    Attorney · Bridgeport, CT · Member since 2021 · 32 posts · 25 votes
    5y
    Originally posted by @Jared Hockensmith:

    @Dillon Cook Yes that’s exactly what I was thinking. And if I have to exit with a flip, that’s okay with me as well. Yeah, I actually got my wife to get onboard with the duplex house-hack. So if I’m not able to brrrr anything for whatever reason, that’s how we plan to start.

    Hi @jared hockensmith glad you got wifey on board--my husband and I are also about to purchase our first multi family house hack. It's the easiest way to get in the game with no or low money down, learn how to landlord, and just START. Everything will be up from there. Best wishes!

    1Reply
  • John Gunderson
    Investor · Madison, WI · Member since 2013 · 18 posts · 5 votes
    5y

    OP

    I have done a handful of house hacks and 15+ BRRR deals. I love the idea. I was never able to pull off a 100% OPM BRRR, perhaps I lacked the creativity. A few potential snags I see you'll want to have a plan for:

    1. Rehab Cost - It can be very difficult to hit rehab budgets on the first one... you get better at it over time but with 100% leverage there isn't a lot of room for error. There is a chance you have to pay cash to get the refi done even if you're right about the ARV.

    2. Seasoning - bank policies can differ on this but beware of the equity being trapped for up to a year. This has happened to me. Sometimes the lender agrees only to learn more about the details of their own bank underwriting policy later and offer far less than you need. Or require invoice back-up for capex. Can’t stress enough how important it is to line this piece up and make sure the lender understands the plan.

    3. Timeline - time between when you close and when you collect rent is a variable you need to have OCD around in your scenario. As you cost out this deal be realistic of the soft costs created by time.

    I would recommend having some contingency $ stashed even if you coordinate this all with OPM.

    The cool part is that as long as you get it done and you’re reasonably close on your projections you’ll end up with a rental property!

    2Reply
  • Jared Hockensmith
    OP
    Rental Property Investor · Tampa, FL · Member since 2019 · 20 posts · 8 votes
    5y

    @John Gunderson Thanks John!

    0Reply
  • Joseph Crunkilton
    Rental Property Investor · Oregon City, OR · Member since 2020 · 324 posts · 780 votes
    5y

    @Jared Hockensmith

    You can get 4 conventional mortgages fairly simply in your name. Plus if you're married you can put the mortgage in her name on the house and it will be no hassle. Start analyzing deals and making offers. 

    0Reply
  • Michael Haynes
    Investor · Tampa, FL · Member since 2016 · 681 posts · 288 votes
    5y

    Hello Jared Hochensmith, what you are describing is the reason I find fault with the Bigger Pockets, "Real Estate Investing is EASY!" promotional garbage. What you are describing is a disaster waiting to happen. You are a Wannabe Real Estate "Investor," with no knowledge and no experience and a wife and a full time JOB as a Student? Do you ever watch The Sharks show on TV? One of the first things those Business Investors look at is if you have your whole life devoted to making your start up idea work or not. You don't have the Time or Money or the Credit Rating to do any of those ideas you proposed. You are putting the Cart before the Horse when you think to buy a BRRR that you will not be able to fix up to Rent because you also probably never lifted a hammer and nail in your life and you can't do sheetrock or fix a leak or change a sink or unplug a toilet or do a roofover. You don't have a Team to replace the AC or the water heater and no money to pay them. I will say this again...you need to be very careful with you intentions to spend Other People's Money in an unqualified effort to "Invest" in some Real Estate deal. You should learn all about the business you are thinking to get into and try to Work Smarter and not Harder. How do you do this? You take advantage of all the advantages you are provided with when you become a First Time Home Owner. You can live in your new home for 2 out of 5 years and then sell it Tax-free. If everything works in your favor you can look for another house to fix up during that 5 year period and plan to move into that one and never pay any TAXES on the Sale of your Residence. Duh! BP does not tout this simple Plan for the Newbies. This is the safest way to start. One of the biggest things that they don't point out is where we are in the Real Estate Cycle in the area where you are wanting to buy a property. I am selling my last Rental house in Tampa after over 30 years of being a Landlord with mostly Duplexes in S. Tampa. The Real Estate Cycle is at an all time High. Do you invest in Stocks? Is it smart to buy Bitcoin or Tesla at present Highs? Or wait for Gold and Silver to retrace to the lows of last year to start buying again. Do you even know how to do a Search on Zillow to see what's available to make offers on? Cash is King or at least a Pre-approved loan from a Bank, in writing, to show the Seller and prove that you have some of what it takes to make an offer. I have three neighbors thinking of buying my 3/1 block home that I have been fixing up for two years while I made it my Residence to sell Tax-free. I just put up my For Sale by Owner sign with the price...you never see the square footage or the price mentioned on the For Sale signs and that is the only thing I need to do my calculation on what it may be worth compared to the price of the lot with new construction. Lots of the houses I have seen recently in Tampa, are selling for or above the cost of buying a lot and building a new house just like it. I have two offers of Cash, as is and move out in one week and one neighbor who is trying to get the extra Cash to move in at my price of $205,000. I think it will Appraise at more value with a new roof, termite tented, $5000 refinishing of the Terrazzo floors, all cleaned up and painted inside and out. I maxi-trimmed up all the neighbors overhanging trees, Central AC with an attached laundry/storarage room on the side deck and carport, fenced all around with two big sheds that I had built in the back. It's move in and do nothing for ten years ready. One new consideration is what the administration is planning to do to the Real Estate and Death taxes. You have to be able to plug in all the numbers and see if your Plan will produce Income and Appreciation or not and that does not mean that you ask around and try to get advice! You have to do all your own studies and have all your ducks in a row to make sure that your effort will pay off. Some of the BP stories, like the one last week where the young lady bought 36 doors in two years and retired at 24 are what makes the Newbies think that this is EASY and it is, for some. Get a dose of Reality and go talk to the manager at your Bank and tell them what you want to do...I guarantee their eyes will spin in their heads and not understand a word of what you plan on.

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