Is it pragmatic to do a live-in-BRRRR, house-hack deal starting with a conventional or an FHA loan on a primary residence? I've heard people talk about getting a hard money lender for this strategy, but I'm wondering what alternatives exist. I'll have a friend renting from me for a year or two.
I've ordered the BRRRR book from BiggerPockets, and I've listened to BP Episode 327 where they do a BRRRR deep dive where David softly advised against this (@ 1:19:48 in BP 327) because it wasn't efficient, but I wanna learn more and see if it would be a good-enough way to get into real estate for someone in my position.
I'm estimating that by the time I'm ready to buy--November 2022--I'll have $70,000 (not including my emergency fund) in cash for everything: cosmetic-only renovations, initial down payment, closing costs, etc. Additionally, I'll be debt-free by then.
I currently live in a suburb outside of Denver with my parents where real estate is quite expensive for entry-level homes. So, I had the idea of BRRRRing with a low down payment (3-5%) on a fixer-upper single-family home that only needs cosmetic updates. I'd learn how to do the renovations myself. Once the renovations are done and the house appraises for more, I'd proceed with the cash-out-refinance process.
If I'm understanding all of this correctly, I should be able to get a new loan at 75-80% of the new appraised value. This would avoid me paying PMI, and I'd be living for almost or totally free when accounting for the rent.
Does this sound like a reasonable plan? Am I understanding how this works correctly?
Hey @Hunter Nelson! You are correct in your thinking, but I would challenge you to figure out what your goals are exactly. I find that a lot of clients have this line of thought, but don't truly know where they are wanting to head. The BRRRR strategy is one of those holy grails and buzz words in the investment community, and so it's a hot topic that everyone wants to do! Because it sounds so easy and so magical haha. The first part that they don't tell you is that it's much better suited for lower-priced areas, like the midwest. As it is much easier to add 20% value onto a 100k home than it is on a 400k home. So typically BRRRRs and flips are tough in the Denver market because the margins are so thin, and any renovations you do to the home you will typically get a 1:1 return on it. So unless you can get an off-market deal, and well below market value, it is very tough to make the numbers pan out. But then again a partial BRRRR is still better than a no BRRRR, but you also have downsides, from lower cash flow to an increased holding period where you will be fronting the holding costs and the renovation costs.
Have you considered house hacking? It is honestly the best way to get started and feel the effects of REI immediately. This is where I say that people haven't thought about their goals.
Say in November of 2022 you are able to purchase a 400k home with a 12k downpayment. You spend the next 6 months rehabbing with the remaining 60k and have paid 12k in mortgage over that period. You are all in at 82k, and go to refinance. You are going to need that home to appraise at over 600k in order to pull all your invested cash out of it, and you will also need to qualify for the new loan amount and payment. Where will you be after that? Will you rent it, or house hack it? and now you will need to be able to rent it in order to cover that increased mortgage payment.
Let's just say instead, you already have say 20-30k saved up right now, or are able to save it up pretty quickly, and instead, in November of 2021 you go out and you purchase a 5 bedroom home here in Denver for 500k with an owner-occupied low DP loan(30k all in with closing costs and DP) you then right away add a 6th bedroom in the basement and rent each of the 5 additional bedrooms for 700$ a piece. On your roughly $2400 PITI, you are bringing in $3500 a month in rental income. So you are able to live for free and bring in ~$1000 a month. Now for the next year you save up that other 30k and in November of 2022 you do the same thing and buy another house and rent your room in the old one. In this new house, you decide you want to have your own space so you decide to find a place with a mother-in-law suite in the basement. You take the MIL and you rent out the upstairs 3/1 unit for 2000 a month. So you are now paying ~$400 on your mortgage, but your other rental is bringing you in $1700 a month, so you are still living for free and making ~$1300 a month in positive cash flow. Then in 2023, you do the same thing again, and rent out the basement unit, now all together you are bringing in ~$2300 a month and living for free.
So, in roughly the same time it would take you to get that first BRRRR property done, and hopefully be cash flowing a few hundred a months, you could have 3 cash flowing properties and living for free at the same time! Just some food for thought, but I typically find that clients get hung up on all the shiny objects in REI, and to be honest there isn't a better return on investment than house hacking! And think about what you could do with the savings from living for free as well, that is something a lot of people don't take into account. In that 3 year period maybe you also invest out of state and pick up a few properties in different areas with your cashflow savings, or rent savings.
Hope that helps and sorry for the rant! Good Luck!
You are pretty much on the money there but when you say a friend renting from you do you mean renting that house and you not occupying the home? Just keep in mind there is a difference between "Owner occupied & Non-owner occupied" refinance because that would be primary home versus rental/investment which means lower LTV and higher rates....
Rule of thumb is always try to occupy the home prior to the refinance part if possible when going primary to refi to rental.
Hey @Hunter Nelson! You are correct in your thinking, but I would challenge you to figure out what your goals are exactly. I find that a lot of clients have this line of thought, but don't truly know where they are wanting to head. The BRRRR strategy is one of those holy grails and buzz words in the investment community, and so it's a hot topic that everyone wants to do! Because it sounds so easy and so magical haha. The first part that they don't tell you is that it's much better suited for lower-priced areas, like the midwest. As it is much easier to add 20% value onto a 100k home than it is on a 400k home. So typically BRRRRs and flips are tough in the Denver market because the margins are so thin, and any renovations you do to the home you will typically get a 1:1 return on it. So unless you can get an off-market deal, and well below market value, it is very tough to make the numbers pan out. But then again a partial BRRRR is still better than a no BRRRR, but you also have downsides, from lower cash flow to an increased holding period where you will be fronting the holding costs and the renovation costs.
Have you considered house hacking? It is honestly the best way to get started and feel the effects of REI immediately. This is where I say that people haven't thought about their goals.
Say in November of 2022 you are able to purchase a 400k home with a 12k downpayment. You spend the next 6 months rehabbing with the remaining 60k and have paid 12k in mortgage over that period. You are all in at 82k, and go to refinance. You are going to need that home to appraise at over 600k in order to pull all your invested cash out of it, and you will also need to qualify for the new loan amount and payment. Where will you be after that? Will you rent it, or house hack it? and now you will need to be able to rent it in order to cover that increased mortgage payment.
Let's just say instead, you already have say 20-30k saved up right now, or are able to save it up pretty quickly, and instead, in November of 2021 you go out and you purchase a 5 bedroom home here in Denver for 500k with an owner-occupied low DP loan(30k all in with closing costs and DP) you then right away add a 6th bedroom in the basement and rent each of the 5 additional bedrooms for 700$ a piece. On your roughly $2400 PITI, you are bringing in $3500 a month in rental income. So you are able to live for free and bring in ~$1000 a month. Now for the next year you save up that other 30k and in November of 2022 you do the same thing and buy another house and rent your room in the old one. In this new house, you decide you want to have your own space so you decide to find a place with a mother-in-law suite in the basement. You take the MIL and you rent out the upstairs 3/1 unit for 2000 a month. So you are now paying ~$400 on your mortgage, but your other rental is bringing you in $1700 a month, so you are still living for free and making ~$1300 a month in positive cash flow. Then in 2023, you do the same thing again, and rent out the basement unit, now all together you are bringing in ~$2300 a month and living for free.
So, in roughly the same time it would take you to get that first BRRRR property done, and hopefully be cash flowing a few hundred a months, you could have 3 cash flowing properties and living for free at the same time! Just some food for thought, but I typically find that clients get hung up on all the shiny objects in REI, and to be honest there isn't a better return on investment than house hacking! And think about what you could do with the savings from living for free as well, that is something a lot of people don't take into account. In that 3 year period maybe you also invest out of state and pick up a few properties in different areas with your cashflow savings, or rent savings.
Hope that helps and sorry for the rant! Good Luck!
@Hunter Nelson so one of the reasons that we try to advise against this is that you have TONS of options when buying a primary home. Especially if it's your first time, or if your income is "low" to "moderate", because you have even MORE options that could have even less out of pocket for you.
For example, let's say you could buy a primary home with only $15k out of pocket (this number is arbitrary but just hang with me). That would mean you have $55k left over to find ANOTHER home. You could have two properties when just using standard methods available.
Another reason to not BRRRR your own primary home is that I can find plenty of homes on the MLS that DO NOT fit the BRRRR method but fit my primary home requirements. If I have to find an off market BRRRR property that fits my primary home requirements it could be years before I find it. But just choosing a primary home that's out there now it significantly easier to find.
There's other reasons too but we've seen this story before. The time and energy and money and resources you use to buy a BRRRR primary home you can find 2 properties to buy.
I would suggest exploring...at least EXPLORE it first...buying a primary home with a normal loan, ask about "first time home buyer" programs, and if you do find a good property then BRRRR that one separately. You'll be twice as effective. Just suggesting to think about it.
@Jason Wray thank you for responding to my post! What I mean is that I'll have a friend renting a room from me and I will be living there too, so it would be a house hack.
@Ben Rhodin thank you for responding to my post! I didn't make it clear enough in the original post, but my friend will be living with me, so it will be a house hack.
That's a very interesting point about the price of the home making it harder to BRRRR properly; that's not something I would have considered, so I greatly appreciate the input! I'm willing to house hack for sure, and I do have a few friends who might be interested. I think if I can convince one more friend to rent from me I can live for basically free without having to do renovations. That's definitely something to keep in mind, and I sincerely appreciate you opening my mind to other opportunities!
I haven't officially decided what I want to do for my first investment property, which will also be my first home purchase. Thank you again, and I'll spend some more time thinking!
@Andrew Postell That's a great point about the opportunity cost of the time it would take to find a BRRRR-able property. I need to do more thinking to figure out exactly what I want for my first home purchase, which--like I said in the other two replies I made--will be a house hack with at least one of my friends.
I will definitely explore first-time-homebuyer incentives! Thank you for the reply!
@Hunter Nelson and what you are trying to do is exactly how I started - I took a first time home buyer grant, purchased a home, rented out the rooms to my friends. It was a great way to start.