BRRRR strategy using cash out of pocket

[Account Closed]

Howdy y'all!

First - this is my first post. Yikes! Josh would be more ashamed of me than he is of Brandon when he says " ... really? ... " 

Second - The BRRRR and Rental Property Calculator are awesome. Well done, BP Team, well done.

But, here's my dilemma. So I have a mentor of mine that wants to invest in real estate but doesn't want to do the dirty work, he simply wants to supply the cash. I want to do the dirty work, and I don't have the cash. Naturally, this creates a pair. However, I want to be sure that when I am analyzing these deals that I am doing them correctly and not forgetting anything. Ideally, we would employ the BRRRR strategy, but I want to be sure I understand it correctly - which I don't think I do. As an example, I'll throw in some figures so y'all can correct me as needed.

Purchase property for $50,000. 

+ Repairs of, say, $25,000.

This amount my mentor would be able to supply. No loans are necessary (for now).

Now say the ARV is $120,000 (which, if anyone has some great tools for calculating that / coming to that value, I would appreciate it).

That means my "forced equity" would be $45,000 ($120,000-$50,000-$25,000). 

This is where things start to get dicey. As I understand it, I would go to a given bank, say Chase, and ask for a refi / loan (or whatever it is you ask?), and they would give me a loan for a specific figure ... not sure what that figure is or how to determine that. How do I use the equity that I have created to my advantage? I would like to get as much out of that refi as possible so we can roll the cash forward into another deal. 

Did I just swing and totally miss? Can someone please help me through the rest of this process? All help is appreciated!

[Ryan Ohri]

Ryan, great first name :) Ok, here it goes, this replay is free so you get what you pay for. As I myself am also new, but I believe I do have a good understanding of the BRRRR strategy. In response to your first question of calculating the ARV, this is probably the most risky or "tricky" part of the strategy. You will need to be able to run the comps on this property for similar properties in the condition you plan to rehab this property up to. You can call it ARV but you can also think of it has your after rehab appraised price, because that is was a bank is going to call it when you go into the bank to ask for a new loan on the property(or the "Refinance" in BRRRR). You will also want to check with several banks prior to starting the buying and rehab process and get a lender locked down that they will do this, some require seasoning periods which would require you to hold it after rehab for a short time (6 mos-2 years) before they'd be willing to complete the refinance for you. Also you'll want to find out what their loan to value or LTV requirement is. For example: if the ARV is close to that 120,000 and the bank will give you 80% LTV then they are saying they will give you a loan on the property for 96,000 (plus there will most likely be some closing costs when the refinance occurs). So if you're "All in" for 75,000 (purchase price + rehab), then you stand to get back 21,000 in cash at the time of the refinance with the bank. Don't forget to account for your carrying costs on the property during the rehab. These would include, insurance on the property, taxes, and utilities.

You will need to have a good idea on rehab costs going in, so figure out what you can do and what you can't.  For what you can't make sure and get estimates from several contractors and a time table of when the work can get completed, sooner the better.  You will also need to figure out your terms with your money partner.  Are you paying him back the money he's putting up initially, or is he sharing in the rental property with an equity position?  Some things to consider is all I'm saying, have it figured out well in advance of signing anything.

I currently have a property under contract where I am using a very similar strategy to BRRRR, but somewhat of a hybrid. I am purchasing a property for 75,000 using a construction loan with a local bank, doing 15,000 in rehab and it "should" then (based on the comps I've run) appraise for approx. 105-115k. The higher the appraisal price the better, I will then refinance into a 30 yr /4.25% loan. If the appraisal is lower than I expect and/or the rehab a little higher, I may have to come out of pocket several thousand dollars at closing on the rehab, but I'm ok with that as I have a HELOC I use to make small draws that I can pay back quickly. This allows for a very attractive Cash on Cash return. I hope this helps in some way, good luck!

Ryan