Real Estate Deal Analysis & Advice
Market News & Data
General Info
Real Estate Strategies
Landlording & Rental Properties
Real Estate Professionals
Financial, Tax, & Legal
Real Estate Classifieds
Reviews & Feedback
Updated almost 8 years ago, 02/17/2017
BRRRR Logic Verification
Can you tell me if I'm understanding BRRRR?
I have a SFR that I have had for 4 years with a 15yr mortgage with a tenant that I bought for 100k. Some reno's have been done. Payoff is 60k. If I cashout refi for at 80%, I'd need to put down 12k, plus say 2k for closing costs. Leaving me with about 26k to put down on a new property with and adjustable arm for 5 years. Make some reno's. After about a year, cashout refi for a 30 yr mortgage and repeat.
@Jeremy Paschedag You may want to consider not refinancing your first place to get the cash to start a BRRRR. That would make a whole new 15 yr mortgage and you'll be paying additional interest on it. Another option if you are short on cash would be to get a loan against the equity on the first house, or a home equity line of credit to finance a second property. And even another option is finding a hard money lender for the initial capital, but just make sure the numbers look right and that the short term loan is at least 12 months before the balloon payment AND you are sure that the refi is going to give you back enough cash to pay back the private lender.
Your timeframe of refinancing after a year is the right call. Most lenders want you to hold the house for 1 year before refinancing it. But this also gives you time to finish the repairs and get a tenant in there to start paying your mortgage. Also once you refinance, you should have your cash back to start buying the next property and doing the same thing!
With the first property, it's currently on a 15yr mortgage, but if I were to refi, I'd be looking to go to a 30yr. Does that change anything?
I hadn't thought about an equity loan on the first. What are some pro's and con's? At the end of the day, are my payments for the 3 loans the same as it would be for 2 - 30yr mortgages?
Howdy @Jeremy Paschedag
Here is the basic idea behind BRRRR strategy (as I understand it and have used).
B - Buy a property at a significant discount (distressed property). This is key to be able to get as close to 100% of your cash out when you refinance. The typical deal involves purchase with Hard Money, Private Money, or a HELOC.
R - Rehab the property to current Market Value. No need to explain.
R - Rent the property and let season for bank refinancing requirements.
R - Refinance the property with long term Cash-out refinance loan.
R - Repeat.
I'm sure you really knew these steps.
The BRRRR strategy is normally used on shorter turn around times (6 - 12 months) to get out of the higher interest rates of the finance methods I mentioned.
I have a couple of questions.
What is the current mortgage payment for your SFR? Does it meet your Cash Flow requirements? If it does why change it. Will a new refinance loan give you better Cash Flow? Then that might be better. I do like @Joe Swanson HELOC idea. Of course it will depend on the amount you will need for new purchase. The good thing is it is reusable. You can use it in conjunction with a Hard Money loan.
The following applies no matter how you do your financing. In order to get 100% of your cash out you must ensure your all in costs (purchase price, Rehab cost, Closing and Holding costs) are no more than 70% of your ARV/Bank Appraised Value. Since the refi bank will provide a loan that's 70 - 80% LTV.
No matter which way you go with financing keep that in mind.
Good luck.
Thank you @John Leavelle. Yes, I am familiar with BRRRR. Though when I bought my rental, I didn't know BP existed and didn't know what I was doing. I just bought a house, did some light rehab work, and have had it rented out for about 4 years. So I have equity that has grown due to time.
My mortgage payment is $800. Seems high, but it's also a 15yr loan. The bank has a plan to pay half that amount every 2 weeks. It does not meet my requirements. If I knew then what I know now, I might not have bought it. I believe a refi would drop my payment to around $600 per month. Which would be better cash flow. If I were to do an equity loan, that would be an additional expense. Thus making my situation, less good.
Sale price was $100k, I put 20% down. I put about $10k into it. I haven't had to make a house payment without a tenant. Payoff amount is $60k. Realtor.com has the value at about $128,500 and Zillow has it at about $153,500. That would put me at about 80%. Right?
What I thought, was that I would cash out at say $120k. Payoff original load, leaving me with $60k. Put down 20% of $60k payoff. Leaving me with $48k, less closing costs. Is this not right?
Unless you have already been approved for 80% LTV by a lender I would not plan on getting that percentage. From what I have seen most people on BP have been getting a 75% LTV ratio for refinancing a rental property. And remember that is based on the banks appraisal. You definitely need to talk to some lenders to get their opinions.
What condition is your property in currently? That will have an effect on the appraisal. You need to get some good comps to narrow down your estimate on the Market Value. Let's be conservative for now and use $128,500 for Market Value. That would mean a loan of $96,375.
$96,375 - $60,000 (current loan balance) = $36,375 (not including closing costs).
This is a ruff estimate (I am not a expert)
No matter what. If you can improve your Cash Flow by $200, then the refi is definitely worth it. You will probably not get as much cash as you think you will. Unless the appraisal comes back closer to the $153K. We hope.
You still might look into the HELOC. Even if you don't use it for your next purchase it can come in handy when you need cash. It works just like a credit card.
Hope this helps.
Thank you again @John Leavelle! I have read about BRRRR and such, but until I was put it in terms I could understand/relate to, I wasn't full appreciating the concept. I'll have to read up on HELOCs.
If I refi, do I need to put 20% down, thus taking more from the $36,375?
No. You are taking cash out. You only pay 3 - 6% of the new loan in closing costs. Unless you can roll them into the loan. They do have "Cash in" refinancing loans. People use it to increase the equity in the property to avoid PMI.
OK, that's what I'm wanting to do - avoid PMI. "Cash in" refi would be 20% of that loan? So in my scenario, 20% of $60k?
If the bank gives you a loan of $96,375 based on an appraisal of $128,500 (75% LTV), then, you would have 25% equity still in the property. No additional cash (other than closing costs) is needed. No PMI required. Your good.
@John Leavelle seems to have covered the rough numbers for the cash out refinance pretty well and I am not expert in that matter so I don't have much to add to that.
However, you asked about the HELOC. I recently looked into HELOC in Texas (the rules are different in other states) and it seems like banks will only do the HELOC on your primary residence (maybe I didn't look hard enough). There are small closing costs (a few hundreds typically) but the interest rate is variable. Some may have a yearly fee (usually around $100 or so).
The bank will use the same criteria (approx. 80% LTV - money still owed) to determine the max amount for the line of credit.
You may be able to find a HELOC with interest only for the "draw period" (which I have typically seen at 10 years but it could be different) but most of the ones I looked at required interest + principle payments. During the draw period, you can draw as much money as you want (up to your HELOC limit) whenever you want. After 10 years, you cannot draw money anymore and you have 20 years (again, typical of what I have seen but could be different) to repay whatever you still had taken out by the 10 year mark (still with a variable rate).
The benefit of the HELOC is that you do not have to take any money out when you open it. So you only start paying interest when you take the money out, which could be 6 months down the road. You can use that money for the down payment of another house or to pay it in full and then refinance the house after a year, put the money back in the HELOC to avoid paying interest and take it out again when you need it. Please keep in mind that you may have prepayment penalty in your state.
One of the main problem is that the interest rate is variable, so you really don't want to be in a position where you have to keep the money out very long as the rate could climb up.
The other problem I have heard of but haven't had time to investigate further is that, apparently, the bank can call the HELOC at any time, meaning they may ask you to reimburse all the money they gave you at one point if they feel like it. So you would have to cover that risk by having a plan to get that money if that was ever the case.
People seem to have better luck getting better terms with small credit unions. I did not in my area so far.
Hope this helps!
THANK YOU both so much!
@Xavier G. very good points! The only reason I would not want to do a refi is because you've already paid nearly 1/3rd of the mortgage payments, only 11 years of a 15 yr mortgage left. Yes if you refi to a 30 year loan you will have lower payments, but for 19 additional years, and most likely at a higher APR for the longer loan.
There are some great ways to use HELOCs and Home equity loans to reduce the amount of interest you pay, aka more money to invest. I found this article a while back and am still super intrigued by the idea. I've just purchased my first investment property so haven't had a chance to use it yet. https://www.listenmoneymatters.com/how-to-actually...
@Jeremy Paschedag & @Joe Swanson,
Agreed, I also had the feeling that you would be paying quite a bit of money ($4-5k) in closing costs to only get $36k out of it. Better cash flow but more costs over the life of the house.
If you have enough equity on your house, you could find a HELOC that will cost you close to nothing to open (and keep opened) and that could get you that same amount for a short term until you refinance your new acquisition.
Just to clarify on my previous post, I talked to a few other banks today and clarified the "call out the loan at any time" possibility and what I was told is that the only thing they could do is limit my line of credit to a lower amount (so I could not borrow more money out of it) if things started going south like in 2008-2009, but they could not just ask for all of the borrowed money back.
One of them also clarified that at the 10 year draw, the rate would become fixed to whatever the rate was at the time + 1 or 2% depending on the repayment period.
Another point to clarify and that they will lend to you up to 80% of LTV but no more than 50% of the value of your house.
A good news though is that the two banks I talked to were offering interest only payment for the draw period (10 years) which fits nicely in the BRRRR strategy since you plan on repaying the money within a year or so when refinancing the property. You're basically not tying up additional money to repay the principal during that time period. I'd be careful when getting close to the end of the draw period in case you cannot refinance right away.
Just be careful to have a plan to reimburse the HELOC quickly if rates were getting out of control since your primary residence is on the line!
And again, some of the numbers above may be different in your state due to specific state regulations.
Thank you @Xavier G. for the follow up.
And Thank You @Joe Swanson
The HELOC I have is on my personal home with a credit union. 10 years (5 for draws/5 for repayment). No more draws after 5 years. Current interest rate is 4.75 APR. Monthly payment is 1.5% of Balance. Must start repayment after 5 years (Not an issue).
Everything Xavier said is correct for Texas. Cannot get one on a rental, vacation properties, mobile homes. However, other states do have different rules.
I will be switching to Frost Bank at the end of year 5. 20 loan (10/10) interest only first 10 years.
Remember the interest is tax deductible.
John