Real Estate Agent · Arlington, VA · Member since 2015 · 11 posts · 1 vote
Here's my first BRRRR deal:
I'm buying a 2/1.5 bath townhouse for $370k (for sale by owner AND owner financing). I'll be gutting the place and turning it into a 3/2.5. I'm in northern Virginia and can rent this place for +-$3000/month.
370k with 10k down, 70k for the repairs. So I'm in for 80k cash---And 360k is financed on the place. Conservatively, the ARV is 460k. So if I pull 100k out and I have a sucessful BRRRR?
@Ian R. Always happy to help. Had a quick phone call with Nick. He's on the right track just needed help figuring out how it works. Even the simple stuff is can be difficult if you've never done it before. I think the light finally clicked on for him. All good.
Doesn't look good to me. As a rental it won't cash flow as-is as it's less than a 1% deal (actually .83%) and definitely not after you refi after the rehab assuming your 100% LTV (.65%). Also you're not going to be able to cash out refi at 100% LTV, maybe 85% tops ($391K). You're financing $360K + $80K = $440K all in for $460 ARV. Couldn't even pay the realtors to flip it. 70% rule for flips, you'd have to be all in at $322K, lot of ppl make money on flips at 80%, still $368K. Look at 2% rule for cash flow and 70% rule for flips and then look at Hampton Roads ;).
You're missing the fact that no bank will do a 100% ltv cash out refi. You'll be able to pull just 75% of the $460k arv out which basically means given your numbers that you get to pull out nothing.
@Nick Mullen You are paying $370k ($10k down) and then putting another $70k in. How are you going to pull $80k back out? With an ARV of $460k best case you can pull out 80% which is $368k. That doesn't satisfy your original seller mortgage and no bank is going to take a second position without more equity.
Regardless, I don't think the numbers look strong enough to take it a solid rental investment. Keep searching.
@Nick Mullen You will not be able to pull out your $70k.
Most banks are not willing to lend more than 80% of the appraised value on investment properties. There are occasional exceptions to this but not many. See my previous post to you.
If you were to live in the house as your primary residence you could possibly refi up to 95-100% and pull your money out that way but not if you are renting it.
@Nick Mullen Will you have a seller financed mortgage of $360k? If so, that's already 78% of your equity. The bank takes existing mortgages into consideration, especially if that bank is not going to be in first position.
No your math doesn't work. You are 80k in your cash and 360 of the banks cash into the property. *IF* you can get 80% LTV on 460k they will give you 368 meaning you just get 8k after paying back loan, and that is assuming they don't charge you any fees or points and good luck with that. There wouldn't be any point in refinancing.
Plus your cashflow is thin. This would be a pure appreciation play.
@Nick Mullen I think the part that you're missing is that you whatever you owe is equity you don't have. And you can only borrow against equity that you do have. So if you've still got a 360K loan on the property, you can't borrow against that equity. Your cash out refi would have to first go to satisfy that. 70% of the ARV is just 322, so you wouldn't even be able to pay off what you've already borrowed.
Just to carry your scenario further, what you're proposing is having a property where you would owe 470 (100k from cash out, 360 to original seller) on a property whose value is 460. Nobody would lend that!
@Ian R. Always happy to help. Had a quick phone call with Nick. He's on the right track just needed help figuring out how it works. Even the simple stuff is can be difficult if you've never done it before. I think the light finally clicked on for him. All good.
Where is this located? In Arlington? What does the cash flow look like?
From a BRRR: If the ARV is 460K then you'll be able to refinance at around 75% LTV which is 345. If 360K is financed right now then you need to come with more money to closing which doesn't make sense
That's one of the bad things when it comes to low down payments - it can take some time to gain the right amount of equity. I did something similar in the area and 5 years later and after an equity boost in the market, I still don't have enough to refinance to make it worth it.
Where have you guys found a bank willing to finance an investment property with so little down? All of the banks I called, require 20% down, which has really killed my investment hopes unless I find a cheap house(which are hard to come by in my area)