How to BRRRR a duplex that is already renovated?

Question

Christopher Phillips · Answer

@Ashley Benning

It's not a BRRRR if it's already renovated and rented out. It would just be a straight investment. Since the leases are already in place, you'll be looking at a conventional loan in the 15% to 25% range unless you can convince the owner to do seller financing. But it they just renovated it, I would suspect they would want to get their money back out...

On a side note, for 1-4 families we typically talk about cash on cash return . Pro forma cap rates for 5+

Austin Fruechting · Answer

Cap rate still gives you an indicator of cash on cash return even though it's not used for valuation in under 5 units. However, pro-forma's are not actual performance. I see things listed (from duplex to apartment complexes) that claim a cap-rate of X... based on a pro forma.  When you run the numbers based on actual performance, you often see that their 9cap on pro-forma is actually a 6cap in reality. My guess is something similar to that is what is going on and why it hasn't sold. Have you done a cash flow analysis on it?

Also, if it's rented towards the top end of what it could rent for given the size, location, and remodel work that is already done... you won't be able to BRRRR it. The things you are talking about won't increase the rents or perception of the property much at all. If those things would increase the rents significantly, then you could consider it.

Arianne L. · Answer

Thank you for the mention @Jorge Ruiz

@Ashley Benning If you can purchase it for 75% of what it will appraise for, you will be able to all your cash back out assuming your "initial investment" includes the cash you use to purchase and closing costs.

I would ask your agent why they think it has been on the market for a while. A good agent should be able to give you a good idea. It might be location specific, or it might be that the listing agent's marketing isn't up to par (poorly taken photos, or no photos at all, no description, agent didn't click the right buttons on the mls so it didn't post to all the websites, agent non responsive, there might be a registered sex offender next door, etc.) There are a lot of factors that could play a part in why it's not selling. And they may not matter to you which is great but it might be turning off other buyers.

Jorge Ruiz · Answer

@Ashley Benning

Here is something that may help that I just remembered. Listen to BP podcast #233. @Arianne L. talks about how she used delayed financing to do what you are talking about. I found some info that I believe is helpful when using the delayed financing strategy. I have copied it and will paste it. Here it goes:

"If an investor is buying with cash and flipping they get their money back when they sell the property. But if they are seeking to hold a property for any length of time and want their cash investment back there are some important rules to understand with conventional loan:

If you buy a property with cash (or with a HELOC) you can receive a cash out loan on Day 1.

There is not a 6 month waiting period with receiving a cash out loan if you purchased a home with cash or with a HELOC

BUT you will be limited to the amount of….

Your purchase price + closing costs (costs when you purchased the home)

OR

75% of the “After Repair Value”…

WHICHEVER IS THE LOWER AMOUNT (super important)

These rules are important to understand so here are two examples:

Example 1: If you purchased a home with $50k of cash, and put $30k of renovations into the loan, and the home was worth $100k. 75% is $75k and $50k is your purchase price. So you could only receive $50k in your first 6 months ofownership since the LOWER amount is your purchase price. After 6 months you could receive the full 75% of the ARV.

Example 2: If you purchased a home with $80k of cash, put $5k into the home, and the home was worth $100k. 75% would be $75k and your purchase price is $80k…so the lower amount is $75k.

When buying a home with cash you can absolutely get cash back right away but you will be limited to the lower of those two amounts."

Hope this helps.

Jorge

Christopher Phillips · Answer

@Ashley Benning

how BRRRR is calculated with a real deal:

https://www.youtube.com/watch?v=B9MVEg0LI1w

Christopher Phillips · Answer

@Ashley Benning

For 1-4 family, it's all about Cash on Cash Return $s and Cash on Cash ROI %.

You always need to run your own numbers since the performance will be based on your investment into the property and your financing scenario. You also have to look at the rents and see if they are close to market or if they haven't been raised in a long time. And also look at who is paying for what utilities.

This will get you to the monthly cash on cash return - Rent $s less Expenses $ (mortgage, insurance, utilities, reserve %'s)

Cash on cash ROI % is based on the investment you make into the property - Investment $s (down payment, closing costs, rehab) /  by Annual Cash on Cash Return $s. What the previous person put into the property will be different so their ROI will be different from yours...

For BRRRR to work, you have to follow all the steps: Buy at a super deep discount due to the condition or the owner's situation - rehab it - rent it out - refinance it at 75% After Repair Value (ARV)* - Repeat

* your ability to refinance at 75% ARV will depend on the lender you're refinancing with and the scenario (cash up front versus private/HML).  Sometimes lenders will want some seasoning before refinancing with a new appraisal, some won't make you wait. It depends on the lender and what you used (cash vs financing) to purchase the house.

Jorge Ruiz · Answer

@Ashley Benning

Maybe its a good investment but not for BRRRR. Best of luck to you.

Jorge

How to BRRRR a duplex that is already renovated?

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