Help! BRRRR Question????

Question

Hello,

I was recently watching one of BP's videos on the BRRRR strategy and had a question about one specific aspect of this strategy.

How is it that a property produces income and cash flow during the acquisition face of the BRRRR project?

If we have to come up with the money, make monthly payments to the lender, spend time and money rehabbing the property before we can get any tenants in there and wait "6 to 12 months" (depending on refinance details of the bank or lender); how can I make sense of income and cash flow during the acquisition face part of the results page of the BRRRR calculator?

Thank you,

Oskar

Thank you BP for the amazing community you've brought together.

Jennifer Beadles · Answer

Hey @Oskar Beckmann! I see a lot of questions about the BRRR Strategy, so I'll share how I've personally done BRRR's though I know there are a few different ways to structure them.

1. I never put money down, instead I have my HML cross collateralize the equity in another property I own (since I have many) OR I take the equivalent of the HML's down payment and put it in a separate account that they have access to in case of default. So I always do a 100% loan with the HML

The reason I want the 100% loan is so that I can do a rate and term refinance (no seasoning requirement) and all the HML has to do once they're paid off is release the lien on my property or release the bank account.

2. I also have the HML finance the renovation costs into their loan, which they take into account when they create the loan. Same point as above, this allows you to do the rate & term refinance so theres no need to get your cash back since its all in the HML loan.

No matter if you put money down and pay the renovation out of pocket or go for zero out of pocket (with the exception of the monthly interest payments, I've not seen a HML who was willing to do all 3) your cash flow is going to suck until you refinance.

I hope this helps!

Jennifer Beadles · Answer

@Oskar Beckmann you asked for an example, so here is an example of an actual BRRR deal that I did except I am rounding up.

Duplex purchase price: $130,000

Renovation budget: $12,000

= HML Amount of $142,000

Monthly HML Payments = $1,420 x 3 months (to rehab and refinance) = $4,260

Hard money points get tacked on to the HML and get handled at payoff, so the total HML payoff was $144,840

New appraised value came in at $230,000 which allows for a max LTV of 75% (since its a duplex) which means I could have a new loan amount of $172,500 without bringing any money in to close the refinance.

Since my total HML payoff was $144,840 + roughly $5000 in conventional refinance costs my new conventional loan amount was $149,840 (I rolled in the refinance costs).

Other details: normally HML's require 20% down, which in my case would have been $28,400 so the HML took a second lien out on another property I owned with a ton of equity for that amount. Once I refinanced and paid off the HML + HML points he released the lien on the other property.

So at the end of the day I was out $4,260 in HML payments and got a property that was worth $230,000 yet I only owed $149,840 and the monthly cash flow was $1043.

About 2 years later I went back and got a HELOC at 70 LTV (value is now $350,000+) which gave me access to $100k in stagnant equity which I use to acquire other properties.

Hope this all makes sense. Like others have mentioned there are multiple ways to structure BRRR deals though I prefer the cross collateralization so that a rate and term refinance can be done with no seasoning :)

John Leavelle · Answer

Howdy @Oskar Beckmann

Good question.  The answer is there is usually no income during acquisition and Rehab phases.  If the property has tenants paying rent and considered livable, then, I would suggest it is not a true BRRRR candidate.  The properties I look at are normally distressed with no tenants.  They are not in livable condition and can not be purchased using conventional financing.  Other than cash you must use Hard or Private Money loans.  During the Rehab/Holding period you make interest only payments with a balloon payment due at a future date (6 to 12 months).  These payments are part of your Holding costs.  Along with insurance and utilities during the Rehab period.  Once you have it rent ready and tenants in place that is when you have income.

Holding costs occur from the closing date until you have the property fully rented.  It could be one month or six months.  It depends on the extent of the Rehab, how long it takes to complete, and the time it takes to be fully occupied.  The quicker you are able to go from close to occupied the sooner the tenants will be paying for those costs instead of you.

With Hard/Private Money Financing you will have to have “skin in the game “.  It may be a down payment, All Rehab costs, Holding costs, and Closing costs.  When you are analyzing the deal you must consider what your expected total cash outlay will be.  When you do the Cash-out Refinance these are the costs you are attempting to recover along with paying off your acquisition loan.

Jennifer Beadles · Answer

@Brian Garrett you got it!

There are a few benefits to doing a rate & term refinance over a cash out refinance, one being the seasoning requirement to use the new appraised value and another is the interest rate is usually slightly lower on the rate and term versus the cash out.

If you did a HML and put 20% down & paid for the renovations out of pocket and you wanted to get all of your money back you would have to wait 6 months (or sometimes 12 depending on lender) to do a cash out refinance and to use the new appraised value.

With the rate and term refinance you can do the refinance right away with no seasoning and your only out of pocket costs would be the HML payments before the refinance.

I use to buy properties at the court house steps that needed very little work, so one property I bought on a Friday with 100% HML doing the cross collateralization, it needed literally no work so I started the refinance immediately (it takes a week to record the new deed) and closed on the refinance in less than 30 days with no money down.

Jennifer Beadles · Answer

@Brian Garrett the HML is paid off just like a normal loan refinance. Cash out is needed only when you as the owner are wanting to get cash back out of the property.

I chose to allow that "excess" equity to stay in the property, I could have waited another 3 months to do a cash out refinance and paid myself the $22k but decided to just go forward with the rate & term instead of switching to a cash out.

The HML payments get paid monthly, so they can't be rolled into a new loan.

Benefits of putting the equivalent to the down payment in an account for the HML is to be able to do the rate & term (or call it regular) refinance instead of a cash out. This allows for 100% financing and you avoid the seasoning requirement (6-12 months) for the cash out refinance.

Jennifer Beadles · Answer

@Nghi Le You're right, you can definitely have another lender record a 2nd to do the rate & term. I've never had to do that, but it could be done.

Rain City Capital is my HML who does the cross collateralization.

Brent Coombs · Answer

@Oskar Beckmann, you wrote "BRRRR might not be the correct method to use for the properties I'm analyzing"(?)

Are you saying that all-in, they'd cost you more than about 70-75% of their appraised ARV?

And/or, you calculate that they'd not cash flow positively when you've re-borrowed 100% of your outlay?

In that case, I agree, they're not (pure) BRRRR candidates. You'd be leaving money in those deals, even after Refi. Good luck...

Brian Garrett · Answer

Can you explain a little further how you are structuring this deal with the HML?

Also how does the HML get paid back when using the rate and term refinance?

Could you give an example of a recent deal or a hypothetical one?

Brian Garrett · Answer

@Jennifer Beadles I agree and it's definitely an option that  I'm going to keep in mind and consider now!

Jennifer Beadles · Answer

@Tae C. you are right, the cash out refinance will allow for a higher LTV, though I still prefer the flexibility of the HELOC because I'm not paying interest until I use it and the HELOC interest is simple interest as opposed to amortized in a mortgage which has a higher cost overall.

I'm really surprised that you couldn't find any local banks to do a HELOC on an investment property. I haven't had luck with credit unions either, they tend to be more in the box.

Rain City Capital serves WA, OR, ID and I think California for now.

@Brian Garrett You're right, it's not 100% zero out of pocket, but when done right the cash flow on the new property should repay your initial investment in a few months so it's still a pretty great deal :)

Help! BRRRR Question????

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