All Forum Posts by: Effram Barrett

... or have it gifted to you.

@Effram Barrett

If you borrow the downpayment, how are you planning to finance the balance of the purchase?

A conventional lender is not going to underwrite the property if you have none of your own equity invested and are borrowing the downpayment.

I'll question this answer a bit. The BRRR strategy has nothing to do with the rehabbing of the property. Whether you keep the existing loan or refi cash out, you are still doing the rehab no matter what. So you are not transferring the cost of rehabbing the property to future tenants in any way. Unless maybe you're suggesting that by taking on more debt and lowering your cash flow, you will have less profits to do repairs in the future?

I would argue that you should not do a deal if your numbers don't allow for the gross profits to cover the estimated repairs - whatever they may be. 

"To answer your question YES IT WILL. To expand on that answer, you are transferring the cost of rehabing the property to the future tenants when you engage in teh "BRRR" method. Ask yourself this question will the property rent for the same amount after renovation that it will if you don't renovate? Probably not, rents tend to be higher in renovated properties." 

That being said, the answer as everyone has stated is Yes, if you buy a house and put down 25% and pay rehab out of pocket and then do a cash out refi to pull that money back out - you will have less cash flow after the refi then before simply because the loan will be greater.

And that definitely adds to the risk in investing. You may be able to find the deals where the numbers work to pull your money out each time. But if the deals don't cash flow after the refi, do you still want it? Or if they don't cash flow much at all, do you still want it?  If none of your properties are cash flowing, how are you going to save up money for repairs (both simple repairs like replacing a toilet or faucet and the big ones like a new furnace or roof)?

But here's the thing. If you can do the BRRR strategy and have some decent cash flow (say 150 to 200/mo net profit after estimated repairs), then you can grow a reasonably large portfolio with surprisingly little capital and generate some generational type wealth that no other investment vehicle can offer (outside of the lottery maybe). :-)

Example. Lets say you saved 30k or so over a 3 year period and bought a 150k house for 90k that needed 15k in rehab. You'd have to put down 18k and pay the 15k in rehab outright. There went your 30k in savings.  But now you have a 72k loan that has payments of 400/mo or so. And lets say that generates net profits on your rental of 400/mo.

If you leave that cash in the deal, you have to wait another 3 years to save the same 30k to buy your next house. So in 10 years, you'll have 4 houses making 400/mo = 1,600/mo.

Now lets switch to the BRR method. And after you do that first deal, you do a cash out refi and get your money back. You now owe 105k on the house and your payment is another 175 to 200/mo greater.  So your net profit on that house is only 200/mo instead of 400/mo.  But now you have your 30k back so you can buy another house.

Lets say you buy 2 houses a year doing this. In 10 years, you'll end up with 20 houses making you 200/mo (which is 4,000/mo). Plus you'll have your 30k back in the bank. 

So what does that look like:
BRRR - 20 houses = 3 million dollars worth of real estate
900k in equity capture 
4,000/mo in rental income
2,500/mo in principal paydown
120k/yr in appreciation (4% times 3 million in real estate)

Non- BRR method - 4 houses = 600k worth of real estate
180k in equity capture
1,600/mo in rental income
360/mo in principal paydown
24k/yr in appreciation (4% times 600k)

The numbers above don't reflect growth over time at all either (i.e. Your first two houses bought in year 1 will be worth more in 10 years, your principal paydown more, etc).  But its meant to show just how big a difference your portfolio will look like over an extended period of time.

And thats about keeping the big picture in mind. By giving up a little equity and cash flow in each house, you can grow your portfolio into something that has exponentially more equity, rental profits, principal paydown and appreciation to where its generating more wealth.

I'm pretty close to being in my year 10 of investing right now and I've been doing this since I first started. I'm up to 68 houses now. And those are pretty much the numbers I'm looking at an as an average (i.e. arv of 150k, all in at 70% ARV, loan amounts, etc). I did a blanket loan cash out refi across 7 properties to pull out 100k.

Does that 100k less in equity or 700/mo less in rental profits really hurt me? Not when you consider that the 100k let me add another 10 or more houses and continue to grow the portfolio.

There is definitely some risk to it though. Its a lot easier to have a cushion when your properties are averaging 400 to 500/mo net cash flow versus 150 to 200/mo net cash flow.

But would you rather take on that risk and have 20 properties or 30 properties as opposed to 3 or 4?  I can tell you right now that if I wouldn't have been able to pull my money back out on my deals, I'd be lucky if I would have 3 or 4 properties right now as opposed to near 70......

3 or 4 is a nice way to subsidize your retirement and generate a little income for today. 20 to 30 is a way to create a fantastic retirement and generate a really nice size chunk of income today as well.   Maybe not one you'd retire on necessarily but enough of one where if you lost your job, you wouldn't lose your house......

@Effram Barrett Its in Humble 2 minutes from 1960 and 59. It really is a great location for IAH and other amenities. I think the house is great for airbnb but I am not able to manage a short term rental at this time.

I have a rental property in a suburb of Houston and I have been approached to lease my house to an investor with a lot AirBnB experience. They will use the property for their AirBnB business. They have excellent reviews on AirBnB but they own all of their current properties. They will sign a 2 year lease and leave the refrigerator. The refrigerator has no value to me but its part of the deal. The rent we have discussed is a little below market value.  There is an appeal of a 2 year lease for me as I am not able to manage the property as easily since I live out of state. The major selling point for me is they have to maintain the house in an excellent condition to keep tenants coming to their properties. They will take care of minor repairs. 

Does anyone have experience with this or suggestions on this arrangement?

So just to recap. You are using private money for the down payment and holding/closing costs. Keep in mind thats going to be an issue when you try to get a loan to purchase. If you haven't had the money in your bank for more than 2 months, then they're going to ask you where it came from (lender will require 2 mos of bank statements). And they're going to tell you that you can't use borrowed money for the down payment.

Now if you stick it in your bank for over 2 months that would help solve that issue. But I believe they might ask you on the loan app or the loan docs whether any of the money used for the down payment is borrowed. If you answer no, you're lying and that would be a problem as well.

So thats going to be the biggest hurdle for you to overcome.

Lets say you find a local bank that will allow it though. Maybe they'll do 75% of the purchase price (236k loan). You would then need to use 79k for the rest of the purchase plus 40k for the rehab (119k) and the rest for holding.

So now you have 236k loan and a 125k private money loan for a total of 361k in loans on a property worth 425k.

Here is what you could then do: Do a cash out refi for 80% of the ARV (425k) which comes to 340k. That allows you to pay off the first mortgage of 236k but only allows you to pay off 104k of the private money loan which leaves you a balance of 21k still owed.

Now what you could do is turnaround and get a heloc on the property for another 10% (42,500) and pay off the remaining balance of the private mortgage and pocket the rest of the cash.

So now your two initial loans are paid off. You will have pocketed 21k. And you will now owe 340k on a first mortgage and 42,500 on a second.

The questions that scenario raise:
1) Does the property cash flow with those two loans?
2) Will your private money lender allow you to pay off a partial amount of the loan with the initial refi and then the rest after you get a heloc?

3) Can you find an initial lender that will let you use borrowed money for the down payment?

The plus side of that is that you would get a 425k property and end up pocketing 21k in cash to boot.

Those initial BRRR properties can really set you up for investing if you use them right. Max out the most amount of money you can while its owner occupied since owner occupied can get up to 90% LTV on heloc's with some banks (you have to shop around to find the banks that go that high but I recently got 100% LTV on my primary).