All Forum Posts by: Mark J.

@Lane Forhetz

Thanks everyone for contributing and keeping this discussion going. It's been very helpful talking (and thinking) this through. I had a professor once who said that until you can explain it in writing, you don't fully understand it. That's proven true for me many times.

@Lane Forhetz - Two things you're executing very well on: #1 Find deals @ 65% ARV. #2 Somehow acquiring and closing on a hard money loan, buying & closing on a property, rehabbing it, and getting your cash back out through a refi in six weeks. That's impressive! Well done, sir! If I can build some solid relationships with HMLs, am able to cut another three-weeks off the renovation time, and spend about $5K off the rehab costs, I'll be able to get the process down as well as you. So, I'm close to making it work-- but not quite there yet.

What kind of properties are you buying -- auctions? How are you able to close on the purchases so quickly? Are you using commercial loans for the cash-out refi? 

As I've experienced it, there are two magic numbers that make a BRRRR successful. #1 Buying at 65% ARV (max!) and #2 Spending no more than 10% of the ARV on the rehab. That's the challenging part because you have to create value / equity equal to 35% of the ARV by only spending 10% of the ARV on the rehab. My experience has been more like I've spent 15% of the ARV on the rehab (and holding costs)-- so that 5% gets locked away as equity and comes out of my pocket (e.g. drains my acquisition capital).

On the property I'm currently waiting to refi, I purchased at 65% ARV, closing costs pushed it 67% ARV, I completed the reno right on target at 10% of the ARV, and holding costs + refi closing costs will push my costs to about 14% of the ARV or resulting in about $4,400 out of pocket. Not a perfect BRRRR, but if I had not invested $3K in non-essential (but important upgrades), I'd only be $1,500 out of pocket-- so that's pretty darn close to a perfect BRRRR for me! ;)

Again, I really appreciate everyone's thoughts and feedback here. 

I'm with you @Neil Sinha. I've spent hours running through different scenarios and cannot for the life of me see how a BRRRR works with a hard money loan.

Broad strokes here-- but you're gonna pay $8K-$10K in hard money costs for a $100K loan for three months (12%-14% interest + 3-4 points + closing costs). For a flip, sure, that's just the cost of doing business and it comes off the top. But for a buy-and-hold, there's no top,  other than your cash flow I guess. And if you're pre-spending your cash flow for the next two years to pay for the property's acquisition and rehab, then I just don't see how it makes sense.

@Antoine Martel - Yes, but Fannie Mae's "Delayed Financing Option" doesn't work for a BRRRR. The engine which makes the BRRRR go-go-go is the value and equity created through the rehab (AKA the 25% that doesn't get funded by the conventional 75% ARV cash-out refi). Sure the DFO allows me to get my initial investment + closing costs back, but that means every dollar I put into the rehab is not recoverable and becomes locked away as equity in the property. That puts the brakes on the BRRRR train and would drain my capital after just a few renos.

Perhaps I'm totally missing the point, but if you're only getting back your initial purchase investment, then that's not a BRRRR (at least as I've come to understand it). Or perhaps you're just finding killer deals at 70% LTV that are rent ready.

@Todd Dexheimer - that sounds like a plan. The bank I've been building a relationship with for 2 1/2 years told me today they no longer offer commercial funding for residential properties-- but they were more than happy to try to talk me into a HELOC. Same thing with the other bank I use for my PLOC funds. You'd think being a disciplined steward of their money, paying them thousands in interest payments, and articulating a clear vision for a real estate business I'm trying to build would get them a little more interested in me. Not so much.

Well, not to worry, tomorrow I'll be working on next week's call list, gathering together all the financial documentation I know they're going to want to see, and putting the final touches on my will-not-be-ignored funding proposal which I'm gonna slide across the table in as many meetings as I can get. 

So there... ;)

@Todd Dexheimer are you able to get commercial loans on residential rental properties?

@Jorge Ruiz - yes, the "delayed financing option" enables you get back what you paid + closing costs, but the BRRRR model is dependent on creating 25% equity through the renovation so, at a 75% LTV cash-out refi, essentially you have little to none of your own money tied up and can continue to recycle that cash and build passive income prosperity!

@Kurt McDowell - thanks for the lead. I just spoke with Missy and we reviewed some options. They have a few products that may work, specifically a 7/1 ARM with a five-year sliding scale pre-payment penalty (5% if you sell/refi in year 1 down to 1% if you sell/refi in year five and beginning year six I could refi with no prepayment penalty). So far, I had only been thinking 30-year fixed, but since I'll likely be holding properties at least five years, the 7/1 ARM with a 30-day seasoning period may just be the solution I'm looking for. THANKS for the lead.

@Jay Hinrichs - Yup, definitely want to have my cake and eat it too! ;) But if I want to progress as a real estate investor, clearly I need to begin to plan for the pros and cons of business lending.

Appreciate everyone sharing their knowledge and experience!

Thanks @Kurt McDowell and @Michael Noto -- appreciate your responses. 

Could you offer some leads on the lenders that you or your colleagues have successfully used? Feel free to PM the info if you don't want to publicly post the info. THANKS! 

Also, what kind of terms are you typically getting with those lenders?

@Andrew Syrios -- I've looked into that briefly, but as you noted, the amortization is shorter which would make the monthly payment higher and cut into my cash flow. 

I've explored commercial loans a little last year, but what I found was that they required more the cash down (25% or more), which would quickly drain my reserves, and have higher interest rates-, which again would mean a higher monthly payment and cut into my cash flow? 

If I use commercial loans for my next few properties, should I plan for lower cash flow and rely more on appreciation?

Appreciate your thoughts on this...

BRRRR works, no doubt. I've completed two but am now stuck waiting three months until I can cash-out refi on my third. So here's my question-- how the heck are all these investors doing it-- BRRRR-ing 5-10 properties per year?!

Since Fannie Mae's seasoning requirement is six-months for a cash-out refi, these investors would need a LOT of capital to continue to acquire properties while they wait for refi funds. For investors like me, who only have the capital to purchase + reno one property at a time, that limits me to two BRRRRs per year (if I do it perfectly). I'm currently looking for additional funding at local banks and credit unions, but with so much money tied up in the current BRRRR, my DTI ratio and credit score have taken a real hit.

SOOOO-- Brilliant investors out there in BP Land-- how are you doing it-- funding multiple BRRRRs simultaneously?! Are you relying on partnerships or, if you're a solo investor like me, how have you built-up your property acquisition fund? Are you using some combination of hard money / HELOCs / PLOCs / credit cards / family & friends / partnerships / flip profits?

Many thanks in advance!

Mark...

I'd offer that it's an organic process that just naturally unfolds. If you're standing on the lake's edge and staring at the fish swimming around and you want to know them, it's much more difficult to establish that kind of relationship from where you're standing. But if you've jumped in, and you're all now swimming around together in the same water, you'll naturally become allies and mentor-like relationships will just happen, particularly if it's mutually beneficial. I try to keep my karma balanced, as far as what I give to others (e.g. contributing on BP) and receive from others (consuming on BP and in the real world). Good luck!