Hi @Kevin Mahoney! I love the topic of BRRRR and have found that it is best to look at it is like a chess game and work backwards.
I look at BRRRR it as three equally important parts that each need to be understood to succeed.
33%-Buying the right property and understanding rehab costs/timelines
33%-Understanding your rental market and successfully renting/managing the asset after rehab is complete.(Bonus-you can show the bank why you are a great operator)
33%-Speaking the language of a banker, and understanding what they are willing to lend and what cap rate the neighborhood is usually valued at
Step one- Identify if you will be buying a 2-4unit or a 5+unit building, the financing varies significantly between the two. Commercial lenders will typically lend you 70-75% as-is value(at acquisition) and 70-75% of construction costs for a value-add play. Not all commercial lenders offer the ability to cash-out refi at 100% of the project cost, but that is what you want to look for. A home-run deal is when you can create 30% of equity in the building on the 1st lease up after renovations and recapture all of your hard and soft costs to repay the capital you have borrowed!
For residential loans, everything is structured a bit differently. You can still cash-out refi, and it was easier to do so the last few years, but recently lenders in Chicago have been telling me their requirements became much more stringent since COVID-19. Cash-out refis for residential aren't much different from a commercial mortgage now(70-75% LTV), and most banks now want to see 6months of PITI reserves!!
A residential loan is slightly different as the bank looks more at you(your income, credit, debt/income ratio) then the deal itself, whereas a commercial loan they look at a deal dynamics first and want to see that you are a capable operator. Being a young investor, I have found that commercials loans are far more attainable for where I am at in life(easier to get a construction loan too!!).
Step 2- Understand what the property will rent for when the value-add is completed and then how the banks will value it (NOI*cap rate of area=ARV).
Step 3- Understand rehab costs and always over-estimate cost and over estimate time to complete. Only one project has been under budget and on time for me. The more meat on the bone, the bigger rehab, more variables that inevitably change.
Step 4- Now that you understand what your bank will lend, rehab costs, and after repair rents...you know what you can pay for that asset to create 30% equity and therefore get all of your capital out at completion!
Step 5- Hold onto your new asset that cashflows every month, has brand new renovations, and cost you(ideally!!) no $ of your own.
My typical BRRRR investment takes 12-18 months from acquisition to cash-out refinance. Check out my "investments" section on my profile, you can see a summary of my buy/hold BRRRR projects in Chicago.
It may feel overwhelming at first, and that's because it's a multifaceted move in multifamily real estate. You will learn a dozen new tricks after completing just one. You will get good at it, and then want to take down another one. It feels so cool to recapture 100% of the cost in just a year! Cheers, you're well on your way!
-JW
