All Forum Posts by: Michael Radney

You'll usually make a monthly interest only payment.  I've had hard money lenders offer an interest reserve but keep in mind you're paying interest twice if you set it up this way.

Quote from @Mike Klarman:

I am the loan officer on many cashout refis from a bridge loan into a DSCR loan and I have never seen anyone get their full money back. Most times you get 1/3 to 1/2 back. Especially with the costs of renovations.

You guy something for 150k put 75k in and then sell for 300k let's say.  Your loan amount would be 195k. You will need:

30k: Downpayment

3.9k: 2 points

1.5k: Hard closing costs

6k: 3 debt payments/Holding costs could be more than 6k

1k: HOI

1.5k: Title work

So now you are in for a total of 43,900.

Now works is done and you get a tenant and you want to refi based off that 300k. You get 75% of that 300k in a refi. That's 225k. This loan will also cost you $$ to close. Another 1.5k in closing costs and you will spend anywhere from 1 point for the par value rate to up to 4-5 points for the absolute best rate the bank has to offer and there are all kinds of hybrid like I/O loans and ARM loans. But this loan will cost you 5k - 8k to close so that 225 is really 220k.

Now you have a loan amount of 195k to payoff.  That leaves you with 25k.  That's half your float.  That house would need to go from 150k in value to about 375k in value to pull everything out and those deals do not exist for new investors.  If you can imagine, those deals are either pocket listed, require very quick closings usually cash buys only at auctions.  They're just not there for new investors who have little to no network, little to no capital, sketchy credit.

Nothing wrong with the BRRRR strategy, it just takes capital to keep refinancing and holding. I mean the end game for us all is to have a great cash flow producing portfolio into our golden years that keeps appreciating in value. I will be starting my investment career in 2023 as well.

Most of us can only afford deals where the float is 50k and less.  So the deal above for that 150k house cost about 50k in float.  So there's about your max home value you can work in and no more than a max budget of about 200k for loan amount.

Let's pretend now that we did not refi but we sold it for 290k. We took a 290k offer. 10k below our ask, which really, if you work in the right areas you will get ask or better. So, we have a loan amount of 195k yo payoff. That leaves us with 95k. We take our 50k float back. That leaves 45k gross profit, but let's say you net 38k. So now, you had 50k in your LLC account and now it is 88k. We get right into another deal and flip again and we keep flipping. So now, we're flipping and we have about 300k in our account and we see a 4 fam building go for sale in TB, FLA. It's listed for 900k, needs 200k in work but when done it is worth 1.4 M. That deal will cost 200k and maybe you will get 100k back in the refi. But now you are holding a quality asset.

That guy in the first example still probably only holds one SFH in an urban neighborhood. The second guy did 5 flips, profited 200k, and now holds a muti-fam building.

Who would you rather be?

Hold.  But Hold when it's time.  You wanna open your own real estate company that purchases, sells, and refis real estate?  The very first thing your company needs is a steady income that you then can deploy into quality real estate assets.  You wanna hold a duplex in the middle of Indianapolis or a 6 bedroom home on a lake in a resort town?

This is what I went through when I started out in '99.  I was trying to do BRRRRs (before they were called BRRRRs) and my offers were almost never competitive enough or the price I had to offer to get deals didn't make them worthwhile.  Flips worked as long as I budgeted smaller margins.  Finding deals myself and using cash or a near-cash equivalent (private money, etc) increased profits.

I'm not saying you can't find good deals using hard money, you definitely can.  Just my experience but it's tough to make a consistent business of BRRRRs using expensive money, especially the purchase closing costs and holding costs paid out to a HML lender.  For flips, hard money provides good leverage for building a cash reserve but the budget and ARV estimates have to be really good. 

Granted, having a lot of cash isn't needed to get started.  Lots of creative ways to get up and running.  From there, building a reserve provides options.  In my market I find $200k cash is enough to consistently buy an entry level home, renovate it profitably and still have a small reserve.

Local REIAs are good. Investors can be tight lipped about their good GCs/subs but there’s usually a few willing to help.

Chatting up experienced city inspectors. They see everyone’s work and can also tell you who’s good about correcting their mistakes.

Supply houses and lumber yards can tell you who they see coming in and ordering all the time.

Construction loan officers usually have a small stable of GCs they work with regularly. This is good because their feedback is usually based on working with a GC over multiple projects.

Same goes for RE agents who specialize in new construction and investor rehabs.

Draftsmen/architects have names they’ve ended up working with multiple times.

If your permitting system is online you can pull building/plumbing/mechanical/electrical permits. It's not a source but you can see who’s doing clean rough-ins and finals vs the ones who have constant deficiencies to fix.

The good names sometimes start being mentioned from more than one source.  You can also ask who to avoid.  Those names come up more than once too.

@Jared C., a few other points. As a beginner, I would suggest waiting until housing prices and rates have stabilized a bit, so you're dealing with fewer moving parts. It's very easy to spend your money but getting it back, not so much. I'd also consider doing a flip before trying a BRRRR because it can be a little more forgiving re: budget miscalculations, bad contractors/subs and time overruns.

Someone above said it but I'll repeat, finding a property that's significantly undervalued usually means it's an extensive rehab or gut. You really should avoid those deals when starting out. Finding a small flip needing lighter rehab, that nets 10% – 15% while gaining valuable experience, is not a loss.

Hard money has its place but the reality is most of my budget savings are found in using cash (or private money), using a GC for as little of the project as possible and directly managing all the trades/subs. House hacking on a primary residence with a one-close construction to perm loan is a cheaper option too.  The process is slower with a one-close CTP but cheaper. 

It takes time to find a team of quality GCs and trades. Once you find people who know what they're doing, you then have to find further filter that group and find those whose personality and work style meshes with yours. And if you don’t know what you’re doing they’ll ignore or dismiss your suggestions. To manage trades yourself, you need some experience (2 – 3 projects) to correctly assess a project, create scopes of work for each activity, bid it all out, create a realistic schedule and do constant QC throughout the entire rehab. It isn't something I'd suggest for someone new.

Realistically, the first few times, you’ll probably use a GC for your entire project. GC plus using hard money makes it much harder to finish up with 25% equity, which is why you might want to try a flip first.

Finding a mentor or taking less to shadow a project, sort of as an apprentice, would help.  Attending all the inspections helps you learn a ton too.

Quote from @Jared C.:

I am looking to start my real estate investing career by the end of this year, or early next year. I have read the BRRRR book, as I am highly interested in this strategy, because it lines up with my investing goals.

My question to any investors employing this strategy is: have you, or could you get a hard money loan to acquire and rehab the property, then cash out refi into a traditional mortgage for the exit strategy, With the ARV of the property allowing the traditional Loan at 75% LTV to pay out more than you started with???

Thank you In advance! 

Small bit of advice, keep your permit timelines in mind.  Recently learned of an investor who purchased a property with hard money and didn't know it was currently taking 3 months for building permit approval in Richmond.  So that's three months (of his six month loan term) right out the window, to be followed by extension fees and additional interest. Compounding that mistake by many others throughout the rehab schedule is how you end up upside down on equity.

I find it's better to buy with cash and use hard money for the rehab but I understand that's not always possible.

You're right to be cautious but honestly, no matter how much you learn beforehand, you're still going to make mistakes. When I did my first flip, I went into it not expecting to make a penny. Just wanted to figure out the process.

Quote from @Matthew Bowling:

Would using your business address be the most appropriate?

That's fine, if that's what you're most comfortable with but it doesn't have to be.  Presenting yourself as business-like as possible is always good but it's more important to get the notices.  Just make sure you're getting/checking your mail regularly, whatever address you use.

It doesn't have to be your personal address. You do need an accurate address for notifications though, in case the policy is updated or canceled.

@Bryce Jamison yes, because it saves you money.  Over time you'll have a tenant's actions damage your unit beyond what they can afford or are willing to pay.  When that happens, insurance pays, not you. 

Without insurance, their unexpected problem suddenly becomes your problem and starts costing you money.  Why?  Tenants usually don't plan or have the money for future unexpected large costs.  When something like that happens, they'll typically turn to you for payment.  Doesn't matter that it wasn't your fault.  If you don't help, usually they'll just stop paying rent or break the lease and move out.  Or sometimes get an attorney to try holding you responsible.  Yes, you have a lease with clauses you can enforce to hold them accountable and limit or indemnify your liability.  In reality you're almost never going to recover that lost money. 

Again, may not be your fault but meantime you're spending money.  If there's no insurance, you end up working the numbers and usually see it's cheaper to absorb some or all of that cost rather than turn the unit over and rent it again.

Avoiding increased premiums is smart business too.

@Kristi Tietz I've done some transactional funding for a few investors but I was branch manager for a mortgage broker in a previous life, so I'd overseen and fixed hundreds of closings. There's so much nuance you learn on the title side of things, about where things go wrong, what can cause problems, which moving parts need the most attention. I wouldn't have ever attempted it as a beginner. I funded a few distressed property sales, the investor had skin in the transaction, my money came in last, my funds never left escrow and I was paid back through the HUD-1 (closing settlement statement). I would have never done it if I hadn't personally known the title company owner and how he handled business because ultimately he was the one protecting my funds.

I just posted about it here:

https://www.biggerpockets.com/...

It's been an excellent option for me.  I gave it a test run using the free option and quickly signed up for a paid subscription.

Strong suits?  Customer service that actually helps you when needed.  Whoever created their back office workflow process did a bang up job.  They do a great job following up and providing real solutions to problems.  The property listing function is really strong, a one stop shop.  Tenant applications and lead management is good.  Their leases are state-specific (which is standard these days) and can be modified.  $5/mo gets you unlimited e-payments.  Maintenance tickets are easily created by tenants.

Lots of other tools too.  If you have any questions just let me know.